Financial Services - Personal Financial Planning - Report Example

I. Introduction This paper aims to critically assess the following ment: “There is no point in saving for the future as the penalises those that do. It is better to enjoy life while you can and let the State look after you when you are unable to do so yourself. Accordingly, financial planning is essentially a waste of time.” (Anon) This paper aims to look at the issue that has been pointed out by the statement and presents arguments in line with it. This paper argues that while government punishes those who save, the incentives come to those who invest after they save. The importance of financial planning, which is not just comprised of saving is also discussed. This paper aims to give some recommendations in order to gain the incentives of having a financial plan without being penalized by the government through its policies. II. Body A. Government policies that discourage saving It may be true that the state punishes those who save. Accordingly, there can be three most identifiable government policies that discourage savings: taxation on savings and capital; low interest rates in risk-free financial instruments; and social security and other government programs that substitute savings—the major argument of the above statement. Taxation on savings and capital. One government policy is to make provision for taxes. Taxes and government spending are part of the fiscal policy. Because taxes are included in savings account for every interest received by an investor or depositor, the taxes serve as a disincentive to save, at least in the risk-free securities in the market. Low interest rates: less incentive for delaying consumption due to inflation. Low interest rates in banks, which sometimes result in very low real rate after deducting inflation, give consumers very little incentive to save. Due to the time value of money, consumers might as well save as their dollars are worth more for the current, than delay consumption because the reward is not huge enough for them to be compensated. Social Security and other government programs substitute savings. With more government programs that are available to the public that substitute the role of savings, the public does not find any other reason to save behind such safety net. The prevalence of these programs that are part of the policies of the government, seem to be enough for the public which does not give additional incentive to save. B. Personal financial plan and long-term financial security While people are discouraged by the government to save through its various policies that penalizes the savers, the future’s uncertainty is the major motivation behind all personal financial planning efforts (Xiao & Noring 1994). Planning enables people to certain strategies in order to meet their goals while adapting to uncertainties that the future holds. Personal financial planning enables a person to take charge of her financial affairs to become financially independent. While there are many motives as regarding personal financial planning and goal-setting, the major motivation for most people is to ensure long-term financial security (Financial Planning Association 2009). Long-term financial security as a major objective can be described as putting some cushion as preparation for any financial contingencies in the future (MilitaryFinance.UMUC.edu 2009). These financial contingencies include death, temporary or permanent disability resulting from illnesses, accidents and injuries, medical expenses, living expenses at retirement, college expenses for children, etc. With the growing costs of living that includes the basic necessities in life, the growing need for financial education and personal financial planning becomes more and more important (Missouri.edu, 2009). “Financial problems and concerns of people are increasing in an uncertain economy, and their effect upon productivity is critical. Documentation of these effects to date is needed to promote financial counseling and education programs for the worker at the workplace (Williams, Halderman & Cramer 1996, 147).” In a socialist economy where prices and output are controlled, where there is much less uncertainty in doing things, leaving the matters of planning in terms of personal finance to the government has been the norm. But in a capitalist economy where the profit-driven markets are subject to fluctuation in prices, there is less certainty about the state of the things in the years to come. And to prepare for these uncertainties is the basic reason behind the concept of long-term financial security, which is the main objective of personal financial planning. C. Life goals and family resource management Personal financial planning is about dealing with uncertainties while achieving one’s life goals. These life goals depend on one’s life stage, as an individual has different priorities during a specific life stage (HSBC.co.in). These different goals are also the basis for family resource management (Porter & Garman 1993). “You need to plan for your wedding, higher studies, a family, and the list continues. With the cloud of inflation looming large, smart financial planning is an excellent way to try to achieve long-term goals like childrens’ education and short term aspirations, like a foreign holiday (HSBC.co.in 2009).” Some of these life goals include: saving for retirement, saving for college, buying a home, getting married, starting a family, starting a new job, joining the military, estate planning, and saving on taxes (Financial Planning Association 2009). These are the basis for personal financial plans. “Save for a better tomorrow.” Those words represent the mantra of many of today’s personal financial management professional. According to Garman and Forgue (1997), financial success is the achievement of five lifetime financial objectives: pursuing maximum earnings and wealth, practicing efficient consumption, finding life satisfaction, reaching financial security, and accumulating wealth for retirement and an estate to leave to heirs. As early as 1911, these objectives were noted and have remained relatively consistent since that time (Kinley, 1911). These objectives are the underlying cornerstone for the financial management techniques or recommended practices that have been taught since that time (Muske & Winter 2004, 79)” D. Saving is just the start For all these life goals, saving is usually the start of personal financial planning. It is true that many policies of the government that discourage people to save, as these policies penalize people to save, which gives more incentive to consume. However, most personal financial planners do not recommend just saving for the entire personal financial plan of an individual (Sherman & Jonathan 2003). Savings is just the starting point for individuals. After a substantial amount in savings, individuals can invest their hard-earned money in higher yield financial instruments, higher than what they receive from their bank savings account. These financial instruments include insurance, mutual funds, unit investment trust funds, IRA, 401k plans, treasury bills and other financial investment products (Brealey 2004). E. Invest, do not just save When through the government policies the savers are being penalized, especially through taxes in savings and lower interest rates to offset inflation (Keown 2005), these penalties are offset when people shift their activities in their personal financial plans from saving to investing. By putting their saved money to higher yield investment vehicles, financial goals of an individual can be reached at a certain period given an investment vehicle’s return. Some of these investment vehicles give tax advantages that are not available to savings. These include high-risk financial vehicles such as real estate and precious metals. Of course, getting into these vehicles when it comes into an individual’s financial plan has to correspond to an individual’s financial goals. Say, due to high risks of these investments, people must include these in their financial plans for goals such as capital gains and not for income purposes. Financial investments that offer steadier returns for additional income purposes can be safer investments such as mutual funds, blue chip stocks and treasury bonds (Free Management Library 2009). “Financial goals are the long-term objectives that your financial planning and management efforts are intended to attain (Garman & Forgue, 1991, p. 60). Since household life cycle stage, financial resources possessions, and other household characteristics differ, family financial goals will not be the same for all kinds of families (Garman & Forgue, 1994, pp. 68-72). In most cases, if households intend to achieve their financial goals, they have to save. Thus, behind financial goals are saving motives (Xiao & Noring 1994, 25).” As an individual sets goals in relation to her priorities in life, the individual achieves these goals by incorporating financial vehicles in her personal financial plan. As most of the time an individual’s life choices involve money, gaining control over one’s finances by saving and investing is crucial to give her freedom. This is the major essence of personal financial planning. III. Conclusion Personal financial planning is not just about savings. Personal financial planning is about taking charge of one’s own personal financial affairs such as managing consumer debts, investing for security, comfort or wealth, and preparing for contingencies. Personal financial planning enables one to control her finances in order to make better life choices in the future. Personal financial planning has never been more relevant during these rough days that are brought by the global financial crisis. As the economy weakens and the prospect of the brighter future of government assistance becomes cloudier, this is the best time to plan for contingencies and the future. It is time to take into the individual’s hands her financial future. Only with this will she become less dependent on the government and the volatilities of external economic factors that could outbalance her finances. In a country such as the United States where democracy has made a lot of choices available for individuals, it seems unwise to waste this huge opportunity to better enjoy life by reaching what an individual wants through achieving personal financial goals. This is the essence of personal financial planning. In this country where freedom lets an individual takes care of her financial future as how she may want it, it is an awful decision to give the government the responsibility of taking care for her financial future. 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Date accessed: February 15, 2009 from http://www.afcpe.org/doc/Vol%2052.pdf Read More