Reasons you need to understand personal finance

Personal finance is an important aspect of everyone’s life, including the ‘Generation Z’. Generation Z are individuals born between the mid-1990s and early 2010s.

If you were born during that period, you are most likely Generation Z. Right now, young people are taking giant strides and embracing the unconventionality of working standards since the pandemic. There are more financial resources to take over your finance and secure financial freedom. However, deciding to take this step may seem cumbersome as controlling your finance can be a quite a hard nut to crack.

First, a good understanding of financial literacy and key terms related to personal finance can help to make morally sound and well-informed decisions about managing money and planning for the future.

There is a wide gap between your money, how to utilise it, and how to multiply it; it goes beyond getting a bigger income. If you lack the required financial literacy knowledge to turn your life around, then it might be hard to move past your current income into wealth or financial freedom.

In this article, we will explore some key personal finance terms that every Gen Z should know. These terms include budgeting, saving, credit score, investing, and debt. Understanding these terms will help Generation Z build a solid foundation for managing their finances and achieving their financial goals.

Discretionary expenses

The Chief Executive Officer of Money Africa, Tosin Olaseinde, says, “Discretionary expenses are the expenses that you can choose to spend on non-essential things like entertainment, hobbies, vacations, and luxury items. These are not essential to your daily living, and you have the ‘discretion’ or choice to spend or not spend your money on them.”

According to her, in order to include this in your money management tool, “Pay your essential expenses first such as housing, utilities, and debt payments before allocating money to discretionary expenses.”

Also, the Corporate Finance Institute describes discretionary expenses as a non-essential expense that is incurred by an individual, household, or business. Another way to think of discretionary expenses is to classify them as ‘wants’. So, that means apart from your compulsory bills, you should understand funds set aside to service a want. What makes it important is how you prioritise it.

Budget

Considered as one of the most important aspects of finance, a budget is described as a process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do, a report by Money Coach reveals.

CEO Wealth Motley adds in a conversation with our correspondent that, “a budget is telling your money where to go.

A personal finance expert, Bisoye Okwoli, says,  “I usually tell people to budget to the last naira. Set out an amount every month for saving. You cannot meet everyone’s needs, else you will soon die; “So set aside what you want to give and after you have expended that, let people know that you have exceeded your giving threshold.”

Lifestyle inflation

Lifestyle inflation can be described as a situation whereby you increase the cost of your living due to more income generation. This dangerous ploy tricks you into believing that your living standards must be on par with your earnings. It drives you to make reckless money decisions and later leads to regret and sometimes poverty, especially when the income reduces drastically.

While urging individuals not to get involved with increasing lifestyle costs, Olaseinde says, “Please avoid lifestyle inflation. This is when people start increasing their expenses at the same rate at which their income increases; not comparing costs before making a purchase; always compare before you make that purchase”

Retirement savings

Retirement is a period when an individual has to leave behind an active work life due to the effects of aging or having met the required years of service of an organisation. It is inevitable and befalls everyone. Although retirement periods differ, in Nigeria, once you reach the age of 65 years, the individual is relieved from all jobs and active service to the country.

Retirement saving is money that you set aside to spend when you can no longer actively work to make an income.

The Chief Executive Officer, the Nigerian Council of Registered Insurance Brokers, Mr Tope Adaramola, while speaking in a report on retirement adds that “We must take note that everyone must retire, and the notion that retirement is for those we call salary earners should be debunked. Everyone should make space to retire someday when they cease their daily work routine. Ostensibly when they cease, they will only live on what they had planned for when they were in active work, whether as a salary earner or non-salary earner such as an entrepreneur.”

“So, at the point of your disengagement, you can buy an annuity and annuities are sold by insurance companies. The beauty of annuity is that most annuities bought pay salaries for life. You will continue to draw based on your age and agreement with the annuity seller. There could be immediate or deferred annuity depending on your wants and the type of goals set.”

Emergency fund

An emergency fund is a sum of money set aside to cover unexpected expenses such as medical bills, car repairs, or job loss. Experts recommend having at least three to six months’ worth of living expenses in an emergency fund.

In a report by the PUNCH, Former Financial Manager at Wales Bank Asset Management, Racheal Alabi, says that “Emergency funds are stocked-up funds that you can use when you have unplanned expenses.

“An emergency fund is like money for rainy days. But in Nigeria, some people say it is always raining.”

He explains that emergency funds are important for every aspect of life in case of job loss or mid-life events that require urgent financial solutions.

Compound interest

A term used in regard to investment, compound interest is interest that is earned not only on the principal amount but also on the accumulated interest. Usually, individuals who run businesses or invest put in a sum, and whatever interest that accrues on the business or investment over time is described as interest.

Compound interest also reflects on debts paid over time. It is why a loan app will lend out a sum and the repayment will be higher than the sum initially dispensed to the customer. This is an important term to note especially if you are new to investment planning.