To successfully navigate modern living, it is essential to grasp the basics of personal finance. This series seeks not just to offer you piecemeal financial information, but a broad roadmap to the diverse labyrinth of personal finance from a Christian perspective.
In the modern society, money pervades all aspects of life. Almost any issue we can think of is tied directly to money – from the clothes we wear, to the houses we live in, to the food on our tables, to education, to politics, to environmental concern. Even in matters of faith, the outworking of our beliefs are almost inevitably tied to money in one way or another.
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Manage money well by having an adequate grasp of the basics of personal finance, and life can be thoroughly meaningful and enjoyable. Manage money poorly, and life can be difficult.
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An Overview of Personal Finance
Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?
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Each of us has been given a unique role on earth. Some are called to serve in ministry, many are called to serve in the marketplace. Whatever our calling, there are certain milestones we will almost certainly go through. We can visualise these events on a timeline.
During our time on earth, there are various life events that we typically go through, including marriage, buying a house, and having children. Then there are other goals such as taking a trip around the world or buying an investment property. Adding these events to the timeline creates a unique picture that is descriptive of each of our lives.
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Each of these milestones and events bring with them various financial implications. Figuratively speaking, these are the towers we build during our lifetimes.
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The overarching aim of personal finance, in essence, is to ensure that we have enough money to complete all these towers.
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Personal finance is the stewardship of the financial resources each of us has been assigned. It involves planning, conserving, safeguarding, expanding and channeling the wealth God has placed in our care, so that we have sufficient monetary resources to meet our financial obligations and support ourselves during our lifetime.
It has many facets ranging from banking, budgeting, buying, credit, and financial risks, to future life events, income generation, insurance, investing, loans, renting, retirement, and taxes.
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Domains of Personal Finance
The consequences of not having enough money are often devastatingly obvious. Severe indebtedness, and constant worrying about money. In dire cases, missed education opportunities, starvation, homelessness, and poor sanitation. Words cannot begin to describe the suffering people endure.
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Good financial management helps us to avoid crashing into the ground. In its most basic form, financial planning helps us to navigate the various life milestones so that we have enough to sustain ourselves. Broadly, the facets of personal finance can be grouped into 6 domains:
Budgeting & Cash Flow Management
In order to stay on track financially, income and outflows have to be in balance.
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Good cash flow management allows us to build assets, reduce liabilities, and increase our net worth. It typically involves keeping our discretionary expenses under control through expense tracking, and includes proper management of loans and responsible use of credit.
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Insurance & Risk Management
Life may not always be smooth sailing. If things go south, this helps us to mitigate the damage caused by the unforeseen adverse event and get back on our feet as soon as possible.
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Investing
Growing our money makes it go further. Rather than letting our money remain idle, investing our money well attracts a positive rate of return. The additional money helps us to achieve more lofty life goals, and allows us to bless others with the excess.
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Retirement Planning
At some point, we have to stop work. It is important that we are able to support ourselves until the day we are called home.
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Tax Planning
Organising our finances correctly helps us to reduce our tax burden. Taking advantage of tax breaks, together with incentives such as tax deductions and rebates, enables us to legally avoid excess taxes. This allows us to channel the additional money to other meaningful causes.
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Estate Planning
We are destined to die once, and after that to face judgment. The assets we leave behind have to be appropriately distributed. Proper estate planning ensures that the proceeds go to our intended beneficiaries, such as our spouse, children, church or charitable groups.
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Managing Your Money – Putting Your Financial Life in Order
A holistic approach to personal finance considers all 6 domains, and organises them in a way that conduces towards personal financial wellbeing. Missing out on 1 element can lead to severely undesirable consequences, such as being unable to get back on our feet if unexpected adversities occur, or muddling through life only to find that we have to continue working after reaching retirement age.
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To do so, we can employ the steps of the personal financial planning process:
- Assessment
- Goal setting
- Plan creation
- Execution
- Monitoring
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Step 1 – Assessment: Financial Checklist
It is very easy to develop a partial view of personal finance. Often, this arises because of the information we happen to be heavily exposed to, the financial professionals we encounter, or the personal inclinations we have.
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For a start, it is important that our approach towards managing our personal finances covers all 6 domains. Use the 6 domains mentioned above as a checklist to ensure that you have at least a basic understanding of each domain. After that, make an assessment of what you have done in relation to each of these domains, and whether they are working well.
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Step 2 – Goal Setting
After you have evaluated your financial situation, set goals for each of these areas. There are 3 types of goals you can set:
- Learn more – if you have no clue what a particular domain involves, start by learning more
- Put in place a basic system – once you have gained sufficient knowledge to put in place something basic, arrange them into a functional system
- Make enhancements – just as with many other aspects of life, personal finance is a lifetime journey of improvement
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Of course, you can always decide to do nothing. That is fine if that particular area of your finances has been put in order.
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Step 3 – Plan Creation
Now that you have set your personal financial goals, create a plan on how to go about achieving these goals. Decide which area to look into first, and which areas to look into later. Set a timeline for yourself. Aim to achieve certain tasks by certain dates, or set aside time every day or week to work on certain areas.
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Decide also if you would like to seek the help of professionals concerning the various aspects of your finances, or if you intend to do it yourself. The following table indicates which financial professionals could help with which areas:
Step 4 – Execution
A plan is just markings on a piece of paper or digits in a computer if it is not set into motion.
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If you choose to engage a financial professional, he will oversee the execution of the plan in consultation with you. If you decide to execute the plan yourself, there are numerous technological tools you can utilise to make your journey easier.
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Step 5 – Monitoring
After you set your plan in motion, it is important to check if it is moving your finances in the intended direction. If anything is out of place, make adjustments so that your finances are on track.
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Revisit your financial plan regularly, and especially when significant changes in your needs or life circumstances. When your existing plan no longer fits your life circumstance, repeat the process of financial planning to make it fit.
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Deepening Your Knowledge on Personal Finance
Our life circumstances differ from one another, and the value of each domain of personal finance differs across individuals. For some, detailed tax planning may be an ineffective use of time. For others, estate planning may be urgent and important. It is important that you know which aspects are more important and useful to you.
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Knowledge on the various aspects of personal finance is readily accessible in many forms: books, articles, webinars and classroom teaching among others. In pursuing knowledge, it is important that we focus our energies on the areas that are most relevant to us. At the same time, it is important to place each piece of knowledge within the broader context of Christian financial stewardship.
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This website contains many articles that are useful in deepening your financial knowledge. Once you have grasped the basics of personal finance, read more on:
The Financial Machine assembles the disparate aspects of personal finance into an integrated whole – a financial machine as the name suggests. In aligning the different aspects of personal financial management, it produces powerful financial outcomes that conduce to financial freedom. To learn more, attend our Workshop, visit our Facebook page or obtain a copy of The Financial Machine (to be released in June 2020).