Lagos — In today’s wobbling economies and uncertain financial environment, it is important for employees of public and private establishments as well as self employed individuals who run shops and small enterprises to have solid personal finance plans. Experiences have shown that even developed economies like the United States sometimes fall into recession such as experienced in 2008.
In Nigeria, we have seen instances of mild recession that has resulted to loss of jobs as witnessed in the massive lay-offs by banks and other corporate organisations. The reality of mass purge even in government owned institutions such as the Nigeria National Petroleum Corporation (NNPC) is still very fresh in our memories.
Only recently, top management executives of a first generation Nigerian bank were laid-off in what the bank described as “a cost-saving repackaging from the top echelon.” Senior managers, Assistant general managers and even general managers were involved.
We also recall the 2009 tsunami in the banking sector in which employees of banks, ranging from managing directors, executive directors, senior management staff and other cadre of employees, were laid-off in a Central Bank of Nigeria, CBN -induced intervention led by its Governor- Sanusi Lamido Sanusi.
Given the above scenario, it is imperative that individuals start very early to have their own solid personal finance plans for the raining days, which usually come to many as a rude shock.
What Is Personal Finance?
Personal finance is the financial management which an individual or a family unit is required to do to obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.
When planning personal finances, the individual would consider the suitability to his or her needs of a range of banking products (current accounts, savings accounts, credit cards and consumer loans) or investment (stock market, bonds, mutual funds) and insurance (life insurance, health insurance, disability insurance), products or participation and monitoring of individual- or employer-sponsored retirement plans, social security benefits, and income tax management.
Personal financial planning process would include all the following: Credit-debt, mortgages, car loan, credit cards, unsecured personal loan, rent-to-own, student loan, title loan and payday loan. Others are refund anticipation loan, refinancing, debt consolidation, bankruptcy, employment contract, pawn, salary, wage, salary packaging and employee stock option.
Personal finance also entails employee benefits, retirement, pensions, defined benefit, defined contribution, social security (as it applies in developed economies like the United States of America).
Other aspects of personal finance are business plan, corporate action, personal budget, financial planner, financial adviser, stockbroker, financial independence, estate planning, cooperative and credit unions.
Components Of Personal Finance
The key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and reevaluation. In general, it involves five steps:
Assessment: A person’s financial situation is assessed by compiling simplified versions of financial statements including balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank accounts), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
Goal Setting: Having multiple goals is common, including a mix of short- and long-term goals. For example, a long-term goal would be to “retire at age 65 with a personal net worth of $1,000,000,” while a short-term goal would be to “save up for a new computer in the next month.” Setting financial goals helps to direct financial planning. Goal setting is done with an objective to meet specific financial requirements.
Creating A Plan: The financial plan details how to accomplish the goals. It could include, for example, reducing unnecessary expenses, increasing the employment income, or investing in the stock market.
Execution: Execution of a financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
Monitoring And Reassessment: As time passes, the financial plan must be monitored for possible adjustments or reassessments. Typical goals that most adults and young adults have are paying off credit card and/or student loan debt, investing for retirement, investing for college costs for children, paying medical expenses, and planning for passing on their property to their heirs (which is known as estate planning).
Areas Of Focus In Personal Finance Planning
The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board (FPSB) are:
Financial Position: Is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person’s balance sheet, calculated by adding up all assets under that person’s control, minus all liabilities of the household, at one point in time.
Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished.
Adequate Protection: The analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long-term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.
Tax Planning: Typically, the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as one’s income grows, a higher marginal rate of tax must be paid. Understanding how to take advantage of the myriad tax breaks when planning one’s personal finances can make a significant impact.