The word Finance can be very scary for non-financial students. The mere thought of reading or preparing a balance sheet can send most people running faster than Hussein Bolt! I am a culprit. However, I had a great financial adviser who showed me what a great personal financial manager I can become. The truth is that we all have the ability to manage our finances. Three attributes are needed to mange this fit:
•The ability to learn the ground rules
Information on finance can be akin to meandering through a maze. The more technicalities your search turns up, the more confused you will become. This generally leads to a frustrated state of mind and might take a long time to learn what you need to know. The Internet has made this process easier and you only need to focus your attention on these key areas:
•General principles of financial planning
•Insurance
•Investing
•Taxes
•Retirement
•Estate planning
Remember to always carefully validate the sources of the information you collect before accepting it as true and accurate. Many financial blogs and podcasts can be extremely valuable, but others are based more on personal experience than on years of education, training, and professional work. Personal stories can help you tune in to your own situation, but they might not reflect a comprehensive understanding of finance or relevant laws and regulations.
The ability to apply this knowledge
Knowing that you need to budget and understand your cash flow is one thing, but actually doing it is another. Start with the basics. You need to track all your money coming in (your total income) and everything going out (your fixed expenses and your discretionary spending). Once you know where your money is coming from and going to, you can set up a budget to help keep track of your month-to-month income and expenditure. From here, you will be able to determine what you can contribute to savings and investments. Make these contributions automatic transfers.
After you set up the basics, your financial planning needs will get a bit complicated. For instance, you might start out by calculating how much money you need in your emergency reserve account, but then realize that you also need to figure out how much to save for retirement. Additionally, anyone earning income is exposed to various risks, which might include disability. Understanding your unique circumstances, applying appropriate strategies and setting up systems will help you stay on track.
Much of what applying your knowledge looks like in practice is simply taking action and holding yourself accountable. It can help to write out your financial goals and check in with those regularly to remind yourself why you’re working hard to manage your money. And to make sure you stay on the right track over time, you should set up check-in points periodically throughout the year. For example, you might want to revisit your budget monthly, your investments quarterly, and your overall financial plan annually.
•Manage Your Behavior
This is by far the most challenging piece, because emotions often cloud our judgment. It can feel simple to manage our own money during good times. However, we often fall prey to recency bias— that is, assuming that what happened in the recent past will continue into the future. Confidence or fear projected into the future can distract us from making prudent decisions. When things get stressful, you get distracted. Other things take up your time, energy, and attention, diverting you from managing your finances. As you continue to learn, you might also find yourself confused by a myriad of opinions and different ways of doing things. Decision fatigue can set in. It can become extremely challenging to make even the simplest of decisions as you start questioning yourself and your knowledge. After all, there is a lot on the line—your money and your life. You don’t want to make a mistake, and you want to do everything you can to maximize your financial resources. Your decision-making can become clouded by fear, and it can just as easily be affected by greed.
To successfully manage your own money, you need to manage your own behavior. That means taking small, consistent actions over time. You need to create your plan of action and stick with it through market ups and downs, through everything from personal struggles to professional triumphs..
Eric Roberge
