QUESTION: I have a problem with mismanagement, and I seek advice if possible. I am looking forward to hearing from you.
FINANCIAL ADVISOR: You have taken two very important steps in the process of establishing financial stability in your life: recognizing that there is a problem with financial mismanagement and seeking advice on how to correct the problem.
I’m not sure what brought you to the point of recognizing the problem as there are several red flags that you might have seen. I remember an employer asking me some time ago to help some employees improve their financial management.
Management came to the conclusion that employees were not managing their finances well because they regularly requested payday advances, paying a significant portion of their income by payroll deduction into service loans, or both.
There are several other signs that indicate you have a problem with your money management. Here are some examples:
• You are using an increasing share of your income to repay your debts;
• You depend on overdraft facilities to pay recurring bills;
• You use cash advances on your credit card to pay other bills;
• You tend to make only minimum payments on your credit card;
• You borrow to pay basic bills – utility bills, for example;
• You pay bills late or not at all;
• You borrow from Peter to pay Paul;
• You have constant cash flow problems;
• Debt collectors call you;
• Your excess funds are not being used effectively to earn money; and
• You take too much risk with your money.
Some may argue that personal financial problems are due to people not earning enough or even being underpaid. The truth, however, is that there has to be a balance between income and expense, whatever the situation. If there is a deficit, especially if it is recurring, there is a problem with the management of the money.
If there is such a problem, priority issues like saving, investing and educating children can be overlooked. The constant worry that this situation often arouses can lead to health problems, poor job performance, poor interpersonal relationships and significant family stress, or even family breakdown.
I can only be general in my response, not knowing the exact nature of your problem and what caused it, but I hope the solutions you seek emerge from my response.
The classic answer is to make a budget – a realistic budget that aligns spending with current income. This is the key, as many budget, but it doesn’t significantly reflect how they make and spend money.
Others make a budget but don’t stick to it. It’s just a meaningless exercise because they don’t track their spending, they don’t prioritize, they buy on impulse, and they borrow beyond their ability to pay, for example.
A budget is a spending plan that should show how money is earned and spent, including periodic, not just regular, spending, and it makes it easier to exercise control.
The budget must balance itself from the start, that is, when it is created. Otherwise, it’s a waste of time. Stay on track by tracking your spending and be patient. Avoid rushing to acquire too many too early. What you can afford is what you can afford.
Sometimes there is the argument that money problems arise because of emergencies. Every effort should be made to build up an emergency fund, which may be difficult for some given their level of income.
If you are in debt, contact your creditors and see if they are willing to compromise with you on how you can honor your debt. Explore the possibility of debt consolidation, which can allow you to have debt over a longer period.
Put away your credit card if you have one and it contributes to your problem. Since credit card debt is very expensive, make it your priority to eliminate it. If you have to make serious adjustments to your lifestyle, so be it.
If you have an asset, like a car, that you can’t afford, sell it. In fact, it may be a good idea to sell assets to reduce debt if the need arises.
Good financial management requires that you use your financial resources wisely. So put your money in safe institutions, use your excess cash to earn, invest wisely, diversify, buy good quality assets and maintain them well.
Your first exercise is this: document your income, all your expenses, your debts and commitments. Set your priorities and create a written plan to fix your financial situation step by step, and stick to it slavishly.
All my wishes.
– Oran A. Hall, author of “Understanding Investments” and lead author of “The Handbook of Personal Financial Planning”, offers personal financial planning advice and [email protected]