According to Business Dictionary, financial management is simply “the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization.” In an organizational context, financial management might include things like creating written procedures and policies, budget controls, and internal controls.
Financial Management Ensures Your Financial Future
It’s kind of like taking a trip with no plan, no map, and no compass or GPS. Imagine setting sail on the open ocean without any idea of where you wanted to go or how to get there.
You decide to throw all relevant tools to the wind and simply see where the ocean currents take you. Sure, it may have worked out for Christopher Columbus. But it’s a safe bet that your financial future won’t be so fortunate.
This holds true whether you’re an individual, a small-to-medium sized business, or a large multinational corporation. Without strategic planning regarding the ways you or your organization earn, spend, and invest money, too much gets left to chance.
Financial management also means setting goals and analyzing past trends. Whether it’s to manage your retirement funds, save for future emergencies, or leave something behind for your heirs, there are quite a lot of ways that you can benefit from financial management.
Here are ten reasons why you should consider financial management.
1.) Managing Your Retirement Funds
With interest rates at historic lows, traditional methods of sustaining yourself during retirement are no longer viable.
Certificate of Deposit (CD) accounts no longer yield much of anything unless you have a few million dollars laying around that you can
stand to part with for years at a time. Treasury bonds also yield very little, although the Federal Reserve (America’s central bank) has begun slowly raising interest rates.
Without financial management, it’s difficult to get a handle on your retirement. You might become involved in investments that are too risky or just don’t pay off.
2.) Donating To Your Favorite Charities
Charity may not be a big concern for everyone. But one benefit of hard times is that they can bring out the best in people. In today’s difficult economic climate, many people find some solace in giving back to their community on a small scale or giving to nonprofit organizations on a larger scale.
If you want the financial freedom to contribute to the charities of your choice, you will need to engage in some financial management. Since charitable contributions are literally giving money away, you have to be careful not to part with more than you can spare.
Without proper financial management, it’s impossible to know the safe amount you can afford to let go.
3.) Making Your Money Work For You
The comedian Jerry Seinfeld once made a joke about the phrase “making your money work for you.” After all, he said, if your money can work for you, why do you have to work for your money in the first place?
Of course, the joke conflates the intended idea of the phrase.
Once you have enough money to invest, it can beget more money for you without you having to earn it at a traditional job.
4.) Tax Compliance And Efficiency
If your income is near or below the poverty level, it’s unlikely you’ll ever find yourself being audited by the Internal Revenue Service (IRS) or your country’s equivalent tax collection agency. But the more you make, the more you’re on the radar of tax authorities, and the higher your chances of being audited.
In the event of an audit, it’s important that you can show you did your best to comply with all appropriate laws and regulations. If it appears as though you purposely falsified information on your tax returns or otherwise engaged in shady financial activity, you could be facing fraud or tax evasion charges. These are felonies that can come with hefty fines and jail time.
With good financial management, you can rest easy knowing that you followed all the rules and won’t owe any extra taxes or be facing any felony charges.
5.) Preparing For An Emergency
According to some surveys, the vast majority of Americans could not come up with the funds needed for a $500 emergency. That means that in the event of a catastrophe, whether it be financial, medical, or otherwise, most Americans would wind up in bankruptcy.
This sad truth is one of the most important reasons to consider financial management. Making sure that you have sufficient funds saved in case of an emergency is crucial. Without an emergency fund, everything could change overnight. One unexpected event could mean the difference between being safe and going broke.
6.) Leaving Something Behind For Your Heirs
If you have children or other dependents that you expect will survive you, then you should consider financial management to plan for their future. Part of financial management can include the creation of a living will that will determine how your assets are allocated after you pass away.
Without a will, all of your assets go to your next of kin, which will most often be your firstborn child.
Using financial vehicles like trust funds can not only provide for who you want in the way you want but also make sure that they don’t squander the funds you leave them. Instead of giving one child everything up front, it’s possible to leave your heirs smaller sums over time by using correct financial management.
7.) Hedging Against Losses In Specific Financial Realms
Part of financial management includes proper diversification. This means that your assets will be spread across multiple asset classes in specific proportions. Being diversified means that all of your eggs are not in one basket, so to speak. So, if something like a stock market selloff happens
suddenly, you won’t be down and out. Your portfolio might take a hit, but some of your finances will stay flat or even improve.
For example, gold tends to rise in times of uncertainty. In the event of financial upheaval, a long position in gold might save you when the stock market craters. This is referred to as “hedging,” meaning that if you lose in one area, winning in another area will make up for it.
8) Making Sure Your Time Doesn’t Go To Waste
The common denominator that all these reasons share is that they involve making sure your hard-earned money doesn’t go to waste. Currency represents life – the amount of time it takes to earn that currency. Not planning to manage your finances creates an uncertain scenario whereby you could see your life’s work evaporating without a trace.
Reasons To Consider Financial Management Summarized
In short, the reasons you should consider financial management are many and varied. This is only a partial list.
If you want to manage your retirement better and be able to donate to charitable causes that mean something to you, you’ll want to consider financial management. Making your money “work for you” also necessitates financial management, providing passive income whenever possible.