◄UNIT 4: Effective CommunicationUNIT 6:Education and Welfare Systems►

UNIT 5:Personal Finances

  • UNIT 5:Personal Finances

    Key unit competence: To be able to make informed financial judgement

    and decisions.

    Introduction
    Personal finances are individual or family finances. How we obtain, budget,
    save and spend money over a period of time is called financial management.

    In this unit, we shall learn how to manage personal finances.

    Activity 1

    As a class, brainstorm on the term ‘personal finances’.

    5.1 Sources of revenue

    Activity 2

    1. In pairs, discuss the major activities from which your country earns
    revenue.
    2. Tell your friend some of the activities through which your community
    members earn income.
    Revenue refers to all the money coming into a business, a country or a person
    especially through the sale of goods or services. Revenue can be obtained
    from different sources.

    For an individual, the following are possible sources of income:

    1. Personal savings
    2. Selling of goods and services
    3. Employment
    4. Donations or gifts from friends and relatives
    5. Selling of personal property

    6. Borrowing from friends, relatives and financial institutions

    For a company, the following are possible sources of income:

    1. Savings
    2. Selling of goods and services
    3. Rents and leases of company property
    4. Interests, dividends and royalties paid by other companies

    5. Selling shares to the public

    For a government, the following are possible sources of income:

    1. Foreign exchange
    2. Taxes (propert tax, income tax, import duty etc)
    3. Fines and penalties charged on those whom have broken the law
    4. Fees charged on services rendered by the government
    5. Interest from loans given to individuals and institutions
    6. Grants and donations from international donors
    7. Loans from international lenders
    8. Leases and rents on public property
    9. Income from government-owned corporations
    10. Sale of government assets such as houses
    11. Property trustee – where privately owned property reverts back to the

    government if the owner dies intestate.

    Exercise 1

    As an individual, list the sources of revenue for your country.

    5.2 The concept of saving to an individual and the wider

    society

    Activity 3

    Group work

    1. Discuss in your groups the disadvantages of spending money without
    saving.
    2. What are the advantages of spending money sparingly in order to save?
    The concept of savings can be categorised into two kinds in order to be
    properly defined.

    (a) Personal savings - This is what people save in order not to consume all
    their income. These savings can remain on bank accounts for future use or
    be invested in other ventures like building houses, shares, and other financial
    instruments. Personal savings depict a relationship between savings, income
    and consumption but the level of income is the major determinant of
    personal savings.

    (b) National (Public) savings - These are personal savings plus the
    business savings and public savings. Public savings are basically tax revenues
    less public expenditure.
    At the individual level, the higher the savings, the higher the standards of
    living. Higher savings among individuals result in financial self-actualisation
    after a period of time. This enables individuals to fulfill most of their
    psychological and physiological needs. These are, for example, good feeding
    and clothing, better housing (private shelter), better child care in form of
    health and education, and even other luxurious property like cars or luxurious
    styles of life like big weekend shopping, holiday abroad, big investments, etc.
    At the society level, savings have a great impact. Consistent personal/
    household savings result in big investment e.g. credit cooperative societies
    which may impact positively on the welfare of the members of society
    especially through soft loans to start or boost small scale business/economic
    activities.
    When prices of commodities rise, personal savings are affected as people
    spend more on buying commodities.
    Through individual development accounts - these are savings accounts that
    allow individuals and families to save and generate money for a specific
    savings goal. For example, to buy a home or rehabilitate an existing one, start
    or expand a small business, pay for college education or job training, own a
    vehicle for many purposes e.g. personal transport means for convenience to

    reach work or income generation.

    Personal/household savings bear directly on national/public savings,
    especially through individual retirement accounts. Economists argue that
    lower personal savings may lead to a decline in the net national/public
    saving rate. This decline in national saving may lead to insufficient funds for
    the economy to invest in people’s good standards of living. There is also the
    possibility that and the entire society members may not be saving enough
    for retirement.
    It is also obvious that when personal savings are low, investment will also
    be low. Hence low economic growth and economic development in the long

    run. This is a drawback to the economic advancement of the wider society.

    Exercise 2

    What is the difference between personal and national savings?

    5.3 The importance of saving and the role of interest in

    saving

    Activity 4

    Discuss as a class what is meant by saving and the role it plays in an

    economy.

    The importance of savings

    Savings play an important role in an economy. Savings are important at
    different levels. We therefore need to understand who saves, why and how it
    can affect the economy entirely.
    In an economy, savings are done by households, companies and the
    government. Households save in order to cater for future expenses e.g.
    children’s education. If households don’t save, they will have insufficient
    funds to cater for future expenses. For example, they may struggle financially
    at old age or after retirement and as a result become dependent on family
    members or the government.
    Companies always save their net profit; that part of their profits that they do
    not pay out to shareholders as dividends. It is saved for future investment
    financing e.g. in rehabilitation of existing facilities or replacement of worn

    out equipment.

    Therefore, if companies don’t save sufficiently, they will not have enough
    capital to finance any replacements or expand investment. The company
    may not operate efficiently or fully fund its growth potential.
    It may not have enough funds to employ more people especially the skilled
    labour force.
    When the government’s tax revenues exceed expenditure on wages, social
    security payments, fuel, school books, hospital supplies, among other national
    expenses, then it has enough funds to build new roads, bridges, hospitals,
    schools and other public facilities that will improve the living standards of its
    citizens.
    If the government doesn’t save, it will have no funds to finance fixed
    investment in social infrastructure e.g. schools, hospitals, housing and
    physical infrastructure such as roads, bridges, airports, etc. This will result in
    poor standards of living, how economic growth and development.
    Therefore, the three parties: households, companies, and government are all
    interrelated in matters of saving in an economy. Despite the differences in

    savings behavior, they are not independent of each other.

    Exercise 3

    What do you understand by the term ‘savings’?

    The role of interest in saving

    Interest means the cost of borrowing money expressed as a percentage of the
    loan amount. Interest rate is the amount charged, expressed as a percentage
    of the money borrowed by the lenders to borrowers.
    Therefore, we can say that savings are dependent on interest/interest rates.
    If the interest rate is high, the rate of savings will be low and the reverse is

    true.

    5.4 Social, moral, ethical and environmental implications of

    financial decisions

    Activity 5

    Brainstorm on the ways we can make wrong financial decisions at school
    and outside school as students.
    Financial decisions, at individual level, can be defined as ways in which an
    individual decides to earn and spend his/her income so as to satisfy his/her
    needs.
    A person’s financial decisions have implications on the social, moral, ethical

    and environmental conditions of society. These are as presented below.

    Social implications of financial decisions

    Bad decisions at family level impacts the entire society as a society is made
    up of families. Failure of parents to offer good education to their children due
    to inappropriate decision making on finances results to a poorly educated
    society and this has consequences. Either the generation to follow will have
    poor living standards out of the parents’ inability to educate their children
    or there will be insecurity and crime due to frustration over lack of job
    opportunities. This can be caused by luxurious spending. This may lead
    to lack of finances to cater for the immediate household needs like food,

    clothing, etc.

    Environmental implications of financial decisions

    These result from the fact that some investments, however income-generating
    they may be, they can also be destructive to the environment. This can be
    either due to pollution or depleting the natural resources. For example, a
    decision to start a business on charcoal must involve cutting down trees
    which has adverse effects to the environment. Poaching is also destructive
    as it goes against conservation of wildlife. The business may be intended to
    create savings but there are other side effects to the environment.

    Investing in self-help projects for daily income may be either good or bad to

    the society, for example, hotel or bakery investment may enhance service

    delivery and society development as food is a necessity and such a venture
    will definitely meet that need while generating income to the investor.

    However, it may have negative effects e.g. pollution of the environment.

    Ethical implications of financial decisions

    From the ethical point of view, it is necessary to look at morality of one’s
    actions and this involves the sense of right and wrong. No matter how
    financially favourable a situation might be, one should not engage in illegal
    businesses. For example, drug trafficking and corruption are morally wrong
    and illegal. Using personal funds in corrupt deals like bribery is illegal in
    society and unethical. Unethical means that it goes against the moral

    expectations of the society.

    Grabbing public land that is meant for public use to use for personal gain is
    also unethical.
    Another example of an unethical financial activity is engaging in prostitution.
    Practising prostitution is immoral and a social evil.
    Spending money on college education or education upgrading, on the other
    hand, leads to individual and society development. Education is a social need
    that leads to professional qualifications which qualify an individual for job
    opportunities. When people in society gain education, they are likely to live
    better lives.
    When making financial decisions on how to generate more income, save or
    spend money, it is therefore important to consider how the decision is going

    to impact on the society and the environment.

    Exercise 4

    1. What are they doing? p
    2. How is the habit they are engaging

    in affecting their financial situation?

    5.5 Keeping track of personal money and payment
    commitments

    This involves ways of managing the way we spend our finances. This can be
    on a daily, weekly or monthly basis. Keeping track of personal money and
    payment commitments can be realised if the following is done.

    1. Managing finances well

    This can be done by keeping track of the spending habits. This is most
    efficiently done by recording. Recording helps in accounting for every
    expense incurred. It should be done on a daily or weekly basis. Information
    recorded on paper can be transferred to a computer for convenience. In case
    a computer is not accessible, a note book can be used.
    In the note book, information about the spending habits; for example, in a
    month, how much is spent compared to how much should have been spent
    is recorded. This helps to identify misuse and helps in sticking to a personal
    budget.
    2. Develop a personal budget

    A personal budget is essential for one to know how much he/she expects to
    spend over a period of time. In drawing a personal budget, it is important
    to consider expenses on necessities such as clothes, food, housing, utilities,
    entertainment, etc.
    The budget should reflect personal savings e.g. retirement savings, study
    savings, long-term savings and any other goals. Maintaining weekly or
    monthly checks to see that the expenditures are as budgeted for is very
    important. Even small amounts of money should be accounted for.
    Changes on the budget can be made depending on the available alternatives.
    This is if the changes are appropriate in meeting the personal needs at lower
    costs.
    3. Pay financial commitments in good time

    Payment commitments refer to the resolve to meet all the financial obligations,
    such as debts and monthly bills. In day-to-day living, we incur expenses that
    are payable on say monthly basis, yearly, etc. Budgeting for one’s finances
    allows for accuracy on the amount to be paid and when it is to be paid. These
    can be electricity bills, water bills, house rent, school fees, loans, credits from

    friends and financial institutions such as banks.

    Exercise 5

    In pairs, discuss how a business on drug trafficking affects the society

    5.6 Extended work

    Drawing knowledge from the concept of personal/household saving learnt
    in this unit, make a saving plan for your family for one month. Closely refer

    to the average income of your family against daily expenditure.

    5.7 Unit summary

    Sources of revenue

    For an individual

    1. Personal savings
    2. Selling of goods and services
    3. Employment
    4. Donations or gifts from friends and relatives
    5. Selling of personal property
    6. Borrowing from friends, relatives and financial institutions

    For a company

    1. Savings
    2. Selling of goods and services
    3. Rents and leases of company property
    4. Interests, dividends and royalties paid by other companies
    5. Selling shares to the public

    For a government

    1. Foreign exchange
    2. Taxes (propert tax, income tax, import duty etc)
    3. Fines and penalties charged on those whom have broken the law
    4. Fees charged on services rendered by the government

    5. Interest from loans given to individuals and institutions

    6. Grants and donations from international donors
    7. Loans from international lenders
    8. Leases and rents on public property
    9. Income from government-owned corporations
    10. Sale of government assets such as houses
    11. Property trustee

    Importance of saving

    1. They cater for future expenses.
    2. They can be used for future expansion by companies.
    3. They can be used by governments for development projects.
    4. They can be used by governments to finance long term investments.

    Keeping track of personal money and payment commitments

    1. Managing finances well
    2. Develop a personal budget

    3. Pay financial commitments in good time

    5.8 Test your competence

    Read the short story below then answer the questions that follow.

    Isaac was known to many as a mean person. He would never buy anyone a
    cup of tea though he had a lot of money. His children never had enough to
    eat. They wore tattered clothes. They would be sent home from school due
    to lack of school fees. Isaac kept huge amounts of money in the bank. He

    said that it was his savings for future needs.

    In the same village there lived Ellis. She worked with a multinational company
    and earned a huge salary. However, whenever she got her salary, she went to
    a spending spree. She would buy expensive clothes, travel to different places
    and attend parties with friends. Soon, she would be without money. She
    would start visiting friends and asking them for money to buy food. People
    started laughing at her saying that although she earned a lot of money, she

    was poorer than them.

    Questions

    1. Do you Isaac’s saving was justified? Explain your answer.
    2. Was Ellis’ way of life responsible? Give reasons for your answer.

    3. What advice would you give to both Isaac and Ellis concerning saving?

    ◄UNIT 4: Effective CommunicationUNIT 6:Education and Welfare Systems►