Finance, Money Management Is All About Common Sense
Columbia Daily Tribune (MO)
By Alan Lester
Finance is the lifeblood of businesses and people; simply put, it is a study of money management and how it affects business and our personal lives. In other words, how to save and spend wisely.
Many of the students in my finance courses are initially apprehensive about the course itself. I tell my students that planning for financial success in business and our personal lives is no different than planning game strategy in sports. What is the game plan? How are we going to win? What must we do?
I explain that all organizations, households, and people need to set realistic goals from the five principles of finance; 1. cash flows (the most important since if a business or household does not have positive cash flow, survival is extremely difficult); 2. time value of money and the importance of compound interest; 3. need versus want — the monetary effect on our level of satisfaction, growth and success; 4. cost versus benefit — the comparison of benefits over costs; and 5. risk versus return — the level of risk undertaken for a level of return.
I also tell my students that finance, to a large extent, is common sense.
I start all my classes asking students the following question, "Which is correct? — the greater the risk, the greater the return," or, after a little discussion, "the greater the risk, the greater the potential return." Ah, the first is hope — the second is truth.
The fifth principle — risk versus return — is the one that has the most unfavorable impact on businesses and people. Both often follow the false hypothesis that the greater the risk, the greater the return. THIS CAN BE A VERY COSTLY PRACTICE. One word can make all the difference! We are all aware that the financial crisis of 2007-08 was largely caused by deregulation and speculation, which resulted in a severe contraction of liquidity. How much did the disregard of the risk-return and other principles contribute to this contraction?
In my courses, we study financial forecasting, investments and their returns, borrowing and its cost, and how leverage (debt) impacts businesses and people. People must have the utmost confidence in the numbers. We do this by discussing how the numbers are developed and the supporting documentation (what data were used). We discuss how the economy, markets, international business, (macroeconomic or systematic factors which are outside our control) can impact rates, costs, returns, growth, and the Federal Reserve's monetary policy.
In personal finance, we track our financial path from post-high school to the grave and how the various stages of our lives bring the need for increased knowledge, and adjustments to our financial plans. For example, when do we purchase insurance and what kind?
How do we structure our investments as we mature and age? Along with this, we change our variables (only one for each scenario) to determine which change has the greatest impact on our results. We also discuss why saving for retirement is critical, when we should start saving, and when should we make wills and talk about estate planning and all it entails?
It's not an easy process — wills and estate planning are not interesting topics because they only become effective when someone dies — but it's necessary if we want our assets kept within the control of our family and not the courts.
I require students to write a paper on a current finance topic. In my personal finance class, I have the students write a paper on financial planning for a fictional client, where the student is the financial professional.
I grade all papers for quality — content, spelling, sentence structure and word usage. This is a major undertaking for many students. In spite of the level of technology businesses and people use today, it is important that students know how to write, using proper English and sentence structure, and present their material in an easily understood and professional manner — stick to the relevant facts.
I also assign weekly homework. This gives students the opportunity to use what they learn in class to support the material and provides answers to issues we have discussed. The homework may include answering questions about budgeting, insurance needs, investing in securities, estate planning, important qualities to know about auto and home buying/renting, and saving and spending wisely. There also are questions on the time value of money, how compound interest works, and why it is important.
Finally, I give two exams, the midterm and final. The combination of homework, in class work, assigned paper, case studies, exams and discussion groups in the eight-week courses require the students to plan adequate time management in scheduling, preparation and on time submission of work.
Alan Lester is an adjunct instructor at the Robert W. Plaster School of Business at Columbia College. He teaches both at the college's main campus and at its location in St. Louis. He has a lifetime of organizational experience, from serving as an executive for a bank holding company, to developing business contacts and strategic plans, to consulting with the FDIC and state banking departments involving distressed banks.