1. Enumerate and discuss the factors affecting the financial decision of an individual.

Family Structure
Marital status and dependents, such as children, parents, or siblings, determine whether you are planning
only for yourself or for others as well. If you have a spouse, partner, or dependents, you have a financial
responsibility to someone else, and that includes a responsibility to include them in your financial
thinking. Not only is it important to know our own beliefs and attitudes about money, but it is also critical
to understand those of our spouses or partners. You may expect the dependence of a family member to
end at some point, as with children or elderly parents, or you may have lifelong responsibilities to and for
another person. Partners and dependents affect your financial planning as you seek to provide for them,
such as paying for children’s education. Parents typically want to protect or improve their children’s
quality of life, and they may choose to limit their own fulfillment to achieve that end. Providing for
others increases income needs. Being responsible for others also affects your attitudes toward
and tolerance of risk. Typically, both the willingness and ability to assume risk, the possibility or
uncertainty of loss, diminishes with dependents and a desire for more financial protection
grows. People often seek protection for their income or assets even past their own lifetimes to
ensure the continued well-being of partners and dependents. An example is a life insurance
policy naming a spouse or dependents as beneficiaries.

Health
Your health is another defining circumstance that will affect your expected income needs and
risk tolerance and thus your personal financial planning. Personal financial planning should
include some protection against the risk of chronic illness, accident, or long-term disability, and
some provision for short-term events such as pregnancy and birth. If your health limits your
earnings or ability to work or adds significantly to your expenditures, your income needs may
increase. The need to protect yourself against further limitations or increased costs may also
increase. At the same time, your tolerance for risk may decrease, further affecting your financial
decisions.

Career Choice
Your career choices affect your financial planning, especially through educational requirements,
income potential, and characteristics of the occupation or profession you choose. Careers have
different hours, pay, benefits, risk factors, and patterns of advancement over time. Thus, your
financial planning will reflect the realities of being a postal worker, professional athlete,
commissioned sales representative, corporate lawyer, freelance photographer, librarian,
building contractor, tax preparer, professor, website designer, and so on. For example, the
careers of most athletes end before middle age, include a higher risk of injury, and command
steady, higher-than-average incomes, while the careers of most sales representatives last longer
with greater risk of unpredictable income fluctuations. Table 1.1.1 compares the median salaries
of certain careers.

Age
Needs, desires, values, and priorities all change over a lifetime, and financial concerns change
accordingly. Ideally, personal finance is a process of management and planning that anticipates
or keeps abreast with such changes. Although everyone is different, some financial concerns are
 common to or typical of the different stages of adult life. Analysis of life stages is part of
financial planning. At the beginning of your adult life, you are more likely to have no
dependents, little if any accumulated wealth, and few assets. Assets are resources that can be
used to create income, decrease expenses, or store wealth as an investment. As a young adult,
you also are likely to have comparatively small income needs, especially if you are providing only
for yourself. Your employment income is probably your primary or sole source of income.
Having no one and almost nothing to protect, your willingness to assume risk is usually high. At
this point in your life, you are focused on developing your career and increasing your earned
income. Any investments you may have are geared toward growth. As your career progresses,
income increases, but so does spending. Lifestyle expectations increase. If you now have a
spouse and dependents and elderly parents to look after, you have additional needs to manage.
In middle adulthood, you may also be acquiring more assets, such as a house, a retirement
account, or an inheritance. As income, spending, and asset base grow, ability to assume risk
grows but willingness to do so typically decreases. Now you have things that need protection:
dependents and assets. As you age, you realize that you require more protection. You may want
to stop working one day, or you may suffer a decline in health. As an older adult, you may want
to create alternative sources of income, perhaps a retirement fund, as insurance against a loss
of employment or income. Table 1.1.2 suggests the effects of life stages on financial decision-
making.

2. Define and discuss financial system and its functions.

A financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and
assets between borrowers, lenders, and investors. Its goal is to efficiently distribute economic resources to
promote economic growth and generate a return on investment (ROI) for market participants. Financial systems
are private and public institutions such as insurance companies, banks, investors, and stock exchanges that allow
individuals to exchange funds across mediums. They may also include a set of rules and processes that financial
market participants use in deciding which projects to finance, the terms of the deals, and who may fund the
projects. These systems may exist within private firms, cities, provinces, territories, or regions. They typically
consist of lenders, borrowers, and exchanges that negotiate loans and transactions to fund projects or bring
returns on financial assets. You may organize this type of system with central planning, market principles, or both.
Different monetary forms may originate from trading economic goods on both sides. These various forms may
include cash, claims on a company, or commodities and depend on the market performance of the asset to
increase in value.

In any functional economy, economic resources are limited, with individuals having unlimited wants and desires.
This problem, referred to as scarcity, is one of the significant drivers of an economy. However, it challenges an
economy in determining when, where, to whom to distribute its resources. Consequently, it resulted in a financial
system structure capable of efficiently allocating economic resources to stimulate growth. Also, it allows
participants to benefit by:

Providing a way of making payments (banks)

Giving participants a way of earning interest in the form of time value (investment institutions)

Protecting them against financial risks

(insurance)
Collecting and distributing financial information

(credit agencies)

Governing regulations to maintain stability (central banks and governments)

Maintaining liquidity

and converting investments into cash (banks and financial institutions)

Ensure liquidity

For individuals and institutions to run asset and fund transfers, enough asset liquidity is necessary to match
demand. The financial institutions, markets, and service providers involved in these systems ensure a fluid flow of
funds so investors can buy and sell assets at will and make these assets easily accessible. Liquidity also contributes
to the system's stability and can make it less prone to financial crises or collapse.

Create a payment system

Financial institutions and service providers within a fiscal system provide a payment system for individuals. They
create an efficient and seamless process that allows merchants and businesses to send and receive money in
exchange for products and services. Additionally, they enable individuals to access cash regardless of location.
Through this system, individuals can make payments with credit cards, checks, or cash.

Manage risk

A monetary system can provide risk management by ensuring the protection of financial assets against systemic
and systematic risks. For instance, a bank may conduct payment and refinancing operations and participate in
preparing policy measures and systems development. It may analyze threats to financial stability while working
closely with regulatory bodies to prevent financial crises.

A system may also include insurance services to protect financial assets from mishaps through insurance schemes.
Financial institutions, such as credit agencies, may gather and distribute relevant information to help individuals
and institutions make informed, risk-free decisions. These risk-management services help to maintain efficient
payment and economic systems at different levels of operations.

Provide financing

A function of these systems is to develop a network of financial institutions that work together to provide financing
through the transfer and exchange of capital across locations. For example, you may seek a loan from a bank or
similar financial institution when starting a project. These banks collect deposits from individuals with excess cash
as savings and provide capital as debts to borrowers.
While the typical lenders are individual account holders, financial institutions may also get funds from public
entities, firms, and non-residents who lend out excess funds. Typical borrowers include governments and non-
financial corporations who use these funds to provide more accessible products and services while providing
additional jobs and investment opportunities, driving economic growth. This coordinated service between lenders
and borrowers channels funds from net savers to net spenders.

Inform and implement government policy

Governments use fiscal systems and their components to regulate and stabilize the economy. For instance, they
may set policies to control specific economic occurrences, such as unemployment, inflation, and interest rates.
These systems can also assist in the formation of policies that address individuals of different financial classes. As
governments develop strategies to ensure stable economic systems at the individual, corporate, provincial, and
federal levels, fiscal institutions oversee the financial and operational requirements to ensure the implementation
of those government regulations.

Increase individual ability to save

A primary function of these systems is to use financial institutions and services to help individuals save assets. For
instance, a financial institution may use a long-term investment such as pension savings for an extended period to
manage the effect of inflation. The client receives interest in exchange for the use of this money, increasing their
savings. These savings can have a circular effect, as when investors grow their assets and wealth, they typically
contribute to economic development.

System components

Here are the different components that comprise this type of financial process:

Financial instruments

Financial instruments are assets that individuals can trade in financial markets, and they typically are cash or
derivative instruments. Cash instruments include securities and loans. Derivatives are commodity features and
financial products that depend on the future positive performance of an underlying financial or real asset.
Examples of this type of financial instrument include shares of stocks, futures, or options.

Financial institutions

Financial institutions are businesses that function as intermediaries for monetary transactions, including
depositing, borrowing, and lending. Examples of financial institutions include insurance companies, banks, lending
institutions, brokerage firms, and investment companies. These businesses also provide payment and settlement
systems for smooth market operations, which contribute to financial stability.

Financial markets
Financial markets are places of exchange between lenders and borrowers. Participants can exchange assets such as
bonds, stocks, commodities, and derivatives. Markets contribute to economic growth by allowing investors to
invest capital and ensuring that it stays safe and adds value. For instance, investors typically buy company stocks,
anticipating an increase in the value of the company over time and the value of their stake in the company. As the
company makes a profit, so do investors. Investors may spend or reinvest their earnings, helping strengthen the
economy.

Financial services

Financial services are the forms of assistance that various finance professionals provide to investors, lenders, and
borrowers to facilitate financial market transactions. Financial institutions such as traditional banks, brokerages,
investment banks, and microfinance schemes typically provide these services. Assistance may range from saving
funds to providing loans to protecting assets from systemic risks. Financial service providers also ensure that
individuals have access to capital and investment options to drive growth for individuals or businesses.

3. Why do we need to desynchronize income and consumption?