Oran Hall | Emancipate yourself from financial slavery

Financial slavery is the state of being controlled by our finances and the financial decisions we make. There are several ways by which people become financial slaves, but freedom can be achieved, though not necessarily overnight.

Financial slavery manifests itself in people having little control over their financial life, spending more than they earn, not being able to meet emergency expenses, not being able to choose how and when to spend, not having control over their financial lives, and not being able to meet their living expenses and realise their goals.

The good news is that change is possible – with a change in mindset and attitude, as well as recognising that a new way can be found to do things differently. Key to making the change is recognising that there is a situation that needs to change and openness to learning how to manage financial matters better.

Not everybody experiences financial slavery for the same reason. Some are born into difficult circumstances. Others become financial slaves by the decisions they make. Granted, some make poor decisions due to their low level of financial literacy, others due to their own carelessness.

Regardless of people’s position, their psychological make-up can have some bearing on how they make financial decisions. People’s attitudes to financial matters are framed by their own experiences, the attitudes of their families, the influence of the church, their friends, and the society in which they grow up.

Even with exposure to good financial education and good financial advice, some people make decisions slowly, some are driven by fear, others by greed, others by aversion to loss, and others by over confidence, for example. These behavioural biases reveal themselves especially when people are making investment decisions.

These biases are real and do not change easily, but using them as an excuse for poor decision-making is not helpful. What is required is for people to be able to see how they relate to money and to make their decisions in ways that align with who they are – not paying too much attention to others, who may be quite different from them, anyway.

Further, these biases could explain why people who have similar backgrounds and experiences fare differently in their financial lives – some being slaves, others being masters.

In any case, there are basic principles which help guide us in making financial decisions – ultimately determining our financial fate.

Here are some. Start by determining your current situation. Identify your assets and liabilities, and take a good look at your cash flow as reflected in your budget. If you do not have one, you know you have work to do. Determine if what you see reflects your priorities and can help you achieve your goals. Of course, you would need to know your goals, which should be clear and realistic.

If you have debts, zero in on them. If they are a drag on you, strategise how you will bring them under control, which could mean taking drastic action, including curtailing your spending to generate funds to service them. You may need to sell assets to bring your debts under control.

Give savings and investment priority, reducing spending if necessary or earning extra income to boost cash flow. Be sensible when saving and investing. Go for good yields at your level of risk. If you are risk averse, stocks should not weigh heavily in your portfolio. And if you are comfortable with risk, there is no need to pack your portfolio with instruments that expose you to great risk just to max out your yields. It might not go as you plan.

Give your investments time to generate compounded returns, and do not encroach on them. Treat them as long-term commitments, and look for opportunities that give tax-advantaged returns. Seek out passive income, where possible.

In your spending, avoid unnecessary purchases, live within your means, spend on what truly adds value, and allow your spending to lag behind increases in your income.

Monitor your financial situation regularly. Review your spending, check your accounts, follow up on your commitments – loan payments and utility bills, for example – and collect money due to you. Adjust your plans if necessary.

This is important. Put yourself on a programme of ongoing financial education and use the knowledge and skills you learn. For example, learn and practise all you can about investment and savings instruments and strategies staying clear of what you do not know or understand. As for debt, know what you are committing to: understand the terms of the loan and ask questions before affixing your signature to any document.

If you are in a state of financial slavery, you can free yourself with the appropriate strategies above, but it could take time. If you are not a financial slave, don’t become one. It can be so sweet when you do not need to be emancipated.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com