Should we become Finance “Jedi” or “Sith” to master personal financial management?

Before we move further, I remind again that this article will deeply look to the process of personal financial management from a different perspective. It does not contain the general standard that has been widely reviewed by financial consulting experts. The common thread remains the same, having a mature personal financial plan can make life journey easier and even guarantee the future and their families more secure. However, for someone to have ability to plan his personal finances, does financial knowledge become so important so that the person can make better and responsible decisions?

Herein lies the confusion, because having financial knowledge does not guarantee someone could make better and responsible decisions. As seen, with many qualified financial knowledge people, it does not guarantee turning them to make better decision over their personal financial decisions. Try to look around us. Starting from our own parents who are the people closest to us. Many of them are not lucky enough in matters of education. They had a mediocre income. However, it turns out they can manage and plan their personal finances. With all their limitations, they can lift the dignity of their children to a higher level with better education provision. Proof? We have heard a lot of inspirational stories in the media, for example a pedicab driver who is able to send his daughter to have master’s degree in a prestigious university and even become the best graduate. How could a pedicab driver, who did not even graduate from elementary school, manage his finances to support his family. Do not we realize there is a "X Factor" which has important contribution here. The X Factor determines someone’s success or failure in managing their personal finances.

It is all about Leadership that really matters

It is all starts with leadership. What distinguishes a person from success or failure in managing personal finances, is his leadership. Knowing what is most valuable to him, what priorities are more important and acting tactically, are the essence of intended leadership. This is the real X Factor that makes a person who does not understand financial knowledge be able to carry out financial planning and management without realizing it. Leadership here becomes Alpha and Omega. Let us look one by one.

First: "Know what is most valuable"

Take example if we put lifestyle as something most valuable, then we will put shopping on lifestyle needs such as branded bags and shoes, mobile phones, luxury cars, and others, above their family needs. If their income is not enough to finance the lifestyle, personal justification was made that these things will improve his image and confidence in their work environment. "Later" it could guarantee success and bring his family to better level. Really? Lifestyle spending turns into investments. They will start to finance their lifestyle through unsecured loans, credit cards, and so on. Problems arise in the future when one by one the arguments start to fall.

It will be different for those who place their family as the most valuable thing. They will always put the fulfillment of primary needs, food and clothing, absolutely fulfilled first, and after that plan part of their income to have house/ apartment to live; and fulfill their children's education in accordance with their remaining financial capabilities. They will adjust each portion of needs to fit their current income. The only difference is the level of quality, there are funds in any way.

Second: "Wise in setting priorities"

Which is more important if we are asked to choose one of these two options: to have a dream house for a beloved family; or to choose a cramped rented apartment with the remaining funds can be allocated for better school education for their children?

The above question often arises in the middle of us, especially for those who are preparing educational funds for their children in the early days of building a family. They also have multiple financial goals such as housing funds, car funds, childbirth funds and so on, which are also intended for their families. It takes wisdom to make the most important decision from many important decisions.

Compensation and benefit structure, both fixed and variable income is one of important consideration point. Sometimes we are too focus on what money we continuously receive every month without realizing what is fixed and what is variable. Variable component always changes and depends on achievement or condition. Using source of funds from variable income to pay or finance our long-term permanent expenses, such as home mortgage payments, would be unwise. What does happen when target is not achieved? The permanent obligation must be paid regularly regardless our target achievement.

In this stage, the ability to foresee big picture and to think holistic is needed, to see past, present, and future in one linear line altogether. 

Third: "Act tactically"

With finite resources (limited income) and infinite needs, ability to take tactical decision & action is very much needed. For example, in relation to education fund, the way to prepare education fund should be as early as possible. Besides having to consider the inflation factor, it must pursue and align with the age of the children. The more children get older, the shorter the time needed to prepare adequate educational fund for their children in accordance with their financial capabilities. Early investment gives more time to opt flexible financial arrangement.

Tactical attitudes and actions are needed in dealing with spending on lifestyle. The way to do this is to set aside a small portion of income each month without disrupting the patterns of spending for routine/ primary needs (food, clothing, education, investment for housing, including simple family vacations). Spending on lifestyle is sometimes needed, but not a top priority.

3 L (eadership) + 1K (nowledge)

After we understand that Leadership is the X Factor that determines the success or failure of people in managing their personal finances, next is what financial products that fit the needs of the funds we want to prepare. For example, education fund, insurance, savings etc. This has to do with long-term investment. At least a minimum of one year. We must be able to understand the contents of financial products well, and only choose them once they meet our needs.

In short, there are many reviews and literature that can be found related to financial product varieties, in internet and magazines. This article is not intended to discuss the types of financial products one by one, but rather to show that behind them there is an inevitable leadership role. This leadership factor makes a person have financial goals so that he can determine the scale of his financial priorities wisely.

At the end, we do not need to become Finance “Jedi” or "Sith" to master our own personal financial management. What we need is the life force, the true belief that come from our Self leadership. Self-Leadership is rooted from high self-awareness to know what is most valuable, wise in setting priorities and act tactically. Our willingness to take risks for the good of an unknown future, and the willingness to completely change our perception of how the world works is what really matters.