Is your personal financing on track?

By Senani WASANA THENUWARA

Though in Sri Lanka ,the level of financial literacy is less, it has been developing during the past few decades. Increased numbers of deposit holders, and enhanced volumes of stock exchange investments are indicators of such increased awareness said Prof. P.S.M.Gunaratne of the Economics Department, University of Colombo in an interview with the Sunday Observer.

He said personal financing is a subject offered in the university curricula in the developed world.

In some countries even adults are allowed to offer it as a subject. In their course of study.

Money and wealth are two different aspects. Money which basically serves as a medium of exchange is considered to be the least productive asset.

But wise people can convert money in to wealth. Success stories behind a person (a company or a country) does not lie only on the earning capacity, it depends on how well earnings are managed.

It is an accepted fact that people should live within their means. This does not necessarily mean one should spend all what is earned.

Earnings either saved or spent would have a reflection on each other i.e. well- planned expenditure will lead to more savings, while more savings today will lead to a better life with more capacity to spend in the future”

Prof. Gunaratne said. In personal financing there are four major areas of concern namely; revenue, expenses, borrowings and savings.

Revenue

At a particular point in time, a person may have multiple sources of income including employment income, property income (such as rentals)and investment income, while some others receive a level cash flow such as employment income while some are exposed to a volatile cash flow in the form of regular income.

Whatever the mode in which the cash flow comes into your hand, it is the sole responsibility of a person to utilise it wisely because non awareness of generated income would results in unwise utilisation while creating opportunities for others to take advantage.

It is hard for a person to upgrade his level of income at once, rather it is more important to keep a proper track of expenses that in turn will lead to progressive income growth in time to come.

Avenues to rethink when spending

Living within your means is the best way to utilise your earnings wisely. People who follow an artificial and a highly sophisticated lifestyle just to show off, have undergone financial difficulties. Therefore, unless one can maintain the sustainability it is recommended give a second thought before following such a lifestyle. Highly sophisticated neighbourhoods also impact on one’s expenditure pattern.

Children are another factor that at times leads to excessive expenditure pattern. Some people tend to spend too much on children, beyond their limits while some others try to give the best of everything (best doctor, the best clothes ) to children which in turns incurs an expense. It is a common issue among the upper and middle class that their children are obese due to unhealthy eating patterns.

This reflects that too much spending is not always constructive. Some parents attempt to achieve their failed goals and ambitions through their children while some others imitate others, which results in unnecessary expenditure.

Becoming over ambitious over your child will not only impose a greater expense but also would result in frustration.

People also incur unnecessary losses due to the fact that they fail to plan their compulsory payments when they are due. Rates, vehicle license fees, credit card bills and telephone bills are a case in point.

Borrowing

Borrowing is another area where over estimation and over ambitiousness easily goes wrong.

For instance many people tend to show different sources of income when applying for a loan but in turn when it comes to repayment they face difficulties as a result of borrowing beyond their cash flow.

Also investment of such money should also be done in a productive manner. Improper planning also compels people to get attracted to irregular sources of financing where they have to meet higher demands. Non disclosure of true income is also a matter of concern. For instance a person may try to lease, when buying a car being unable to disclose income where he/she has the capacity to purchase it outright. These will involve unnecessary expense.

Avenues to rethink when investment and saving

Cash is the least productive asset in the world. Having too much of cash would not earn anything for a person. Cash should be used to generate a productive return. A fair knowledge about financial markets and available investment opportunities is a must in selecting a better mode of saving. People place more emphasis on returns, while neglecting the risk component associated with each investment opportunity.

For instance people do not take into consideration the effective rate of interest when making investment decisions. Rather they are more enthusiastic on the interest rates they will receive, which at times are misinterpreted. All banking and financial institutions have to abide by the law to disclose effective rates. It is also important to divide savings into components, where some cash is set aside to meet contingencies while some are kept aside on a permanent basis.

The duration of the investment also matters in reaping a better investment harvest. At a time where the interest rate in the county is showing an upward trend, it is better to go with short- term investment options which lasts for a few months, while if in the long run the general interest rates is moving downwards it is better to go for a relatively longer period of investment to achieve benefits.

A possible question that crops is where such information regarding prevailing trend can be found. Just referring to the financial pages of newspapers, will be of help. They can also study the direction of certain instruments such as Treasury Bills.

Developing a portfolio of investment is also important rather than tying all the money in one place. For instance, if it is decided to invest in stocks it is essential to build a portfolio because unlike in banks and other modes of investments, stock investment exposes a person to the direct risk of a particular company.

Also in personal financing it is advisable to engage in stock investments with knowledge and also not to place more emphasis on speculative purposes.

In stock market investment the finance theory of high risk high return basically applies. In the real world average return of longer stock holding period is better.

This does not guarantee that you can realise your investment anytime. Therefore, the money that a person needs immediately should not be invested in the stock market.

Also the market may over appreciate or undervalue in the short run.

The best time to invest is the time when the market is in undervalue.

Also within the stocks, the selection should be done carefully. It is better to go for undervalued stocks. Also random selection (passive selection) is better when building a portfolio but should not over emphasis that it will outperform all the time. Therefore, in stock selection it is important adhere to timing, selectivity and diversification.

Insuring oneself is also an investment in one aspect. It is also important to be vigilant in deciding the best policy that suits a person. Maintaining a trustworthy relationship with banks and other financial institutions is also important in personal financing.

Also failure to plan for utilising lump sum money received in the form of retirement benefit also ends up in sad stories. People should make the correct choice of investing such money in whatever the sources available with vigilance.

Selection between physical investments such as businesses and financial investments totally depend on the level of knowledge and physical commitment that can be devoted.

Also those who are not entitled to a retirement benefit at old age should plan for such aspects from now.

Options such as pension schemes would be useful n this regard.

Knowing your net worth (what you possess in terms of wealth after allowing for expenses and obligations) is important.

If you have not given serious thought to personal financing it is advisable to give serious thought by tracking your income and expenses from today.