When was the first time you touched your own money? What did you do with it?
Most likely it was from a visiting uncle when you were about 3 years and you bought sweets with it. Nearly everyone does this, no matter the country they live in. As simple as it sounds, this is the first most powerful lesson about money; if you are wondering what lesson is hidden in there, read on.
Personal Finance is an emerging field of study in Finance because, in the past, people’s finances were managed by governments and private sector companies, let us call all of them together as organizations.
You went to work and the organization paid you a salary. They decided how much annual inflation was and bumped up your pay a little bit annually if you were in the management cadres. In the Union cadres, the labor movement agitated for the increases.
They took care of your pension through the defined pension process and when you retired, you received your pension sometimes until you died.
Your organization decided your insurances and paid your premiums and most people did not even have a clue of how much premium was being paid for their life policies and how much their benefit was.
Your hospital insurance and premiums too were paid, most of the times depending on your grade at your employment and when you fell sick, you just went to the hospital with your employers’ card and you were treated.
Life was defined by a job. To be financially ok, all you needed was to get a job in an organization, accept life as is and join all other people around you and work in the organization till you retired. That is how the words permanent employment were coined. It was taken for granted that organizations will outlive individuals hence they would take care of your personal finances permanently.
But over the last more than half a century or so, things have been changing drastically. The pace of innovation that is rendering skills, products, and services redundant by replacing them with automated alternatives is at its most fierce. For example, Postal corporations that employed thousands to send mail around are now going extinct with email. A bank was defined by the number of branches it had, now banks can do with one or no branch at all. And this scenario is replicated everywhere and there is not even one sector that has not been disrupted.
This ruthless disruption means that organizations can no longer guarantee jobs and the term permanent employment has been changed to contract employment and partnerships.
Individuals can no longer rely on organizations to manage their personal finances because you will definitely outlive your organization, hence you must be in total control of your money by yourself. How can you expect an organization that is faced with the constant uncertainty of change guarantee you life-employment? How can it manage your finances for you? Your guess is as right as mine, it needs to guarantee itself long-term survival before it guarantees yours. And since this is now nearly impossible, you have to take on the management of your life and money.
The innovations have not eluded the financial markets and in fact, have increasingly made those markets more complex, with new weird products being introduced every now and then, the most controversial now being cryptocurrency. Yet individuals have to play in this complex financial market space on their own because even their own organizations are struggling to keep pace and you cannot participate without the skills and knowledge required.
Before the industrial revolution, most people engaged in a trade that provided them with life’s necessities and they managed their own finances. With the industrial revolution, we forgot this and now most people have to be re-introduced to self-money management.
Personal Financial management, referred to as Financial literacy is the knowledge that enables individuals to acquire the confidence to make responsible independent decisions involving money. It will help you to manage your debt, account for your expenditures and incomes and also utilize various services that revolve around money, such as bank accounts, use of credit and debit cards, managing your own insurances and investments.
When you study financial education the knowledge that you beget is financial literacy.
Without any guidance from employers and government on how to play in this complex environment, many people are seeking financial products without express knowledge of how they work. For example, since the introduction of defined benefit schemes in the retirement space, many would be retirees are taking on pension schemes which they are ignorant about.
In the investment space, business people are borrowing from lending institutions with little knowledge of the conditions and terms of loans and on the flipside, their own ability for managing debt.
University students and young professionals who own or have access to a smartphone can borrow online without any assured way of repaying and without appreciating the risk on their credit ratings. This group requires financial literacy to enable them to make the best decisions as they are still in their formative years and have not yet acquired most of the bad financial habits that weigh the older population down. At this stage in secondary school and college, we can achieve the biggest impact in financial education if we focus on delivering the education to these youth.
Finance professionals in the field have different ideals and philosophies in their work. Different professionals approached to advise on how to invest in real estate will offer two extremely different and conflicting opinions which leave the consumer wondering what action to take. For example, an advisor with heavy religious bias would advise to save and buy, while another might advise taking a mortgage. While some other believing in the supremacy of doing it yourself might advise to buy a plot and start building slowly by slowly. By acquiring financial education, you would be exposed to all options and depending on your personal ideologies and philosophies, choose what works for you. And this is the powerful empowerment that personal finance unlocks for you.
Now back to our question at the beginning. Why is your first encounter with money the most powerful education about finance? First times matter a lot. If you taste something for the first time and you love it, I guess you will love it for the rest of your life and vise versa with a negative outcome first time.
On your first encounter, one; you got money for free, two; you used the money for self-gratification, i.e. buying a sweet and enjoying it immediately and three you bought a sweet because someone else told you to buy the sweet or you copied it from those in your environment. These three lessons get engraved deeply in your mind and affect your future money decisions immensely.
Let us see the psychosocial implication over your life.
Getting money for free first time somehow makes you believe that it is possible to get money without doing any work. You keep going to your parents and guardians for money when faced with a need without even consideration rendering any service first. You become dependent without realizing it till your guardians kick you out of the house to go make a living on your own. Some women and even men, decide all they have to do is look pretty and wait for someone to come and offer them money.
In fact, the reality is, we cannot get money without an exchange of our service or product. There is no free lunch and this could to an extent explain why individuals who come from humble backgrounds are easily more amenable to the fact that they must work hard for money than those from well-off families whose expenses are catered to wholly and fully by another person. This second lot struggle more to adapt to the exchange concept of money when left to fend for themselves.
The exchange concept of money states that we must provide a service or product in exchange for money, and this is what the first encounter with free money distorts and blurs for us.
Then two, quick self-gratification. Give any child money and the first destination will be the shop. The guardian will have difficulty convincing the kid that its late in the night to go to the shops or some other excuse to delay the gratification.
As you grow, you, therefore, associate money with immediate gratification and that is why most individuals receive salaries and in five days, they have spent everything. Ideally, your first encounter taught you that money can buy you instant happiness and you do not want to wait.
Now think about the implication of this point. Ever heard of the phrase, money burns in the pockets or money can be smelt? These phrases are used to explains why someone who receives money will be unsettled until he has spent the money and everyone will know about it. This explains why someone with money in his pocket will be arrogant. I had a colleague who would step on tomatoes intentionally in the market on payday because he would quickly fish out 1000 shillings note and ask the seller lady how much the tomatoes he has stepped on cost. This is why Malong would take a video with his money and post it online. This was learned on your first encounter with money.
Then the most lethal point on your first encounter and the reason why most people struggle and stress about money is the last point, how did you decide how to spend the money. You bought a sweet, but how did you know that you should buy a sweet instead of a bag of maize flour with the money. I consider this the canon error of the first encounter with money because it did not allow you to use your own thinking, no one gave you options, all they did was tell you what to do with the money; which was to do what everyone else was doing with their money. This is why we desire other people’s things on Instagram and want them for ourselves.
When you receive money, you don’t have to start thinking about how to spend it. You have been observing and desiring what your friends have and your mind already has a library of what others have done with their money. You are employed, everyone your age in your company is buying a car, when you get the money you will buy a car, full stop. It never occurs to you that every expenditure has its implication because from your very first encounter, this is what you did and it was safe and everyone around you validated it for you.
By learning about personal finance, you will unlearn these deadly sins of the first encounter and start applying your mind to each transaction that you spend your money on. You will appreciate that any expenditure can wait and that each expenditure can be turned into an investment as opposed to an outright sunk cost.
After this first encounter with money, no one sat you down and explained to you how to manage money. In your 16 years in school, you learned a trade to earn money, but never how to manage it. This is why we have created Financial Matters whose mission is to empower people to take charge of their finances and provide them with the education they need to master their money. You can join the Financial matters clan by following this link and access a lot of free material on how to manage your money.
Mastering personal finance is the first step to financial independence because it will enable you to take immediate control of your finances and drive you into wealth and liberate you from the shackles of financial slavery and bondage that people find themselves for lack of personal financial knowledge.