Republic of the

Philippines
UNIVERSITY OF
RIZAL SYSTEM
Province of Rizal
Binangonan Campus

COLLEGE OF BUSINESS

Vision: The leading University in human resource development, knowledge and

technology generation, and environmental stewardship.
Mission:
The University of Rizal System is committed to nurture and produce upright and
competent graduates and empowered community through relevant and
sustainable higher professional and technical instruction, research, extension,
and production services.
Responsiveness, Integrity, Service Excellence, Social Responsibility
Core Values:

Chapter 1.
PERSONAL FINANCIAL PLANNING

Introduction

You will make financial decisions all your life. Sometimes you can see those decisions coming
and plan accordingly; sometimes, well, stuff happens, and you are faced with a more sudden
decision. Personal financial planning is about making both deliberate decisions that allow you to
get closer to your goals and sudden decisions that allow you to stay on track, even when things
take an unexpected turn.

Blair Stonechild states “currency is only a medium of exchange and not a goal in itself”
(Stonechild, 2016, p. 196). As a medium of exchange, it is used to trade goods and services
instead of barter. Money measures the value of goods and services and stores value that can be
used for future purchases (Ebert, Griffin, Starke, and Dracopoulos, 2017). Indigenous Elders
offer a distinct perspective on money in many of the interviews shared throughout this text.
Elder Ermine, for instance, states that “Money is a tool” that you use to create certain
conditions (Elder Ermine, Video 1A).

According to Richards (2015), “Tools are meant to be used. They’re not meant to sit on a shelf
and collect dust.” Richards provides an example of a family that saves for a family vacation.
Instead of judging the expenditure of money as bad or good, positive or negative, he views it as
a tool that has helped that family to achieve their objective, which is more time together. In
order to fully benefit from our tools, we must understand how to use them and what we are
using them for. Some students might want to pursue a degree, while others might want to buy
a home for their families, and some might want to go on a vacation. It is difficult to accomplish
any of these goals without money. Money is a way to achieve our goals and not a goal in itself
(Stonechild, 2016, p. 196).

The idea of personal financial planning is really no different from the idea of planning almost
anything: you figure out where you’d like to be, where you are, and how to go from here to
there. The process is complicated by the number of factors to consider, by their complex
relationships to each other, and by the profound nature of these decisions, because how you
finance your life will, to a large extent, determine the life that you live. The process is also
complicated—often enormously—by risk: you are often making decisions with plenty of
information, but little certainty or even predictability.

Personal financial planning is a lifelong process. Your time horizon is as long as can be—until the
very end of your life—and during that time your circumstances will change in predictable and
unpredictable ways. A financial plan has to be re-evaluated, adjusted, and readjusted. It has to
be flexible enough to be responsive to unanticipated needs and desires, robust enough to
advance specific goals, and all the while be able to protect from unimagined risks.

One of the most critical resources in the planning process is information. We live in a world full
of information—and no shortage of advice—but to use that information well you have to
understand what it is telling you, why it matters, where it comes from, and how to use it in the
planning process. You need to be able to put that information in context before you can use it
wisely. That context includes factors in your individual situation that affect your financial
thinking, and factors in the wider economy that affect your financial decision-making.
https://opentextbooks.uregina.ca/financialempowerment/chapter/chapter-1-personal-financial-planning/

Richards, C. (2015). “Rethinking Money, not as Good or Bad but as a Tool.” New York Times, Feb. 17. Retrieved
from: https://www.nytimes.com/2015/02/17/business/re thinking-moneynot-as-good-or-bad-but-as-atool.htm.

Stonechild, B. (2016). The Knowledge Seeker: Embracing Indigenous Spirituality. Regina: University of Regina
Press.

Learning Objectives:

1. List individual factors that strongly influence financial thinking.

2. Discuss how income, income needs, risk tolerance, and wealth are affected by individual factors.
3. Explain how life stages affect financial decision-making.
4. Summarize the basis of sound financial planning.

The circumstances or characteristics of your life influence your financial concerns and
plans. What you want and need—and how and to what extent you want to satisfy your
wants and needs—all depend on how you live and how you’d like to live in the future.
While everyone is different, there are common circumstances of life that affect personal
financial concerns and thus affect everyone’s financial planning. Factors that affect
personal financial concerns are family structure, health, career choices, and age.

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,
web site 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.

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.

Early and middle adulthood are periods of building up: building a family, building a career,
increasing earned income, and accumulating assets. Spending needs increase, but so do
investments and alternative sources of income.
Later adulthood is a period of spending down. There is less reliance on earned income and more
on the accumulated wealth of assets and investments. You are likely to be without dependents,
as your children have grown up or your parents passed on, and without the responsibility of
providing for them your expenses are lower. You are likely to have more leisure time, especially
after retirement.

Without dependents, spending needs decrease. On the other hand, you may feel free to finally
indulge in those things that you’ve “always wanted.” There are no longer dependents to
protect, but assets demand even more protection as, without employment, they are your only
source of income. Typically, your ability to assume risk is high because of your accumulated
assets, but your willingness to assume risk is low, as you are now dependent on those assets for
income. As a result, risk tolerance decreases: you are less concerned with increasing wealth
than you are with protecting it.

Effective financial planning depends largely on an awareness of how your current and future
stages in life may influence your financial decisions.

Key Takeaways

1. Personal circumstances that influence financial thinking include family structure, health,
career choice, and age.
2. Family structure and health affect income needs and risk tolerance.
3. Career choice affects income and wealth or asset accumulation.
4. Age and stage of life affect sources of income, asset accumulation, spending needs, and
risk tolerance.
5. Sound personal financial planning is based on a thorough understanding of your
personal circumstances and goals.

Ebert, R. J., R. W. Griffin, F. A. Starke, and G. Dracopoulos. (2017). Business Essentials (8th Ed.). Toronto: Pearson
Canada.

Payscale. (2017). “Salary Date and Career Research Center (Canada).” Retrieved
from: http://www.payscale.com/research/CA/Country=Canada/Salary.

SYSTEMATIC OR “MACRO” FACTORS THAT AFFECT FINANCIAL THINKING

Learning Objectives

1. Identify the systemic or macro factors that affect personal financial planning.
2. Describe the impact of inflation or deflation on disposable income.
3. Describe the effect of rising unemployment on disposable income.
4. Explain how economic indicators can have an impact on personal finances.
Financial planning has to take into account conditions in the wider economy and in the markets
that make up the economy. The labour market, for example, is where labour is traded through
hiring or employment. Workers compete for jobs and employers compete for workers. In the
capital market, capital (cash or assets) is traded, most commonly in the form of stocks and
bonds (along with other ways to package capital). In the credit market, a part of the capital
market, capital is loaned and borrowed rather than bought and sold. These and other markets
exist in a dynamic economic environment, and those environmental realities are part of sound
financial planning.

In the long term, history has proven that an economy can grow over time, that investments can
earn returns, and that the value of currency can remain relatively stable. In the short term,
however, that is not continuously true. Contrary or unsettled periods can upset financial plans,
especially if they last long enough or happen at just the wrong time in your life. Understanding
large-scale economic patterns and factors that indicate the health of an economy can help you
make better financial decisions. These systemic factors include, for example, business cycles
and employment rates.

Business Cycles

Ideally, an economy should be productive enough to provide for the wants of its members.
Normally, economic output increases as population increases or as people’s expectations grow.
An economy’s output or productivity is measured by its gross domestic product (GDP), the
value of what is produced in a period. When the GDP is increasing the economy is in an
expansion, and when it is decreasing the economy is in a contraction. An economy that
contracts for half a year is said to be in recession; a prolonged recession is a depression. The
GDP is a closely watched barometer of the economy. However, GDP can be considered a limited
indicator of economic growth because it doesn’t measure goods and services that are not paid
for. For example, caring for children or housework is not counted as part of GDP unless it is
done by a daycare or a hired cleaner. Furthermore, GDP doesn’t account for negative
externalities such as the “harm done by industrial pollution or the health costs resulting from a
polluted water system; these should be accounted as debits to the national income. Conversely
the benefits of clean water and clean environment are not counted within GDP” (Orr and Weir,
2013, p. 110).

Over time, the economy tends to be cyclical, usually expanding but sometimes contracting. This
is called the business cycle. Periods of contraction are generally seen as market corrections, or
the market regaining its equilibrium, after periods of growth. Growth is never perfectly smooth,
so sometimes certain markets become unbalanced and need to correct themselves. Over time,
the periods of contraction seem to have become less frequent. The business cycles still occur
nevertheless.

There are many metaphors to describe the cyclical nature of market economies: “peaks and
troughs,” “boom and bust,” “growth and contraction,” “expansion and correction,” and so on.
While each cycle is born of a unique combination of circumstances, cycles occur because things
change and upset economic equilibrium. That is, events change the balance between supply
and demand in the economy overall. Sometimes demand grows too fast and supply can’t keep
up, and sometimes supply grows too fast for demand. There are many reasons that this could
happen, but whatever the reasons, buyers and sellers react to this imbalance, which then
creates a change.

Employment Rate

An economy produces not just goods and services to satisfy its members, but also jobs, because
most people participate in the market economy by trading their labor and most rely on wages
as their primary source of income. The economy must therefore provide opportunities to earn
wages so more people can participate in the economy through the market. Otherwise, more
people must be provided for in some other way, such as a private or public subsidy (charity or
welfare).

The unemployment rate is a measure of an economy’s shortcomings, because it shows the

proportion of people who want to work but don’t because the economy cannot provide them
jobs. There is always a so-called natural rate of unemployment, as people move in and out of
the workforce as the circumstances of their lives change—for example, as they retrain for a new
career or take time out for family. But natural unemployment should be consistently low and
not affect the productivity of the economy.

Unemployment also shows that the economy is not efficient, because it is not able to put all its
productive human resources to work.

The employment rate shows how successful an economy is at creating opportunities to sell
labor and efficiently using its human resources. Statistics Canada defines the employment rate
as “the number of employed people as a percentage of the population aged 15 and older. The
rate for a particular group (for example, youths aged 15 to 24) is the number employed in that
group as a percentage of the population for that group” (Statistics Canada, 2018, p. 5). In
contrast, the participation rate includes both unemployed and employed Canadians, or, as Stats
Canada puts it, “The participation rate is the number of employed and unemployed people as a
percentage of the population” (Statistics Canada, 2018, p. 5).

A healthy market economy uses its labor productively, is productive, and provides employment
opportunities as well as consumer satisfaction through its markets.

At either end of this scale of growth, the economy is in an unsustainable position: either
growing too fast, with too much demand for labour, or shrinking, with too little demand for
labour.
If there is too much demand for labour—more jobs than workers to fill them—then wages will
rise, pushing up the cost of everything and causing prices to rise. Prices usually rise faster than
wages, for many reasons, which would discourage consumption that would eventually
discourage production and cause the economy to slow down from its “boom” condition into a
more manageable rate of growth.

If there is too little demand for labour—more workers than jobs—then wages will fall or, more
typically, there will be people without jobs, or unemployment. If wages become low enough,
employers will (theoretically) be encouraged to hire more labour, which would bring
employment levels back up. However, it doesn’t always work that way, because people have
job mobility—they are willing and able to move between economies to seek employment.

If unemployment is high and prolonged, then too many people are without wages for too long,
and they are not able to participate in the economy because they have nothing to trade. In that
case, the market economy is just not working for too many people, and they will eventually
demand a change (which is how most revolutions have started).

Other Indicators of Economic Health

Other economic indicators give us clues as to how “successful” our economy is, how well it is
growing, or how well positioned it is for future growth. These indicators include statistics, such
as the number of houses being built or existing home sales, orders for durable goods (e.g.,
appliances and automobiles), consumer confidence, producer prices, and so on. However, GDP
growth and unemployment are the two most closely watched indicators because they get at
the heart of what our economy is supposed to do: provide diverse opportunities for the highest
number of people to participate in the economy, to create jobs, and to satisfy these individuals’
needs.

An expanding and healthy economy will offer its participants more choices—namely, more
choices for trading labour and for trading capital. It offers more opportunities to earn a return
or an income and therefore also offers more diversification and less risk.

Naturally, everyone would rather operate in a healthier economy, but this is not always
possible. Financial planning must include planning for the risk that economic factors will affect
one’s financial realities. A recession may increase unemployment, lowering the return on labour
—wages—or making it harder to anticipate an increase in income. Wage income could be lost
altogether. Such temporary involuntary loss of wage income will probably happen to you during
your lifetime, as you inevitably will endure economic cycles.

A hedge against lost wages is investment to create other forms of income. In a period of
economic contraction, however, the usefulness of capital, and thus its value, may decline as
well. Some businesses and industries are considered immune to economic cycles (e.g., public
education and health care), but overall, investment returns may suffer. Thus, during your
lifetime business cycles will likely affect your participation in the capital markets as well.

Currency Value

Stable currency value is another important indicator of a healthy economy and a critical
element in financial planning. Like anything else, a currency’s value is based on its usefulness.
We use currency as a medium of exchange, so its value is based on how it can be used in trade,
which in turn is based on what is produced in the economy. If an economy produces little that
anyone wants, then its currency has little value relative to other currencies, because there is
little use for it in trade. So, a currency’s value is an indicator of how productive an economy is.

A currency’s usefulness is based on what it can buy, or its purchasing power. The more a
currency can buy, the more useful and valuable it is. When prices rise or when things cost more,
purchasing power decreases; the currency buys less and its value decreases.

When the value of a currency decreases, an economy has inflation. Its currency has less value
because it is less useful—that is, less can be bought with it. Prices are rising. It takes more units
of currency to buy the same amount of goods. When the value of a currency increases, on the
other hand, an economy has deflation. Prices are falling; the currency is worth more and buys
more.

For example, say you can buy five video games for $20. Each game is worth $4, or each dollar
buys one-quarter of a game. Then we have inflation, and prices—including the price of video
games—rise. A year later you want to buy games, but now your $20 only buys two games. Each
one costs $10, or each dollar only buys one-tenth of a game. Rising prices have eroded the
purchasing power of your dollars.

If there is deflation, prices fall, so maybe a year later you could buy ten video games with your
same $20. Now each game costs only $2, and each dollar buys half a game. The same amount
of currency buys more games: its purchasing power has increased, as has its usefulness and its
value. Table 1.2.2 provides an overview of how prices, purchasing power, and currency value
change during periods of inflation and deflation.

Table 1.2.2 Dynamics of Currency Value

Inflation Deflation
Prices Rise Fall
Purchasing Power Decreases Increases
Currency Value Falls Rises
Inflation is most commonly measured by the consumer price index (CPI), which is a measure of
inflation or deflation based on a national average of prices for a “basket” of common goods and
services purchased by the average consumer as determined by the federal government. It is an
accepted way of tracking rising or falling price levels, and as such is indicative of inflation or
deflation.

Currency instabilities can also affect investment values, because the dollars that investments
return don’t have the same value as the dollars that the investment was expected to return. Say
you lend $100 to your sister, who is supposed to pay you back one year from now. There is
inflation, so over the next year, the value of the dollar decreases (it buys less as prices rise).
Your sister does indeed pay you back on time, but now the $100 that she gives back to you is
worth less (because it buys less) than the $100 you gave her. Your investment, although
nominally returned, has lost value: you have your $100 back, but you can’t do as much with it;
it is less useful.

If the value of currency—the units in which wealth is measured and stored—is unstable, then
investment returns are harder to predict. In those circumstances, investment involves more
risk. Both inflation and deflation are currency instabilities that are troublesome for an economy
and also for the financial planning process. An unstable currency affects the value or purchasing
power of income. Price changes affect consumption decisions, and changes in currency value
affect investing decisions.

It is human nature to assume that things will stay the same, but financial planning must include
the assumption that over a lifetime you will encounter and endure economic cycles. You should
try to anticipate the risks of an economic downturn and the possible loss of wage income
and/or investment income. At the same time, you should not assume or rely on the windfalls of
an economic expansion.

Key Takeaways

1. Business cycles include periods of expansion and contraction (including recessions), as

measured by the economy’s productivity (GDP).
2. An economy is in an unsustainable situation when it grows too fast or too slowly, as each
situation causes too much stress in the economy’s markets.
3. In addition to GDP, measures of the health of an economy include: • the rates of
employment and unemployment, and
• the value of currency (the consumer price index).
4. Financial planning should take into account the fact that periods of inflation or deflation
change the value of currency, affecting purchasing power and investment values.
5. Thus, personal financial planning should take into account:
• business cycles,
• changes in the economy’s productivity,
• changes in the currency value, and• changes in other economic indicators.
 REFERENCES

Orr, J. and W. Weir, eds. (2013). Aboriginal Measures for Economic Development. Halifax: Fernwood Publishers.

Statistics Canada. (2018). “Labour Force Survey, March 2018.” Retrieved from:
http://www.statcan.gc.ca/dailyquotidien/180406/dq180406a-eng.htm.

Explain the Planning Process

Learning Objectives

1. Trace the steps of the financial planning process and explain why that process needs to
be repeated over time.
2. Characterize effective goals and differentiate goals in terms of timing.
3. Explain and illustrate the relationships among costs, benefits, and risks.
4. Analyze cases of financial decision-making by applying the planning process.

A financial planning process involves figuring out where you’d like to be, where you are, and
how to go from here to there. More formally, a financial planning process means the following:

• Defining goals
• Assessing the current situation
• Identifying choices
• Evaluating choices
• Choosing
• Assessing the resulting situation
• Redefining goals
• Identifying new choices
• Evaluating new choices
• Choosing
• Assessing the resulting situation over and over again

Personal circumstances change, and the economy changes, so your plans must be flexible
enough to adapt to those changes yet be steady enough to eventually achieve long-term goals.
You must be constantly alert to those changes but “have a strong foundation when the winds of
changes shift” (Dylan, 1973).
Defining Goals

Figuring out where you want to go is a process of defining goals. You have shorter-term (one to
two years), intermediate (two to five years), and longer-term goals that are quite realistic, and
goals that are more wishful. Setting goals is a skill that usually improves with experience.

According to a popular model, to be truly useful goals must be specific, measurable, attainable,
realistic, and timely (SMART). Goals change over time, and certainly over a lifetime. Whatever
your goals, however, life are complicated and risky, and having a plan and a method to reach
your goals increases your odds of doing so.

For example, after graduating from university, Brittany has an immediate focus on earning
income to provide for living expenses and debt (student loan) obligations. She is fortunate that
her family assists her with child care. Within the next decade, she foresees going to graduate
school and perhaps purchasing a house for her and her daughter. Her income will have to
provide for her increased expenses and also generate a surplus that can be saved to accumulate
these assets.

In the long term, she will want to be able to retire and derive all her income from her
accumulated assets, and perhaps travel around the world. In order to do so, she will have to
accumulate enough assets to provide for her retirement income and for the travel. Table 1.3.1
shows the relationship between timing, goals, and sources of income.

Table 1.3.1 Timing, Goals, and Income

Timing Goals Income Sources
Short-Term Reduce Debt Wages/Salary
Intermediate Accumulate Assets Wages/Salary
Long-Term Create Retirement Income Investment Returns
Brittany’s income will be used to meet her goals, so it’s important for her to understand where
her income will be coming from and how it will help in achieving her goals. She needs to assess
her current situation.

Assessing the Current Situation

Figuring out where you are, or assessing the current situation, involves understanding what
your present situation is and the choices that it creates. There may be many choices, but you
want to identify those that will be most useful in reaching your goals.

Assessing the current situation is a matter of organizing your personal financial information into
summaries that can clearly show different and important aspects of your financial life—your
assets, debts, incomes, and expenses. These numbers are expressed in financial statements—in
an income statement, balance sheet, and cash flow statement (topics discussed in Chapter 3
“Financial Statements”). Businesses also use these three types of statements in their financial
planning.

For now, we can assess Brittany’s situation by identifying her assets and debts and by listing her
annual incomes and expenses; that will show if she can expect a budget surplus or deficit. But
more importantly, it will show how possible her goals are and whether she is making progress
toward them. Even a ballpark assessment of the current situation can be illuminating.

Brittany’s assets may be a car worth about $5,000 and a savings account with a balance of $250.
Her debts include a student loan with a balance of $53,000 and a car loan with a balance of
$2,700. These are shown in Table 1.3.2.

Table 1.3.2 Brittany’s Financial Situation

Assets Debts
Car: 5,000 Car Loan: 2,700
Savings: 250 Student Loan: 53,000
Total: 5,250 Total: 55,700
Her annual disposable income (after tax income or take-home pay) may be $35,720, and annual
expenses are expected to be $10,800 for rent and $14,400 for living expenses—food, gas,
entertainment, clothing, and so on. Her annual loan payments are $2,400 for the car loan and
$7,720 for the student loan, as shown in Table 1.3.3.

Table 1.3.3 Brittany’s Income and Expenses

After tax income 35,720
Rent 10,800
Living expenses 14,400
Remaining for debt reduction and savings 10,520
Student loan payments 7,720
Car loan payments 2,400
Remaining for savings 400
Brittany will have an annual budget surplus of just $400. She will be achieving her short-term
goal of reducing debt, but with a small annual budget surplus it will be difficult for her to begin
to achieve her goal of accumulating assets.

To reach that intermediate goal, she will have to increase income or decrease expenses to
create more of an annual surplus. When her car loan is paid off next year, she hopes to buy
another car, but she will have at most only $650 ($250 + $400) in savings for a down payment
for the car, and that assumes she can save all her surplus. When her student loans are paid off
in about five years, she will no longer have student loan payments, and that will increase her
surplus significantly (by $7,720 per year) and allow her to put that money toward asset
accumulation and her graduate degree. Brittany’s long-term goals also depend on her ability to
accumulate productive assets, as she wants to be able to quit working and live on the income
from her assets in retirement. Brittany is making progress toward meeting her short-term goals
of reducing debt, which she must do before being able to work toward her intermediate and
long-term goals. Until she reduces her debt, which would reduce her expenses and increase her
income, she will not make progress toward her intermediate and long-term goals.

Assessing her current situation allows Brittany to see that she has to delay accumulating assets
until she can reduce expenses by reducing debt (and thus her student loan payments). She is
now reducing debt, and as she continues to do so, her financial situation will begin to look
different, and new choices will be available to her.

Brittany learned about her current situation by compiling two simple lists: one of her assets and
debts, and the other of her income and expenses. Even in this simple example it is clear that the
process of articulating the current situation can put information into a very useful context. It
can reveal the critical paths to achieving goals.

Evaluating Alternatives and Making Choices

Figuring out how to go from here to there is a process of identifying immediate choices and
longer-term strategies or series of choices. To do this you have to be both realistic and
imaginative about your current situation; this will allow you to see the choices you are
presented with and the future choices that your current choices may create. The characteristics
of your living situation—family structure, age, career choice, and health—and the larger context
of the economic environment will affect or define the relative value of your choices.

After you have identified alternatives, you must evaluate each one. The obvious things to look
for and assess are its costs and benefits, but you also want to think about its risks, where it will
leave you, and how well positioned it will leave you to make the next decision. You want to
have as many choices as you can at any point in the process, and you want your choices to be
diversified. That way you can choose with an understanding of how this choice will affect the
next choice, and the next, and so on. The further along in the process you can think, the better
you can plan.

In her current situation, Brittany is reducing debt, an obligation for which she is liable, so one
choice would be to continue on this path. She could begin to accumulate assets—cash or
property with a monetary value—sooner if she could reduce expenses to create more of a
budget surplus (Kapoor, Dlabay, Hughes, and Ahmad, 2015). Brittany looks over her expenses
and decides she really can’t cut them back much. She decides that the alternative of reducing
expenses is not feasible. She could increase income, however. She has two choices: work a
second job or go to Las Vegas to play poker.

Brittany could work a second, part-time job that would increase her after tax income but leave
her more tired and with less time for other interests. The economy is in a bit of a slump too—
unemployment is up a bit—so her second job probably wouldn’t pay much. She could go to
Vegas and win big, with the cost of the trip as her only expense. To evaluate her alternatives,
Brittany needs to calculate the benefits and costs of each, as in Table 1.3.4.

Table 1.3.4 Brittany’s Choices: Benefits and Costs

Choices Benefit Explicit Cost Implicit Cost
Continue Reduce debt None None
Reduce debt and increase surplus a Give up leisure
Second job None
little (more income) pursuits
Eliminate debt and increase surplus a Airfare and hotel Risk of increased
Vegas
lot (no debt payment) in Vegas deficit and debt
Laying out Brittany’s choices in this way shows their consequences more clearly. The alternative
with the biggest benefit is the trip to Vegas, but that also has the biggest cost because it has the
biggest risk: if she loses, she could have even more debt. That would put her further from her
goal of beginning to accumulate assets, which would have to be postponed until she could
eliminate that new debt as well as her existing debt.

Thus, she would have to increase her income and decrease her expenses. Simply continuing as
she does now would no longer be an option because the new debt increases her expenses and
creates a budget deficit. Her only remaining alternative to increase income would be to take the
second job that she had initially rejected because of its implicit cost. She would probably have
to reduce expenses as well, an idea she initially rejected as an unreasonable choice. Thus, the
risk of the Vegas option is that it could force her to “choose” alternatives that she had initially
rejected as too costly.
Chart 1.3.1 Considering Risk in Brittany’s Choice

The Vegas option becomes least desirable when its risk is included in the calculations of its
costs, especially as they compare with its benefits.

It’s obvious risk is that Brittany will lose wealth, but its even costlier risk is that it will limit her
future choices. Without including risk as a cost, the Vegas option looks attractive—which is, of
course, why Vegas exists. But when risk is included, and when the decision involves thinking
strategically not only about immediate consequences, but also about the choices it will
preserve or eliminate, that option can be seen in a very different light.

Table 1.3.5 Brittany’s Choices: Benefits and More Costs

Choices Benefit Explicit Cost Implicit Cost Strategic Cost
Preserves
Continue Reduce debt None None
alternatives
Reduce debt and
increase surplus a Give up leisure Preserves
Second job None
little (more pursuits alternatives
income)
Eliminate debt and
increase surplus a Airfare and hotel in Risk of increased Eliminates
Vegas
lot (no debt Vegas deficit and debt alternatives
payment)
You may sometimes choose an alternative with less apparent benefit than another but also with
less risk. You may sometimes choose an alternative that provides less immediate benefit but
more choices later. Risk itself is a cost and choice a benefit, and they should be included in your
assessment.
Key Takeaways

1. Financial planning is a recursive process that involves:

• defining goals,
• assessing the current situation,
• identifying choices,• evaluating choices, and
• choosing.
2. Choosing further involves assessing the resulting situation, redefining goals, identifying
new choices, evaluating new choices, and so on.
3. Goals are shaped by current and expected circumstances, family structure, career,
health, and larger economic forces.
4. Depending on the factors shaping them, goals are short-term, intermediate, and
longterm.
5. Choices will allow faster or slower progress toward goals and may digress or regress
from goals; goals can be eliminated.
6. You should evaluate your feasible choices by calculating the benefits, explicit costs,
implicit costs, and the strategic costs of each one.

Discuss Financial Planning Professionals

Learning Objectives

1. Identify the professions of financial advisers.

2. Discuss how training and compensation may affect your choice of adviser.
3. Describe the differences between objective and subjective advice and how that may
affect your choice of adviser.
4. Discuss how the kind of advice you need may affect your choice of adviser.

As with any professional that you go to for advice, you want expertise to help make your
decisions, but in the end, you are the one who will certainly have to live with the consequences
of your decisions, and you should make your own decisions accordingly.

There are a multitude of financial advisers to help with financial planning, such as accountants,
investment advisers, tax advisers, estate planners, or insurance agents. Many financial advisers
also work as financial planners. They have different kinds of training and qualifications, different
educations and backgrounds, and different approaches to financial planning. To have a set of
initials after their name, all have met educational and professional experience requirements
and have passed exams administered by professional organizations, testing their knowledge in
the field.
Certifications are useful because they indicate training and experience in a particular aspect of
financial planning. When looking for advice, however, it is important to understand where the
adviser’s interests lie (as well as your own). It is always important to know where your
information and advice come from and what that says about the quality of that information and
advice. Specifically, how is the adviser compensated?

Some advisers just give, and get paid for, advice; some are selling a product, such as a particular
investment or mutual fund or life insurance policy, and get paid when it gets sold. Others are
selling a service, such as brokerage or mortgage servicing, and get paid when the service is
used. All may be highly ethical and well-intentioned, but when choosing a financial planning
adviser, it is important to be able to distinguish among them.

Sometimes a friend or family member who knows you well and has your personal interests in
mind may be a great resource for information and advice, but perhaps not as objective or
knowledgeable as a disinterested professional. It is good to diversify your sources of
information and advice, using both professional and “amateur,” subjective and objective
advisers. As always, diversification decreases risk.

Now you know a bit about the planning process, the personal factors that affect it, the larger
economic contexts, and the business of financial advising. The next steps in financial planning
have to do with details, especially how to organize your financial information to see your
current situation and how to begin to evaluate your alternatives.

References to Professional Organizations

The references that follow provide information for further research on the professionals and
professional organizations mentioned in this chapter.

Table 1.4.1 References to Professional Organizations

Professional Organizations Websites

The Association of Chartered

http://www.accaglobal.com/ca/en.html
Certified Accountants (ACCA)
The Association for Financial
Counseling and Planning http://www.afcpe.org
Education
Canadian Institute of Chartered
http://www.cica.ca
Accountants (CICA)

Certified Financial Planner

http://www.cfp.net
Board of Standards

Chartered Financial Analyst

http://www.cfainstitute.org
Institute

Financial Planners Standards

http://www.fpsccanada.org
Council of Canada

The National Association of

http://www.naepc.org
Estate Planners and Councils
Key Takeaways

1. Financial advisers may be working as financial planners, accountants, investment

advisers, tax advisers, estate planners, or insurance agents.
2. You should always understand how your adviser is trained and how that may be related
to the kind of advice that you receive.
3. You should always understand how your adviser is compensated and how that may be
related to the kind of advice that you receive.
4. You should diversify your sources of information and advice by using subjective advisers
—friends and family—as well as objective, professional advisers. Diversification, as
always, reduces risk.

REFERENCES

Dylan, B. (1973). “Forever Young.” On Planet Waves, Asylum Records, 33⅓ rpm.

Kapoor, J., L. Dlabay, R. Hughes, and F. Ahmad. (2015). Personal Finance. Toronto: McGraw-Hill Ryerson.
https://opentextbooks.uregina.ca/financialempowerment/chapter/chapter-1-personal-financial-planning/