The term personal finance is exactly what it implies: the management of your money, and broadly encompasses strategies you can put in place to make smart decisions about said money, not just for the present but also for the long term. How do you meet your personal goals in an effective way that does not leave you constantly in the red? How can you look forward to your golden age with confidence? How will you ensure that your family is well taken care of even after you’re no longer around? These are some of the concerns you will be up against as you seek to live your life in an intentional way. Personal finance seeks to address these questions, and therefore covers a lot of ground, the core of which are: budgeting, saving, insurance, mortgages, investments, and retirement and estate planning.

The importance of personal finance management

Most people, unless they are students of finance or blessed with savvy role models such as parents like my own mother, aren’t naturally equipped with sorting out their personal finances. Little wonder that statistics show that some 70 per cent of lottery winners end up broke, and a third go on to declare bankruptcy. Schools unfortunately seldom provide courses on money management, and so turnout young adults who are clueless about how to effectively manage their money. These young people go on to become adults who are chronically indebt, cynically passing along that debt mindset to their children, the next generation. Believe me, I know it can be overwhelming reconciling your day-to-day money situation, especially in these trying times, let alone thinking about what will happen in the long term. I get why oftentimes the attitude is: things will sort themselves out eventually. But will they, though?

The Bank of Jamaica (BOJ), in its 2018 Financial Stability Report, noted that Jamaican households are servicing three times more debt than a decade ago, and that, for every $100 of household income, $56.60 was found to be going toward the servicing of personal loans. This, it said, was the highest level mapped by the central bank, ever, and suggested that the underlying reason for this rise was consumer loans growing three times as fast as income. “Total real household debt to real disposable income has trended upward, reflecting increasing indebtedness,” the report said.

Please note, in 2009, household debt was the equivalent of $17 per $100 of income. At that time, the BOJ described the movement as a deterioration of household income “well above” average levels prior to the 2008 financial crisis.

Personal finance management premises

Debt, as we’ve now come to understand, is a major hindrance to wealth creation. If you don’t know how to properly handle your personal finances, you will live in indebtedness. It’s that simple. You’ll be unable to meet your personal short- and long-term financial goals, save for your children’s education, and be assured that your retirement will go smoothly. Personal finance management requires that you become financially literate even as you take stock of your income, expenses, living requirements, individual and family goals and desires, and come up with a plan of action for how to achieve this.

• The primary premise of personal finance management is prioritisation: Understand that, regardless of the amount of money you make, you should not spend more than you make if you want financial success. This applies even to people who make tons of money, and you would probably be surprised how many high-earning individuals make a mess of their personal finances and are forced to employ the services of financial planners when they find themselves teetering on the brink of financial ruin. What is the point of making 50 million dollars a year if you are going to spend 75 million in that year? This spells D-E-B-T. You have to have a plan for how you will not only squander your money, but instead make it grow.

• The second premise is assessment: You have to assess what keeps the money flowing in and concentrate your efforts, even with inflation eroding its value, to keep it coming in. Make a budget, in which you first allocate a certain percentage to meeting your bills and obligations, then you allocate a percentage to paying down debt, then finally, dedicate the balance to saving strategies that will make your money compound and grow for you.

• The final premise is restraint and discipline: Understanding the importance of sticking strictly to a personal financial plan that will see you restraining spending on non-wealth-building assets until after you target savings and debt-reduction goals, in service of building your net worth. Think of it this way: The Government has to create a national budget for the country each year that needs to be adhered to as closely as possible in order to keep the country on a path to fiscal growth. This is pretty much how you need to think of your personal finances: mismanagement and misallocation of your funds will spell a bad financial outlook on the path to achieving your long-term goals.