Chapter 1: Personal Financial Planning

Financial Planning Process

A financial planning process entails understanding where one would like to be, where they are,

and how to go from one point to another. Essentially, Siegal and Yacht (2009) defines this

process as: goal definition, assessment of the current situation, identification of choices,

evaluation of those choices, selection, the redefinition of goals. This activity is iterative.

Elements of a Good Financial Plan

Good financial planning highly depends on an awareness of how an individual’s present and

future stages in life may affect their financial decisions. Effective personal financial planning is

grounded on a clear comprehension of one’s circumstances and goals. While everyone is distinct,

there are common circumstances of life that affect personal financial concerns and thus affect

everyone’s financial planning (Siegal & Yacht, 2009).

Factors That Affect an Individual’s Financial Planning Decisions

1. Personal Factors

a. Family Structure

Marital status and dependents determine whether one is planning only for themselves or for

others as well. Partners and dependents affect an individual’s financial planning as one seeks to

provide for them (Siegal & Yacht, 2009). Parents typically want to protect or improve the quality

of life for their children and may choose to limit their own fulfilment to achieve that end.

Providing for others increases income needs (Siegal & Yacht, 2009). Both the willingness and

ability to assume risk 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.

b. Health

One’s 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, for example, birth (Siegal & Yacht, 2009).

c. Career Choice

Career choices affect one’s 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 (Siegal &

Yacht, 2009). Therefore, your financial planning will reflect the realities of being a postal

worker, corporate lawyer, tax preparer, and so on.

2. Economic Factors

a. Business Cycles

In an economy, output increases as population increases or as individuals’ expectations grow. An

economy’s output or productivity is measured by its gross domestic product or GDP, the value of

what is produced in a period (Siegal & Yacht, 2009). When the GDP is increasing, the economy

is in an expansion, and when it is decreasing, the economy is in a contraction.

b. Employment Rate
The employment rate reflects how successful an economy is at creating opportunities to sell

labor and efficiently using its human resources. A healthy market economy uses its labor

productively, is productive, and provides employment opportunities as well as consumer

satisfaction through its markets.

c. Consumer Confidence

Other economic indicators, including consumer confidence, need to be considered during

financial planning. When consumer confidence is high, the economy is more stable relative to

when it is low.

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References

Siegal, R. & Yacht, C. (2009). Personal finance. Saylor Foundation.