Managing finances is required for large and small businesses, organisations, schools, charities, NGOs – and every household and individual.
Managing finances involves issues such as budgets, capital, cash flow, retirement funds, investing, borrowing and credit. Over the past few years the world has been thrown into economic crisis, largely because countries, banks and organisations have not managed their finances well. Debt has overwhelmed many of them.
The world economy also affects “individual economies”. Many people face retrenchments and company closures and investments may not deliver what they promised.
South Africa has introduced legislation to limit individual credit. Debt agencies have been set up to help people work their way out of difficulties.
Some economists report that up to 74% of income is going towards servicing debt. The South African Reserve Bank shows that South Africans have for the past 10 years shown “negative savings rates”. This means that they are borrowing to live.
There is a need for long term saving. If you start saving for retirement at age 25, you need to save 15% of your salary. If you delay to age 35, then 25% is required. Similarly you should start to save when a child is born for his education in 10 years time. If you delay for just 18 months you will need to save 25% more for the same lump sum at the end.
Dan Ariely is a behavioural economist and author of a book called “Predictably Irrational”. He talks about how good intentions to save, pay off debt or otherwise manage our finances better are often shortlived. Instead we make emotional and often spur -of- the- moment decisions to spend money. His conclusion is that the source of much of our financial misery is inability to resist temptation and use self-control .
He suggests that you freeze your credit card in an ice cube. If you want to use it you will have to wait for it to thaw and by then your own emotions may have cooled!
Robert Kiyosaki, author of “Rich Dad, Poor Dad.” is a widely read financial author. His approach to “financial intelligence” is different to traditional approaches to managing finances. His focus is on the development of assets (“Anything that puts money into your pocket”) and the reduction of liabilities (“Anything that takes money out of your pocket”).
He believes that the way people think about money is the root cause of their financial problems. He describes 3 cash flow patterns.
The Poor: Regardless of how much income there is, it is channelled into expenses and leaves your pocket.
The Middle Class: Higher incomes give good “credit ratings”. Borrowed money goes to buy houses, cars, appliances, etc. These are actually liabilities, and again cause money to flow out of your pocket.
The Rich: The first concern is to use income to create assets (property, business, franchise, stocks, etc). The goal is that the asset should add to the income source before it is spent on expenses and large items.