Personal Financial Management. Which Factors Affect it?

Table of content

List of Tables

List of figures

Abstract

Acknowledgment

Abbreviation

CHAPTER 1
INTRODUCTION
1.1 Background of study
1.2 Problem Statement
1.3 The Study Objective
1.3.1 Major Objective of the Study
1.3.2 Specific objectives of the Study
1.4 Research questions of the Study
1.5 Hypotheses of the Study
1.6 The Significance of the Study
1.7 Scope of the Study
1.8 Organization of the Study
1.9 limitation of the study
1.10 Conclusion

CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
2.2 Theoretical framework of the study
2.2.1 Overview of personal financial management
2.2.2 The birth of personal financial management and its features
2.2.3 History of personal financial management in Ethiopia and its features
2.2.4 The Importance of Personal Financial Management
2.2.4.1 The need for personal financial management studies
2.2.4.2 Personal Financial Management Process
2.2.5 Major Factors affecting personal financial management
2.2.5.1 Demographic Variables
2.2.5.2 Financial Knowledge
2.2.5.3 Financial Attitude
2.2.5.4 Financial Planning
2.3 Empirical works on personal financial management
2.4 Conceptual framework of Personal Financial Management
2.5 Research gap

CHAPTER THREE
METHODOLOGY OF THE RESEARCH
3.1 Introduction
3.2 The study area and Study Population
3.3 Research Design
3.4 Data sources
3.5 Methods of Data Collection
3.6 Reliability of the research instrument
3.7 Validity of the research instrument
3.8 Sampling Design
3.8.1 Sampling technique
3.8.1.1 Purposes and stratified sampling
3.8.2 Sample Size determination
3.9 Model specification and Data Analysis
3.9.1 Model specification
3.9.2 Method of Data Analysis
3.9.2.1 Descriptive Statistics
3.9.2.1 Inferential Statistics
3.9.2.2.1 Chi-square test of independence
3.9.2.2.2 Logistic Regression
3.9.2.2.3 Test statistics for over all models
3.9.2.2.4 Test statistics for each coefficient

CHAPTER FOUR
DATA ANALYSIS, FINDINGS AND DISCUSSIONS
4.1 Introduction
4.2 Reliability of data collection Instrument
4.3.1 Distribution of Socio-demographic factors towards attitude and knowledge of medical practitioner
4.3.2 Position of medical practitioners in Sub city
4.3.3 Monthly income with in adequate knowledge and Attitude
4.3.4 Financial Management Attitude
4.3.5. Financial Management Knowledge
4.4 Data analysis of inferential statistics
4.4.1 Chi-square Test of Independency
4.4.2 Binary Logistic Regression Analysis
4.4.2.1 Goodness of Fit Test
4.4.2.2 Classification table
4.4.3 Model Estimation
4.5 Conclusion

CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMENDATIONS
5.1 Introduction
5.2 Summary of Findings
5.3 Conclusions
5.4 Recommendations
5.4.1 Policy recommendations
5.4.2 Recommendations for further research

References

Appendixes

Appendixes

Appendixes

List of Tables Pages

Table 3.1 Summary of population and sample size in each sub city

Table 3.2 Summary of population and sample size in current position

Table 4.1 Reliability statistics

Table 4.2 description of attitude and knowledge of medical practitioners towards personal financial management by socio-demographic variable

Table 4.3 Financial management attitude

Table 4.4 Financial management sub scale

Table 4.5 Cash management scores

Table 4.6 Credit management scores

Table 4.7 Risk management scores

Table 4.8 Investment management scores

Table 4.9 General management scores

Table 4.10 Chi-square value of attitude and knowledge of medical practitioners towards personal financial management

Table 4.11 Hosmer and Lemeshew test for attitude towards personal financial management

Table 4.12 Hosmer and Lemeshew test of knowledge towards personal financial management

Table4.13 Classification of attitude towards personal financial management

Table4.14 Classification of knowledge towards personal financial management

Table 4.15 omnibus test of model coefficients of attitude of towards personal financial management

Table 4.16 omnibus test of model coefficients of knowledge of towards personal financial management

Table 4.17 Model summary of attitude towards personal financial management

Table 4.18 Model summary of knowledge towards personal financial management

Table 4.19 parameter estimation of the binary logistic model of attitude towards personal financial management

Table 4.20 parameter estimation of the binary logistic model of knowledge towards personal financial management

List of figure Pages

Figure 2.1 personal financial management processes

Figure 2.2 Frameworks for personal financial management

Figure 4.1 positions of medical practitioners in sub city

Figure 4.2 a multiple bar chart of monthly income by adequate knowledge towards personal financial management

Figure 4.3 bar chart of monthly income by attitude towards personal financial management

ABSTRACT

Medical practitioners learn money management by trial and error and often realize the mistakes and shortfalls at later stages of life. This study measured the levels of personal financial management knowledge and attitude of the medical practitioners in yeka and bole sub. In this cross sectional study, a pre-tested questionnaire was used to conduct face to face interviews with randomly selected medical specialist, medical officers, nurses and other health officers through a multistage sampling. A total of 385 (53.0% yeka sub city and 47.0% bole sub city) medical practitioners. The aim of this study is to assess the level of knowledge and attitude of medical practitioners towards personal financial management in Addis Ababa city administration yeka and bole sub city public health center. Thus, the target population of this study is all medical practitioners in Addis Ababa city administration yeka and bole sub city. The number of medical practitioners considered for this study was 197 using stratified random sampling technique. The analysis is done using were done through descriptive statistics include cross tabulation, charts and tables and from inferential statistics Chi- square test of independence and Logistic regression model, which are used to determine the factor that affect medical practitioner’s attitude and knowledge on personal financial management. Based on the result of this research paper, Academic qualification, financial knowledge, cash & credit management and saving & risk management is the most effective variable to affect the attitude and knowledge of medical practitioners towards personal financial management.

ACKNOWLEDGEMENT

First, we wish to thank the almighty God for everything that we have achieved and continuous support throughout our life. Next, we would like to reveal our heartfelt thanks to Advisor Dr. Monica T. (PhD) for her valuable effort for the completion of our paper, give consistent advice, deep correction and suggestion at any time until the end of this paper.

It is also our great pleasure to thank our entire friends for their important comment and suggestion on this paper.

The last but not the least, we would like to thank medical practitioners who helped us in questionnaires filling.

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

CHAPTER 1

INTRODUCTION

1.1 Background of study

Financial management (FM) is an essential element in the effective running of the organization. A lot of resources are involved in running organizations and therefore, to get value from those investments require a lot of transparencies and accountability from the people in charge, Burke (2001). The education sector in many countries consumes very high budgetary allocation and therefore sound financial management is paramount. A lot of attention is given to education world over because of the impact it has on development. According to UNESCO (2000), low levels of education are not good on the economy of any nation. As a result, secondary education in some countries like Britain, USA, Canada, Egypt and Nigeria is fully funded by the state.

Building a medical practice can bring many rewards and many responsibilities but success has price. As a medical professional it is often a struggle to balance the many different aspects of a busy life (www.emoneyadvisor.com). The more financial success a physician has the more time it takes to manage it. As the wealth grows, life does not get simpler but it gets much more complex. How well do these professionals keep track of their finances when they are busy striving for a successful medical practice? Are their assets working as hard as they are? How much time are they allocating to manage their wealth?

Financial management has been an age old complication. Ever since trade began among humans, there had been a search for an equitable and fair medium of exchange. It was the barter trade centuries ago which gave rise to conflicts between traders as they could not reach to a settlement on the values of the goods being exchanged, that led to the introduction of money.

Financial experts agree that while people have much more money today than they did generations ago, the amount of knowledge on how to manage that money hasn’t kept pace- not at all (Maura Fogarty, 2012). Taking charge of planning and managing our finance and putting it into implementation is very important for every individual. We must know how to take control of our money. This is not only to set up our household budget but also to save for the future as well as plan for our retirement and invest for our better future. This is also important as every individual would like to live debt free and not going through stressful life, working until our old age just to survive and educate our children. Every human being should have this awareness and know the importance of their financial planning and management. This writing would be very helpful for those who have less awareness on the importance of personal financial management and also helpful for those who are determined to take charge of their finance and let the money work for them. In this writing, the meaning of financial management, the importance of financial management, how every individual can take steps to manage and plan their finances and the awareness of financial management in Brunei are discussed.

Personal financial management is a key component to making our money work for us. This requires planning. Planning is the process of making a proper lay down procedure of doing things and following them to achieve the expected objectives or targets (ArticlesBase.com, 2012). Financial planning is an evolving plan that changes as we grow in our career path and move on in our life stages, it is a plan that needs to be reviewed as the circumstances change for example getting married, buying a house and raising family. As our life goals and financial status changes, we will have to actively review our financial plans to see if we will be able to achieve the financial goals within the given timeline (Career Success for Newbies.com, 2006). Why is personal financial planning and management very important for every individual in this world? Personal financial management leads every individual to live a better life. The more successful we are with our finances, the better our lives will be either today or down in the line. The importance for financial management in detail is discussed in the next section.

Personal finance is an activity that involves the entire individual financial decisions, which includes budgeting, saving, insurance, mortgages. When a person plans his personal finance, he needs to take a range of financial products and other personal factors into consideration. Personal finance has a huge influence on one’s life and future.

Personal financial management becomes an important academic and policy issue both in developed and developing countries (Xu & Zia, 2012). According to Elzabith & et.al (2009) who quoted Deacon & Firebaugh (1988), “Financial management is a continual processing of information as circumstances change” and the expected outcome of financial management is to meet demands (whether long-term goals, short-term goals, or events) by effective use of the resources available to each managerial unit (Donald H & et. al, 1988).

Personal financial management involves using financial knowledge and skills in making financial and economic decisions including financial savings, credits, insurance, investments, and others. Mounting number of studies on personal finance underscore the need for enhancing personal financial literacy of citizens for the fact that complexity of the financial system, increasing access to credit as well as surging cost of life demand individuals to employ personal financial management practices. Despite complex knowledge in finance may not be required from every one, basic financial knowledge related to management of money, transactions, selection and usages of financial products are essential to lead a healthy financial life. However, surveys conducted in most countries, including few developing countries showed a low level of personal financial management. (Xu & Zia, 2012)

Holzman, 2010; Xu & Zia, 2012 showed that personal financial management has got policy makers and academic attention in the developed countries, but the effort in developing countries where Ethiopia is included is not that much. However, few of existing empirical studies (Kontze and Smith, 2008; Raja & et. al, 2011;Nyamty & Nyana, 2011; Kummar and Annes, 2013) showed that the prevalence of financial management has been hindering individuals and the economy of various developing and emerging economies for the fact suboptimal financial and economic decisions by individuals do have macroeconomic implications. These studies suggest the need for providing formal and informal personal financial education and practice in developing countries. Nevertheless, we could not come across organized, except the in school financial education currently offered to school children and youth, in the context of Ethiopia.

Physicians are among the highest paid profession says Stanley and Donna (1990). The salary ranges of physicians and their earnings vary according to the number of years in practice, geographical region, hours worked skill, personality and professional reputation. But they tend to learn money management skills by trial and error and often realize the mistakes and shortfalls at later stages of life (Lawrence F.2001). This causes valuable investment time lost in terms of time value money.

Current pilot study of personal financial management practice among medical practitioners in the Yeka and Bole sub city help to identify whether informal financial education such as work place financial education are required to enhance financial capability of Ethiopians. The study is hoped to contribute by showing the personal financial management practice among medical practitioner’s people which could help in shading light whether education and employment contributes to personal financial management ability. Moreover, the study could be used as a base for further and comprehensive studies which can inform policy makers, academics and stakeholders on personal finance. Furthermore, it will contribute to personal finance literature in developing countries.

1.2 Problem Statement

Physicians are using a variety of strategies to increase their income. Some are buying diagnostic equipment’s and offering patients tests, such as x-ray, ultrasound, PET scans in their clinics instead of referring the patients to the hospitals. They are ordering more tests than needed. Some other doctors are enrolling patients in clinical trials for pharmaceutical companies to collect more fees. Dr. Tara Bishop (2010) of Mount Sinai School of Medicine in New York and colleagues examined how frequently five common lab tests, including cholesterol and electrolyte tests, were ordered at group practices. Using data from a national survey on private practices, they compared ordering by primary care physicians and specialists who either owned or didn't own their group practice and who did or didn't have labs in their offices. Practice owners with labs often make a profit on tests done in those labs. When financial pressure to keep up the lifestyle the doctors seek becomes intense, patients’ referral for specific specialist treatment can be overlooked. It is public perception that medical professionals are informed consumers and excellent money managers due to their impressive lifestyle but the actual financial wellbeing need to be assessed

Another financial survey carried out by Lawrence Farber, Medical Economics (2001) in United States, concluded that more young doctors were worst off in year 2000 than they were in the year before. These doctors can’t keep up with inflation and the rising cost of commodities. They are generally married, and most have dependents, at least two. Almost 70 percent of these physicians own a home by age 34, and 90 percent do by age 39. Because owning such assets typically means owing, many young doctors said money has significant impacts on their self-esteem and their work related behavior.

Medical Economics financial surveys (Robert Lowes, 2005) in the year 2001 and 2004 indicated financial instability in physicians particularly doctors younger than 35 years old (medical economics, 2005). Many of these professionals are only successful in their latter part of their lives. There are several factors contributing to this. New to the world of finance, young physicians take charge of their own financial future with little or no experience. They admit they lack the knowledge and guidance to manage their money. They follow a peer financial method duplication and dependency towards a single financial advisor (spouses being advisors in some cases).

Financial literacy and personal financial management has become a growing academic and public policy debate in most advanced countries; however, the effort in least developed countries remained limited. Some of the studies showed that people in emerging and developing countries are also suffering from low level of financial literacy which demands policy intervention. Government and other concerned organizations including the private sector in financial service need to consider personal financial education for the fact that it enhances economic decision making ability among the community which will contribute to the development of the financial system and sustainable economic growth. In the context of a developing country, financially literate individuals can contribute to better financial inclusion and development of financial markets. It is also possible to enhance the personal and gross national savings and investments which are grave problems in most developing countries.

Ethiopia, a developing nation, is located in Sub-Saharan Africa and is a home for about 100 million people. The country has been striving to eradicate poverty and ensure sustainable economic development. Among the multi-facet challenges of economic objective of a nation, low level of personal saving and investment which according to studies in financial literacy in developing countries this problem may partly associate with low financial literacy and financial inclusion, can be tackled by enhancing financial literacy and financial inclusion in the country. None of the various studies, conducted in this respect, considered the effect of personal financial literacy as part of the solution albeit it is well documented that low level of financial literacy affected financial sector development and hindered economic growth and development in developing countries (Kefela 2011).

The current study is, hence, aimed at conducting exploratory study on personal financial management among the medical practitioners in the public medical services in Yeka and Bole sub city. The target population is selected not only because of convenience of data collection but also there existed low level of personal financial literacy among medical practitioners in different part of the world. For example; as cited in Kefela (2011), Bernheim (1998) surveyed several studies showed that workers display little financial literacy. The current study is, then, helpful in showing the effect of education on personal financial management capability of medical practitioner’s people which could trigger further comprehensive studies, on one hand, and highlight the need for a workplace financial education to medical practitioners.

1.3 The Study Objective

Here, the study aims at achieving the following objectives.

1.3.1 Major Objective of the Study

The main objective of the research is to study the attitude and knowledge on personal financial management among the medical practitioners in the public medical services in Yeka and Bole sub city.

1.3.2 Specific objectives of the Study

The following specific objectives are to study guide to the research

- To describe the response of medical practitioner’s attitude and knowledge towards personal financial management in.
- To determine the association between the demographic characteristics (age, gender, income, marital status, Family place of residence, year of served, academic qualification, family financial states) to the attitude and knowledge of medical practitioners towards personal financial management.
- To evaluate the influence or the factor of financial management attitude and knowledge of medical practitioners in the public medical services in Yeka and Bole sub city.

1.4 Research questions of the Study

This study is attempts to answer the following questions

1. What are the level of financial management attitude and knowledge of medical practitioners in the public medical services in Yeka and Bole sub city?
2. Is there association between the demographic characteristics of the medical practitioners and their personal financial management attitude and knowledge in Yeka and Bole sub city?
3. What is the influence or the factor of financial management attitude and knowledge of medical practitioners in the public medical services in Yeka and Bole sub city?

1.5 Hypotheses of the Study

Here, hypotheses are posed to answer the research questions of the research study. Hence, the research questions and their corresponding hypothesis are discussed on in the coming paragraphs.

The first and main objective of this research will be to assess the attitude and knowledge on personal financial management among the medical practitioners in the public medical services in Yeka and Bole sub city. Based on this and the research questions raised, the following hypotheses will be tested

Hypothesis 1: There is an association between the Scio-demographic variable (age, gender, income, marital status, family’s place of residence, year of served, academic qualification, family financial states) of the medical practitioners and their financial management knowledge and attitude.

Hypothesis 2: There is a significant difference in the level of personal financial management attitude among the medical practitioners in the public medical services in Yeka and Bole sub city.

Hypothesis 3 : There is a significant difference in the level of personal financial management knowledge among the medical practitioners in the public medical services in Yeka and Bole sub city.

1.6 The Significance of the Study

There are previous literature surveys on personal financial management, so far we reviewed, (Lusardi and Mitchell (2011), Lusardi (2012), Lusardi & Mitchelle (2013), but focused on studies implemented in developed countries in US and Europe that early adopted financial education policies. Though the study of Xu & Zia (2012) covered various studies across the globe including forthcoming empirical studies in developing countries, they affirmed scanty of financial literacy research in most developing countries. Further, Kummar & Annes (2013), Subha & Priya (2014), Fatoki & Oni (2014) are among recent surveys of literature in developing countries.

There is a rapidly growing scholarly, research, applied and policy literature that addresses financial literacy as a main topic in the general population ‘(Brascoupé and Weatherdon, 2013) for the fact that, survey results in most countries find low level of financial literacy has been hampering personal financial decision making abilities. The repercussions of poor personal financial decisions do not only reflect in individuals, but also affect normal operation of the financial system and overall economic stability of a nation.

This study will be great importance to several groups of people. The medical practitioners can significantly benefit from this study by getting to understand the attitude and knowledge on personal financial management hence is in position to deal with them. The research will benefit managers from different sectors to be able to manage finances. It will be also of great benefit to scholars, research, applied and policy literature who are undertaking financial management courses.

1.7 Scope of the Study

Here, as discussed in section 1.3.1 and 1.3.2, the main objective of this study is focused on the attitude and knowledge on personal financial management among the medical practitioners in the public medical services in Yeka and Bole sub city more than one-year work experience. Because less than one-year experience has no enough data as population in both sub cities. As such, the study has not covered other sub city and private medical services. The Only target focuses on Public medical services in Yeka and Bole sub city. Moreover, the study does not aim at establishing a likely cause and effect between the chosen independent variables and the dependent variable (attitude and knowledge on personal financial management); rather it just attempts to prove whether there is indeed any relationship as suggested by other research findings between them. The respondents were BSc and above educational background Medical Laboratory, Health Officers, Nurses, pharmacists and Specialist. This is because they are the ones who are involved with personal financial management in public medical services.

Therefore, the study has imitated to understanding the likely relationship between these independent variables on attitude and knowledge on personal financial management. Thus, the study has not covered other aspects of financial management in general.

1.8 Organization of the Study

This thesis has five chapters, each dealing with different but related aspects of the study.

The first chapter will be the introduction. Hence, it gives background information of the major issue covered in the study. This chapter specifically consists of the background of the study, the problem statement of the study, the objectives, the research questions, and hypothesis posed for the study, the significance and the scope of the study.

The second chapter gives a brief discussion on the theoretical and empirical literatures, which will be relevant for the research questions of the study. Therefore, this chapter gives a brief review of related and relevant literature on financial management, historical development of personal financial management in the world and in Ethiopia, attitude and knowledge issues in general.

The third chapter will be about the methodology of the study. As such, this chapter discusses on the major aspects of the methodology which was employed in order to answer the research questions and test the hypotheses posed for the study. Therefore, it discusses on the research design, data type and collection instruments, the model specification and method of analysis for the study.

The fourth chapter of the study discusses on the data analysis, and discussion of the study findings.

The last chapter, which is chapter five, will be about the summary of the study findings, limitations of the study, recommendations and conclusion.

1.9 limitation of the study

One research work cannot be found without problem. Some limitation of the study would be:

- Shortage of reference material and information, especially in developing country like Ethiopia.
- Lack of enough time and financial resources like computers and internet accesses
- The respondents required much explanations to fill survey questionnaires and that took much time, money and energy of the researcher.
- Most of the respondents are service providers and do not have enough time to respond to the questionnaires. These all required additional time to encourage and frequently visit most of the office; even during weekends and out of the normal working hours

1.10 Conclusion

This chapter thus discusses on the general issues in the study. Hence, it gives background information of the major issue covered in the study. This chapter specifically consists of the background of the study, the problem statement of the study, the objectives, the research questions, and hypothesis posed for the study, the significance and the scope of the study.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter is about the theoretical and empirical framework of the study. As such, it critically reviews the existing theoretical models, which are relevant in understanding the research problem of the study, and the empirical results on the main research interest or question; attitude and knowledge on personal financial management among the medical practitioners in general

Therefore, the coming sections will discuss on the issues of personal financial management in general, medical practitioners its main features in the world in general and in Ethiopia in particular. Moreover, this chapter consists of the discussion of both theoretical and empirical literatures on personal financial management. As such, the factors which could influence the attitude and knowledge and the explanatory variables which are used for testing the statistical model are discussed on.

2.2 Theoretical framework of the study

Financial management refers to the acquiring of resources and their management; included are matters involving tax administration, collection of user fees, management of cash, methods of financing capital projects including the issuance of bonds, and accounting. (James C. & et al, 2002)

Christian Regobeth, (2009), defines Financial Management in broader way that it covers the administration and maintenance of financial assets, identification and management of risks, and building up (diversification) of financial assets portfolio to ensure regular flow of financial resources in the future.

Financial education is increasingly important, not just for investors but also average families trying to decide how to balance its budget, fund the children’s' education and ensure an income when the parents retire (Organization for Economic Cooperation for Development, 2006). The OECD further observes that if individuals become financially educated, they will be more likely to save and to challenge financial service providers to develop products that truly respond to their needs and have positive effects on both investment levels and growth.

2.2.1 Overview of personal financial management

The profession of personal finance is based on theories from several disciplines such as family studies, economics, psychology, and sociology. A theory is a general frame-work of ideas. When enough data have been collected, patterns emerge, and a theory is developed to provide explanation. A theory can enable people to predict what might happen when certain conditions are present. The next sections describe theoretical frameworks that are often used in personal finance.

Experts generally agree that personal financial management appears to be directly correlated with self-beneficial financial behavior (Hilgert, Hogarth, and Beverly, 2003). In their research, Hilgert, Hogarth, and Beverly (2003) added financial behavior questions to the nationwide Survey of Consumer Finances. They formed a financial management Index based upon behavior in four variables: cash-flow management, credit management, savings, and investment managements. Comparing the results of this index with scores on the financial management quiz, they found that those who were more financially manage had higher Financial Knowledge Index scores, indicating that financial knows ledge is related to financial attitude.

A number of international surveys have however made evident a rather low level of understanding of financial matters and of basic economics among the average consumer. A UK survey found that at all income levels many people do not plan ahead, and that 70% had no provision to cover an unexpected drop in income, for instance, in the event of bereavement, relationship breakdown or periods of unemployment (Hilgert, Hogarth, and Beverly, 2003).

Further, using the 2014 Health and Retirement Study (HRS) to test basic financial knowledge of adults over the age of 50, Lusardi and Mitchell (2016) developed questions related to the understanding of interest compounding and the effects of inflation and risk diversification. They found widespread financial management that is particularly severe among the elderly. The results were particularly surprising since most respondents over age 50 tend to have more experience with credit cards and bank accounts and have taken out at least one mortgage.

According to Towanda Mitchell, financial management is handling our financial situation in a responsible manner to achieve financial independence (UMBC Money Matters Seminar, n.d). It deals with managing money in all areas of life. Financial management includes personal financial management and organization management. Personal financial management helps us to manage the finance of our home which includes budgeting, saving, investing, debt management and other aspects related to personal money where by an individual can achieve personal goals (Bimal Bhatt, 2011). In other words, personal financial management is the process of controlling income and organizing expenses through a detailed financial plan. Learning to keep track of money coming in, and tailoring the use of this money to fit expenses provides a systematic way and utilizing income (Joseph Wilner, 2009).

Personal financial management is a key component to making our money work for us. This requires planning. Planning is the process of making a proper lay down procedure of doing things and following them to achieve the expected objectives or targets (ArticlesBase.com, 2012). Financial planning is an evolving plan that changes as we grow in our career path and move on in our life stages, it is a plan that needs to be reviewed as the circumstances change for example getting married, buying a house and raising family. As our life goals and financial status changes, we will have to actively review our financial plans to see if we will be able to achieve the financial goals within the given timeline (Career Success for Newbies.com, 2006). Why is personal financial planning and management very important for every individual in this world? Personal financial management leads every individual to live a better life. The more successful we are with our finances, the better our lives will be either today or down in the line. The importance for financial management in detail is discussed in the next section.

Generally, personal financial management knowledge is evidenced through various attitudes and financial behavior. These include individual debt levels (Lusardi and Tufano 2009), participation in the stock market (Van Rooij, Lusardi, and Alessie 2007), ability to accumulate wealth and effectively manage wealth (Stango and Zinman 2009; Hilgert, Hogarth, and Beverly 2003), ability to choose financial products with lower fees, e.g. mutual funds (Hastings and Tejeda-Ashton 2008), and ability to plan we for retirement (Lusardi and Mitchell, 2009).

2.2.2 The birth of personal financial management and its features

From the colonial era through the industrial revolution, for the average consumer, cash was king. The individual consumer bought and sold goods in cash transactions. For those who did utilize a bank, it was merely a place to store one's money and earn a bit of interest; nothing too complicated. Corporate stocks were not yet widely bought and sold on an open market, and certainly the average consumer was not part of what was then an investment system for the elite and the industrial tycoon. The laws of the land had not yet evolved to a point where insurance for one's property, health, and life were necessary. In a word, life was simpler--financially and in many other ways.

Yet in a rapidly developing society where agrarianism was giving way to industrialism, and in a nation where automobiles, goods, and services were becoming more available than ever before, consumer attitudes and behaviors began to shift. Though the notion of paying with cash still held sway through the 1950s and into the 1960s, the introduction of credit cards, wider availability of home mortgages, and the possibility of other forms of credit led to a cultural change in money management. A buy now, pay later mentality began to take root. Indeed, as scholars peer back in time, "there is a widespread view that attitudes about debt . . . changed dramatically during the twentieth century--from a general abhorrence of debt to acceptance of credit as part of a modern consumer society" (Roberts & Jones, 2001, p. 214).

Regarding the lack of financial fitness in America today, best-selling author and nationally syndicated radio talk show host Dave Ramsey, a consumer advocate and personal finance educator, quipped, "the sad thing is that you can be financially mediocre in this country, financially flabby, and still be average. And if the truth be known, being average, normal, and financially flabby is pretty much okay by most folks' standards" (Ramsey, 2003, p. 10). Though Ramsey would suggest that a major culprit is laziness--people know how they ought to behave regarding their personal finances and simply fail to do it--he would also contend that some people do in fact lack the requisite knowledge to make good decisions with their money. While it is more a pet theory than a scientific fact, the notion that personal finance is 20% knowledge and 80% behavior makes intuitive sense (Ramsey, 2003). Indeed, the saying, "this is not rocket science," applies to basic personal finance.

To build strength and momentum for this emerging, inter-disciplinary profession called personal finance, researchers, educators, and practitioners need to take collective, coordinated action. First, personal finance needs to be defined through more organized activities outside usual forums. Commentary on this article will provide a start to conceptualizing the content, theory, structure, and future trends of this emerging profession. Through special sessions at national conferences and electronic idea exchanges, professionals who are interested in this topic can continue dialogue. In addition, publishing special journal issues and books on this topic and organizing comprehensive literature review papers is recommended. For example, AFCPE® could house an electronic repository of short synopses of personal finance research that practitioners can access.

Second, it should be emphasized that the mission of this profession is different from the study of personal finance in business and economics schools and departments to promote financial well-being of consumers and families through education, counseling, service, and research. It is important to take advantage of the unique consumer- and family-focused research in this field as compared with research in economics and business. To further add to the uniqueness, the research is interdisciplinary and diverse and embraces system and ecological theories. The end purpose is largely practical to equip individuals and families with the knowledge and skills to make informed and productive financial choices

Third, the efforts to meet the needs of people working in this interdisciplinary profession should be increased. Personal finance professionals may be educators (extension, middle school, high school, college and university, and independent financial education), service providers (financial counseling, financial planning, and other financial services), and researchers (consumer science, consumer economics, family economics, consumer affairs, family resource management, personal financial planning, and related disciplines). The membership of AFCPE® includes many of these populations, but it could do more to reach and unite personal finance professionals in a comprehensive manner. A survey could be conducted to assess the size and needs of these populations. Based on the survey results, existing services could be improved, and new services could be offered.

Fourth, researchers and practitioners, which include both service providers and educators, need to connect in productive ways. AFCPE® needs to create a routine channel, maybe a special electronic mail group, to provide communication opportunities for researchers and practitioners. Although there is a role for purely theoretical research in personal finance, as a general rule, researchers need to consider the practical implications of their research when they select research topics, present papers at conferences, and publish papers in journals. AFCPE® can facilitate dialogue between researchers and practitioners. Surveys can be sent out periodically to evaluate the needs and resources of researchers and practitioners and to pursue avenues of cooperation.

Fifth, personal finance researchers must connect to researchers outside the personal finance profession. Researchers from economics, business, psychology, sociology, family studies, or human development, for example, need to be identified and attracted to personal finance conferences and journals. Researchers in personal finance are encouraged to present papers at conferences in other related disciplines and actively seek cooperative opportunities for grant writing, publications, and development of unified theories. One way to reach out to other research communities is to seek guest-editor opportunities in journals of other fields for special issues related to personal finance. Alternatively, scholars from related disciplines need to be encouraged to publish in and serve as ad hoc reviewers for FCP

Finally, this work needs to be timely and appropriately provided to decision makers as related policies are framed and implemented. As decision makers recognize expertise related to people and finances, this work will gain public standing and recognition. The roots of this profession set a standard to make a difference in the lives of people and to help affect appropriate policy change

A future is an obligating financial contract that buyers and sellers agree to buy or sell commodities or financial instruments at a pre-decided price and date in the future. The price, quality and quantity of the products are fixed and specified at the time when the contract is made. A futures contract is a tool for controlling risk because it allows the parties in the contract to predetermine the factors which may cost significantly in the business in the future, and therefore benefit from it. For example: Mr. X has a shop that sells product A. To make product A, Mr. X needs product B as ingredient. When product B costs 1 euro he can make 2 Euros’ profit, and the seller of product B can also make profit. In the region, there opens another shop also sells product B, so the product B price goes down 50%. The seller of product B loses money, whereas Mr. X makes more profit. Later, some crises come, the production of product B decreases, thus the price of product B goes up to 4 Euros. However, when product B costs 3 Euros, Mr. X loses money. To prevent this kind situation happens, Mr. X and the seller of product B signed a future contract which agree that product B will be sold at 1 euro on a date with a certain amount. Futures have also a cost-cutting mechanism, especially in index tracking funds and funds in which have fast changing allocation of huge asset. (Keown, 2013)

2.2.3 History of personal financial management in Ethiopia and its features

Ethiopia is the second most populated country in Africa with an estimated population of more than 100 million people according to central statistical agency (CSA) data. It is one of the least developing countries which rank 157 out of 169 countries on the United Nations Development Program‘s 2009 Human Development Index. According to a recent survey nearly 30% of the country’s population lives below the poverty line MoFED (2011). The Ethiopian economy is based on agriculture, which in 2009 accounted for about 42 percent of the gross domestic product (GDP), about 80 percent of total employment, and nearly 80 percent of foreign currency earnings (MoFED, 2009). Ethiopia's major exports include coffee, oil seeds, gold, chat, flowers, pulses, and live animals. Coffee is the leading export, constituting 30.6% of total exports by value in the year 2009 (MOFED, 2009).

The personal financial management system in Ethiopia is relatively young. Following the overthrowing of Emperor Haile Selassie in 1974, Ethiopia was under control of Derg with Marxism-Leninism as its state ideology (Clark, 2000). During this era the Ethiopian personal financial management system followed in the footsteps of their Soviet counterparts. As a consequence of that the tools needed to regulate and supervise financial markets in a market-based financial system were underdeveloped towards the end of that era (Clark, 2000). Since fall of the Derg in 1991 the country has been pursuing “gradualism” as a strategy for the personal financial management system (Clark, 2000). The strategy involves an incremental privatization of the many of the state owned financial institution and enterprises, and further strengthening of regulatory and supervisory organs of the personal financial management systems. This process leads to the emergence of new financial institutions, and preexisting institutions redefining their roles as the country heads towards a more market based personal financial management system. (Addison and Geda, 2001).

A future is an obligating financial contract that buyers and sellers agree to buy or sell commodities or financial instruments at a pre-decided price and date in the future. The price, quality and quantity of the products are fixed and specified at the time when the contract is made. A futures contract is a tool for controlling risk because it allows the parties in the contract to predetermine the factors which may cost significantly in the business in the future.

2.2.4 The Importance of Personal Financial Management

In our personal life, financial management helps us to create a comfortable life with an assurance of a secured future and freedom to spend money to keep us happy. The importance of financial planning and management is reflected in all areas of personal and business life. All individual no matter what their financial capacity is must learn and study financial management and adapt it to improve their life (Bimal Bhatt, 2011).

The importance of personal financial management is, it enables to improve standard of living, which leads to good health and financial stress reduces considerably. Besides that, it also enables the individual to take better financial decision which reduces poverty, reduces debts and increases savings and investments (Bimal Bhatt, 2011). In summary it is important for every individual to know the importance and benefits of personal financial management which leads to stress free, financial free and secured life. Many of us were not taught the importance of personal money management when we were young. We did not learn to save, invest, allocate or how to make the money work for us. By knowing the importance of personal financial management only is not enough, steps should be taken to plan, organize and manage our personal finances. Many of us are in debt, have no idea how we got here and do not know how to start digging ourselves out (J.Scott, 2009). Today we can break the vicious cycle by teaching the young ones to better manage their finances. Therefore, in the following section, how one can manage and plan their personal finances is discussed.

2.2.4.1 The need for personal financial management studies

The study of personal finance remains the subject of interest in various disciplines such as home economics/consumer economics, behavioral finance. Fungeld and Wang (2009) revealed individual’s attitude and behavior to daily financial matters as well as their personal management practice can be modified through formal and informal learning experiences they have about financial literacy and financial capability. According to Funfgeld and Wang (2009), to initiate and take various actions aimed at enhancing personal financial management capability, the first step should be studying the attitude, behavior and currently used practices. Consistent with this argument Glen and May (2004), also pointed out that making campaigns to improve personal financial management on the basis of what currently people practicing and the result they obtained enables to get the desired attitudinal change.

The need for studying personal finance has shown growth only in the last ten years. The concern and involvement of local and international financial authorities on financial literacy has been cited as a justification for the importance of the issue. For instance, Pelline & et.al (2010) mentioned Financial Service Authority (FSA), 2005, 2006a in UK; and the OECD, 2005 as national and international effort to assess financial capabilities of consumers. Holzman (2010) also indicated how governments and various local and international organizations including financial institutions have been working towards the promotion of personal financial education. This offered a list of efforts of stock taking on personal financial capability that can serve in designing and implementing intervention programs to enhance personal financial capability. His list includes: OECD initiative of promoting personal financial management education in the member countries, and agencies created in New Zealand (Retirement Commission, 1995), United Kingdom (Financial Service Authority, 2000), Canada (Financial Consumer Agency, 2001), USA (Financial Literacy and Education Commission, 2003), and Australia (Financial Literacy Foundation, 2007, and since transferred to the Australian Securities and Investments Commission) (Holzeman, 2010).

Holzman (2010) pointed out that the last 10 years provided lesson on the importance of consumer personal financial capability to enhancing individual’s wellbeing and building national economy. In developing countries, like Ethiopia, the issue of personal financial management has not given attention by academia and policy makers. The recent financial education policy adoption in developing countries (Xu & Zia, 2012; Kebede et al (forthcoming) should be supported the need for survey of financial literacy and capability level of people to inform better financial education policy and programs.

2.2.4.2 Personal Financial Management Process

Wattles (2007) in his book ‘The Science of Getting Rich’ write that getting rich is not the result of doing certain things; it is the result of doing things in a certain way. There is a science of getting rich, and it is an exact science, like algebra or arithmetic. There are certain laws which govern the process of acquiring riches. Once these laws are learned and obeyed by any person, he will get rich with mathematical certainty.

Personal financial management process uses a stepwise process that helps to determine where the person stands financially. The process involves gathering financial information, setting life goals, examining the current financial status and coming up with a strategy/plan for meeting the goals given the current situation and future plans. It is an on-going process. The six steps are explained in details as follows.

Good financial management starts with (I) setting financial goals, (ii) determining all sources of income and planning for all types of expenses (budgeting), (iii) ascertaining all assets and liabilities as part of managing fund flows, (iv) recording financial transactions under all the heads, (v) automating the process of calculation and generation of financial statements using a personal financial management IT tool, (vi) finally, evaluating the financial statements for financial decision making. Periodic review of progress towards financial goal is evaluated. If financial growth is in line with financial goals, the process needs to be continued; otherwise some financial adjustments need to be made including revision of goals if necessary.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2.1: Personal Financial Management Process

Step 1: Set Goals

Setting financial goals is the most important indicator of ones being financially evolved. Knowing what is important to an individual and his family is a critical first step in a successful personal financial plan. Any major decision of life like buying a house/car, travel, retirement or higher studies that needs money for its fruition is a financial goal.

There are three categories of goals

- Short term (within one year)
- Intermediate (one to five years)
- Long term (more than five years)

A well-defined financial goal is SMART

v- S pecific - what you want to achieve.
- M easurable - how much money you will need.
- A chievable – which can be achievable
- R easonable – whether it can be achieved with the time and money available.
- T ied to a time frame - when you want to achieve the goal.

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