Financial literacy is vital at work and at home

Financial literacy is not only essential for any ambitious business manager to master. It’s a critical life skill for building a successful and happy family and home life, says Peter Hughes.

Financial literacy is vital at work and at home
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One of my firmly held beliefs is that priorities in life come in this order: health, family and job. But I admit, I sometimes get confused!

Whenever I pontificate on these priorities to my children, my wife reminds me of a time she had to drive herself to and from hospital in town when she needed an urgent surgical procedure. She claims I said that I was too busy. I don’t recall it, but I’m glad to say that I have been forgiven!

Experience has taught me, however, that there is another crucial priority in life. One for which we never received any training and are completely unqualified: the management of our own personal financial affairs.

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We dive into our first jobs and, without much thought, start earning. We take life as it comes, and spend our newfound wealth as the spirit moves us and the bank balance permits.

I’ve written extensively on the need for any manager, at any level, to develop reasonable financial literacy. Without gaining an understanding of basic financial terminology and concepts, non-financial managers will always be at a disadvantage when money matters are discussed in the business.

Their inability to contribute intelligently on financial affairs will effectively thwart any ambitions they may have of ever becoming senior business managers.

Managing money at home
Financial literacy and savvy are also critical to managing our own personal financial affairs. It includes settlement of accounts, borrowing money, paying off debts, covering risk, medical aid, making provision for children’s education, and retirement. The list goes on and on.

But worse still, lack of personal financial literacy can result in domestic horrors. Broken homes, divorces, health issues from stress and depression, and even murder or suicide in extreme cases.

An ability to manage one’s financial affairs is not a ‘nice to have’; it’s an essential life skill for success and happiness.

The job of managing one’s personal affairs mirrors almost exactly that of running a profitable business. It includes maximising earnings, reducing expenses, saving and keeping some cash in reserve, investing wisely for future needs, protecting assets against loss, and more.

It’s not my intention to delve into financial concepts such as the time-value of money, compound interest, the difference between fixed, variable and marginal costs, and the intricacies of personal financial management. These topics are covered exhaustively in hundreds of articles on the Internet.

Instead, let’s have a look at a few key issues under each of these headings.

As a manager, you are selling your skill. Make sure it’s being paid for competitively at the prevailing market rate or above.

Benchmark your remuneration regularly, and make the most out of your earnings by taking advantage of all possible company benefits to minimise tax obligations.

Don’t save on an ad hoc basis for future expenses such as retirement and your children’s education. Schedule a monthly amount paid straight off your pay cheque into an interest-bearing account.

Selecting investments is not for amateurs. Use a professional adviser who fully understands your personal situation, risk profile and objectives, and who bills a reasonable fee based on the performance of your investment.

Risk protection
Assess the personal risks to you and your family. Ask all the uncomfortable ‘what if’ questions. What if I or my wife dies or is disabled? What if the house burns down, we are robbed or write off the car?

Do rational assessments of the degree of risk and its financial impact and rank them from highest to lowest. Get an insurance broker to help you select appropriate policies.

Monthly expenses comprise only two types: ‘needs’ and ‘wants’. Don’t get them confused: never spend on ‘wants’ unless you have all the ‘needs’.

Sensible borrowing enables you to secure a home and increase your wealth. Just as you would in the business, shop around and do your homework. Look behind the numbers.

For example, determine exactly how the quoted interest rate is calculated, and get full details of terms and conditions. For a home loan, there are many ‘bond brokers’ available with expert knowledge to assist you.

Peter Hughes is a business and management consultant.