Many decisions we make in life impact us financially. They do not seem like it, but choosing to make your own coffee or the people you surround yourself with will have its costs and benefits to your finances. Want more examples? Keeping yourself healthy is another. Medicines and hospital bills are expensive. It is more cost-effective to exercise, get enough rest, and eat the right foods. But you will never know the effects of your decisions unless you apply proper financial management.

Overall, financial management is the basis of financial decisions. It calculates the costs and analyzes the risks involved in various opportunities to ensure sound judgment. Starting a business, buying a car, and owning a house are examples of decisions that require validation from financial management data.

This article intends to help you make better financial decisions through financial management. Read on to:

• see the 28 examples of life decisions that will impact your finances
• be aware of how financial management helps in decision-making
• know the most important financial decision

Disclaimer: The content of this post is based on the author’s opinions. It is not written to give professional advice.

28 examples of financial decisions

As mentioned earlier in this post, many of our life choices are also financial decisions. Here are 28 examples:

1. Starting/closing a business.
2. Buying a car.
3. Owning (or renting) a house.
4. Marriage.
5. Having children.
6. The school of our children.
7. Travel.
8. Investing.
9. Saving.
10. Applying for/resigning from a job.
11. Managing stress.
12. Retirement.
13. Getting insurance.
14. Borrowing money.
15. Using credit cards.
16. Paying off debts.
17. Estate planning.
18. Giving.
19. Paying bills on time.
20. Having a budget.
21. Tracking expenses.
22. Eliminating liabilities.
23. Learning about money.
24. The neighborhood you live in.
25. Make your own coffee.
26. Eating healthy.
27. Exercise.
28. The people you surround yourself with.

How Does Financial Management Help In Decision-Making?

Financial management is the practice of taking control of money. It involves creating a budget, tracking your spending, and finding ways to improve your income. In these activities, you can calculate and analyze situations most advantageous to you. It shows you your limit, tells you what you need to cut back to save money, and helps you see where you need to focus your efforts more.

It shows you your limit.

Knowing your limit is key to making sound decisions. Many avoid the word “limit” because it denotes a lack of freedom. People want to “feel” free that they intentionally ignore the reality of their limitations. This is poor management. Because the fact is we can’t always get everything we want. And that’s okay. Embracing the truth about our limitations will make us shrewd. It allows us to appreciate and make the most of what we already have.

A passage in the Bible that hits this home is Psalm 90:12:

So teach us to number our days so that we may get a heart of wisdom.

The current average life expectancy for us humans is 70 years. If we translate it into days, that’s around 25,550 days. We will spend about 8,500 of those days sleeping. Roughly 7,300 to infanthood, childhood, and elderhood. And approximately 4,250 to our daily activities like eating, bathing, brushing, commuting, and sitting on the toilet. All in all, we only have around 5,450 days or 15 years to really make a difference with our lives. How do you plan to spend the little amount of time we have?

The same idea applies to our finances. One quick way to do this is to write how much you make each month on a piece of paper. That’s your limit. Base your financial decisions on that limitation.

It tells you what you need to stop.

I also did the exercise when I got into a terrible financial situation five years ago. I highly recommend you to follow this post to get deeper into financial management: Assets and Liabilities. It was the time when I rebuilt my cash flow since I found my outflow was immensely above my inflow. Managing your money includes tracking your income and expenses. By doing so, you will be able to determine what expenditures you need to cut back to prevent you from getting into debt. Here is a list of the 17 things you may need to stop today to help improve your financial well-being:

1. Subscribing to streaming services (like Netflix, NBA League Pass, Disney+, etc.)
2. Using credit cards and paying only the minimum.
3. Getting insurance that you are not sure why you are buying in the first place.
4. Signing up for gym memberships you do not use.
5. Not minding bank charges and service fees.
6. Binge eating.
7. Smoking.
8. Drinking alcoholic and sugary beverages.
9. Junk food.
10. Borrowing money.
11. Buying appliances you do not need.
12. Not following your car’s maintenance schedule.
13. Investing in things you do not understand.
14. Traveling too much.
15. Spending on depreciating assets like cars.
16. Keeping up with the latest devices.
17. Purchasing coffee from coffee shops. (Make yours at home instead)

It helps you focus on what works.

Besides knowing what to stop, financial management can also show you what’s working for you financially. Are you familiar with the Pareto Principle? It is otherwise known as the 80/20 rule. In a nutshell, the Pareto Principle means 80% of our results come from 20% of our efforts. Here are a few examples to make this concept clearer:

• 80% of revenue is from 20% of your customers.
• 80% of your knowledge is from 20% of the books you’ve read.
• 80% of sales come from 20% of your products.
• 80% of passive income is from 20% of your investments.
• 80% of the visitors to your website come from 20% of your content.

But the reverse is also true:

• 20% of your clothes are worn 80% of the time.
• 20% of your life issues cause 80% of your stress.
• 20% of ideas give you 80% of your success.
• 20% of your monthly expenses cover 80% of your needs.
• 20% of what you do provides 80% of your satisfaction.

You get the point. As you manage your money, you will be able to see the 20% that contributes 80% to your finances. Once you find it, focus more of your time and effort there while you give the extra to the other aspects. Below are 9 ideas you can focus on right now:

1. Eliminating a couple of your monthly expenses.
2. Paying off your debts.
3. Negotiating long-term debts.
4. Building an emergency fund (Saving 6 months’ worth of your monthly overhead.)
5. Selling belongings that you no longer need.
6. Reading books on financial management.
7. Investing in mutual funds.
8. Simplifying your lifestyle.
9. Learning how to make your own coffee.

If you like to learn more about the Pareto Principle, I strongly suggest you get the book: The 80/20 Principle by Richard Koch.

What is the most important financial decision?

Choose the ultimate over the immediate. Wealth building takes time. A lot of time. And along the way, you will be challenged to decide between what you want now and what you want the most. In a sense, your financial destiny depends on your ability to delay gratification. In his book, Flipping Burgers to Flipping Millions, Bernard Kelly showed how little things can snowball into something significant over time. He got the idea initially from another book by David Bach entitled the Latte Factor.

Let’s say you chose to make your own coffee instead of buying from a cafe. This decision would save you $3 (Php 168) a day. Now let’s do the math. $3 a day is $21 a week, or $90 a month. If you invested that amount at a rate of 10 percent annually, this is what it could grow into (estimated):

• Year 1 = $1,131 (Php 63,336)
• Year 2 = $2,380 (Php 133,280)
• Year 5 = $6,969 (Php 390,264)
• Year 10 = $18,436 (Php 1,032,416)
• Year 15 = $37,302 (Php 2,088,912)
• Year 30 = $203,444 (Php 11,392,864)
• Year 40 = $569,167 (Php 31,873,352)

Do you see the potential of $3 a day? What if you also chose to buy a new phone every five years instead of every year? What if you walk or ride the bicycle to work rather than drive a car? Small sacrifices are like seeds planted that could one day become a fruit-bearing tree. Again, choose the ultimate over the immediate. So what can you start doing today? Here is a challenge for you based on the book:

• Easy = Save and invest 10% of your income for eight years.
• Normal = Save and invest 20% of your income for ten years.
• Hard = Save and invest 50% of your income for eight years. Or Live on $1,430 (Php 80,080) a month. Save and invest everything that’s left for eight years. Select which option saves you more money.
• Note: Invest in funds that yield approximately 5 to 10 percent annually.

Then start enjoying the fruits of your labor after.

More From The Learning Dad Blog

• Why Is Financial Management Important To All Managers?
• Is Financial Management A Skill? (What To Teach Our Kids)
• What Does Financial Planning Include?
• What Are Wealth Management Products?
• Why Is Financial Planning Good?

Recommended Resources

• The 80/20 Principle by Richard Koch
• Flipping Burgers to Flipping Millions by Bernard Kelly
• The Latte Factor by David Back and John David Mann

Sources

• Life Expectancy – Our World In Data
• 80-20 Rule – Investopedia
• Types of Financial Decisions in Financial Management – Economics Discussion

In simple terms, a manager is a person in charge of something. It could be a business, a family, a sports team, an event, or your own life. Technically, we are all managers. And as managers, one of the most critical areas we should be good at is financial management.

Financial management provides economic stability and profitability. Organizations with managers who practice sound money management will thrive. On the contrary, companies that do not manage their finances will put themselves at risk. Money is always a factor when making critical decisions.

To my fellow parents, we know this is especially true with managing our families. We count the cost all the time. We always consider the financial implications before we make our moves. This post is about helping you become a better financial manager. What you will learn here applies to your personal and professional life. Continue reading below if you want to know the crucial decisions we should make as financial managers and what money issues we have to watch out for.

Disclaimer: The content is based on the author’s opinion. This post does not intend to give any professional advice.

How Important Are The Decisions Of A Financial Manager In Running A Company?

The primary job of a financial manager is to ensure the company has enough money to run smoothly. His decisions will always lean towards cost-effectivity and efficiency. He constantly seeks the best ways to utilize the company’s resources. If I have to rate the importance of a financial manager’s decision, I’d say 7 out of 10.

In 2016 I moved my business to our house and focused all my efforts online – full story here. This transition allowed my company to cut costs and pay off its debts. It’s among the toughest calls I have to make as a manager, but I know it was a necessary move for our business and family.

Money is great, but it is not everything. This is why I only rated its importance 7 out of 10. Three things supersede a financial decision:

1. Higher Authority

The decision of the owner is more important than the financial manager’s. I worked in my dad’s company many years ago. I remember telling him to halt an order from a supplier to maintain liquidity. This decision would give us enough cash to pay our workers that month. Despite my advice, he told me to push with the transaction; and so I did. As managers, we may not agree with our bosses’ calls. But submitting to the higher authority is part of our job.

2. Morality

Do not trade your morals for financial gain or efficiency. Our veterinarian told me my dog, OJ, needs to undergo emergency surgery to remove a stone blocking his urinary tract. It would cost $1,200. OJ was ten. He is almost at the end of his life. Is it a wise decision to spend that amount on an old dog? The other option is much cheaper. For only $50, I can go for euthanasia and end his suffering. I walked back and forth as I called my wife and family members to seek their advice. In the end, we chose life over money. Because it is the right thing to do.

3. Relationship

Relationship over money. Many people questioned us when they learned Lalaine and I were moving out of my parent’s house. They said we would waste money on rent and incur additional monthly expenses. I agree. I actually wrote about my struggle to leave and cleave. The decision did not make sense from a financial point of view. But relationship-wise, it was necessary.

• My wife and I enjoyed our marriage more.
• Our husband and wife teamwork has leveled up.
• Our relationship with my parents and siblings has never been better. We now miss each other and look forward to every family gathering.
• We have better influence and authority over our kids.

Money and relationships usually do not go well together. If you must choose between them, always go with better relationships.

What Are Some Of The Most Important Financial Management Decisions?

Building wealth is less about earning and more about spending. This is one of the most profound financial concepts I learned from Robert Kiyosaki. Think about it, no matter how much money you make, you will never become wealthy if you spend them on things that do not have value. Thus, the most important financial management decisions rest on how you spend your money.

Where should we spend the money?

This might be a bad example, but this is the illustration I last used in my conversation with Lalaine. I asked her: which watch is more expensive, a $1,800 Tag Heuer or a $6,500 Rolex? She said the Rolex, of course. She’s technically correct. But what if I tell you that Tag Heuer depreciates while Rolex appreciates? If I buy Tag and think of reselling it after a year, I definitely have to sell it below the published price. In the case of Rolex, I can sell it at the amount I bought it or even profit from it. In a sense, Tag is more expensive because you will lose money in the long run.

To my wife: this is not an alibi to purchase a Rolex.

Again, I apologize for the terrible illustration, but I hope you get the point. As financial managers, we must consider where we should spend our money. What are the expenses that will give us better returns long term?

How much can we spend?

Financial managers are not magicians. We cannot create anything out of thin air. All we do is use the resources we already have on hand. The challenge for us is to strike the proper balance between assets and liquidity. Assets are the things we acquire that have potential returns. Liquidity is the amount of cash we have to fund our daily needs. Spending too much on assets may hamper our day-to-day operations. Being too liquid will deprive us of future earnings.

It is why having a budget is so crucial to financial management. It helps us determine how much to spend on acquiring assets and how much we should save to maintain liquidity. The safe ratio is 50/50. But to me personally, I like to give more room for my investments. I allot 70% to assets and 30% to cash.

Where should we cut back?

Again, we are not magicians. There is a trade-off in everything we do. To allocate 70% of our funds to assets requires cutting back on some of our expenses. I downsized our manpower, unsubscribed to numerous services, and let go of several types of equipment with high upkeep. I admit they are not easy decisions to make, especially when you grow an attachment to them. But as managers, we have to think logically. Deciding what we should cut is part of our job description. Pruning promotes growth. It will enable us to focus our resources on what matters more.

What Are The Most Important Financial Management Issues Today?

Before I close this post, allow me to share some critical financial management issues plaguing our society today. Becoming aware of them helps us managers make better decisions for the organizations we are heading.

Using Debts

There are different takes on debts. Some, like Dave Ramsey, are completely against it. While there are people such as Robert Kiyosaki who think there are good and bad debts. You have to clarify your personal position (and conviction) about this matter because it will affect your overall game plan as a financial manager. If you decide against debts, you will be more careful about your spending and become extra diligent in saving. If you intend to use other people’s money as leverage, then your tendency is to focus on spending to increase your credit score.

Mixing Business And Personal Finances

If you are a work-at-home dad like me, you’ll understand one struggle we face is separating our business and personal accounts. It is crucial to draw a clear line between them. I have a friend who travels regularly. Thrice a year, he goes out of the country with his wife spending $4,000 to $7,000 a trip. Later we found out his business shut down. Apparently, he was using the company’s resources to fund his personal travels.

Comparing

One bad habit we must remove from our lives as financial managers is comparison. Comparing ourselves to others only clouds our judgment and leads us to act based on emotions. Comparing ourselves to individuals ahead of us may foster envy, jealousy, or a competitive spirit. Comparison to people behind us may result in pride, ego, and superiority. Comparing does not make sense because we all have different starting points. But it’s a disease we all have today since the emergence of social media.

Waste

If there is one common enemy we managers should despise, it’s this: the wastage of resources. It is painful to learn in our country alone, 1,717 metric tons of food are wasted every 24 hours. $460,000 worth of rice is wasted daily – enough to feed 4.3 million individuals. Imagine that. What a waste of resources! But leftovers are not the only problem. Overconsumption of resources is also a form of wastage. It doesn’t matter if it’s money, food, fuel, time, power, water, attention, etc. Any kind of wastage is a failure in management.

More From The Learning Dad Blog

• Is Financial Management A Skill? (What To Teach Our Kids)
• What Is Good Financial Management?
• Why Is Financial Management Important In The Family?
• Financial Management Helps You To Do What? (10 things)
• What Are Wealth Management Products?

Sources

• The malady of food waste: Millions starve as trash bins fill with leftovers — Inquirer.net