The changing social and economic context in which we live effects household financial planning.
Liberalization is a part of our changing social and economic context. Liberalisation describes government policy promoting a free market and competition. Over the last 20 years the liberalisation of the finance industry has lead to greater individual financial responsibility and choice of financial products for the British people. We will address some of these changes to the finance industry and explain how they affect our financial planning. Our second theme is how households, and the individuals within, interrelate with each other. We look at two sides of this interrelationship pointing out the conflict between how households can be brought together to plan and recent demographic changes to household composition. We move onto a third theme, that being how we may change the way we plan due to life-course changes. As we get older, so financial goals and priorities change. We then conclude with how planning, using the financial planning model, could be seen as required in today’s world, to achieve our financial goals.
Brown (2007) tells us liberalisation has lead to an increase in consumer credit. Cheap personal loans (unsecured borrowing) were easy to get. Its effects on financial planning can be seen as finance businesses compete for your business, keeping costs to consumers low. This could lead us to think we might not need to compare products, as we will always get a good deal.
But, liberalisation has also brought a marked increase in the number of financial products available. The most suitable one required to meet any financial goals we have may mean we should choose more carefully. A salesperson selling finance is still a salesperson. Caveat emptor seems more relevant when there is so much choice. (Callaghan, Higginson 2007)
However, more recently the economy has changed making it difficult to get cheap loans. The BBC (2001) tells us how the cost of borrowing for consumers has increased due to higher interest rates and this trend has remerged during 2008. Finance businesses can’t lend money cheaply anymore. The effect on planning this has is we shop around for more affordable loans. Saving us more money in the long term.
Similarly liberalisation and a buoyant economy made it easy to get a mortgage. In some cases credit histories were embellished by finance companies so as to provide these. As an effect on our plans there was no need to put to much detail down about our income and expenditure. You did not have to consider your own income too much to be able to afford a mortgage. From personal experience I can tell you that in some circumstances, personal income statements were taken via the spoken word and trusted. My first mortgage offer was based on what I told the mortgage company and nothing else. Within a week a certificate was produced saying that I was able to borrow £500,000.
Today however changes in the economy have lead to tighter reins being put on who can and who cannot get a mortgage. Some mortgage lenders now require larger deposits. An effect on our financial planning of this is, having to find that deposit. Deposits seem harder to come by as the “credit crunch” hits harder. The use of unsecured borrowing to make up a deposit was commonplace. Now getting hold of a large loan with nothing as collateral is far more difficult.
These economic changes have meant less disposable income for consumers. Affordability may also have to be planned for as a result. Less disposable income also makes it more difficult and time consuming to get mortgage. People may still want one but, plans might have to be drawn up to provide an adequate budget for a mortgage. A full household balance sheet might be required to secure the finance to realise your goal of buying a house.
To draw up such a balance sheet the household must consider how each member affects each other member in it and household economy in general. An example might be looking at how many members of the household are assets (bring money in), how many are liabilities (cost money) and or a balance between these two.
To complete this activity a household conference may have to be called, as each household member is effected by and affects these plans. The effect on planning this has for a household with many members in could be seen as making closer ties between those household members. Individuals may become more aware of their standing in the household during such a conference. It may even create a social order to an extent.
However, Government website statistics tell us there have been demographic changes to households which conflict somewhat with the concept above. There are double the numbers of single person households in 2007 than in 1971.http://www.statistics.gov.uk/cci/nugget.asp?id=1925 And according to other figures from Calderdale Council’s website that number is projected to grow further. http://www.calderdale.gov.uk/council/statistics/factsheets/households.html
Contrary to the way people planning can bring families and households together; these figures lead us to believe this is not foremost in the minds of British people. The effect of being a single person household on planning could be that it makes planning easier. Less organisation is required when less people are involved. Also, the simplicity of producing a household budget for one person may be driving this trend to an extent. A bank statement might tell you all you need to know from month to month.
However, we must also consider that as people get older household composition may change. Single people may turn into couples. Couples may in turn have families. Brown (2007) calls this a life-course change. The effects on planning could be, when you are considering the future, a longer-term view may have to be taken and household financial priorities may change. For example, in a maturing household, saving money to go out might get less priority during a household budget conference. Where as, the children’s financial needs for higher education may get a higher priority. Especially when considering recent government changes to the funding of higher education in Britain. Households may have to consider student loans (unsecured borrowing) or equity release plans to achieve these goals. (Callaghan 2007)
Another life-course change to consider is retirement. As we get older and have set aside what is required for others in our household, so a time comes when we need to plan for our own future, without having a full working income. The effect on planning of getting to this stage of life could be assessing our net worth. Finding our total assets minus liabilities. Through this, we would see whether we could survive in our old age with the standard of living we want.
If not we might have to consider refinancing via a house, if we own one, or renting out a room in our house to supplement our income. Unsecured loans would not be easily possible as an option as they would be very hard to get on low pension incomes. (Upton 2007)
So, putting all the above changes to our social and economic climate in better perspective, we could say harder economic times require better planning. With reference to the Financial Planning Model (assess, decide, act, review) DB123 has introduced, more accurate assessment may be required to be fully aware of the multitude of financial products liberalisation has brought us. This assessment could point us towards more affordable products, for both mortgages and unsecured borrowing. It may also be required to meet financial goals we have set out, which is the point of any plan. By use of discussion amongst interdependent members of a household, more informed decisions could be made about both financial products and goals. For a plan to be of use, you must act on it and stick to it until goals are met or changed. Reviewing plans regularly will mean all and any changes to our household’s mutually inclusive social and economic context can be addressed. No matter if it’s the global economies’ impact or finding we are planning for a family and not just ourselves, planning caters for it all. Well-informed financial plans may well be what Britains require to meet goals today. Consider the BBC is telling us even respected professions such as, “Teachers [are being] ‘hit by [an apparent] credit crunch’” and are striking to keep their standard of living. Plan for change. Don’t leave it to chance.
BBC (2008) ‘Teachers ‘hit by credit crunch’’ [online], http://news.bbc.co.uk/1/hi/education/7342689.stm (accessed 02 May 2008)
BBC (2008) ‘Markets uneasy despite US rally’ [online], http://news.bbc.co.uk/1/hi/business/6925367.stm (accessed 02 May 2008)
Brown, V. (2007) ‘Personal finance: setting the context’, in Callaghan, G., Fribbance, I. and Higgenson, M. (eds) Personal Finance, Chichester, John Whiley/The Open University.
Callaghan, G and Higginson, M. (2007) ‘Personal finance: the changing context’, in Callaghan, G., Fribbance, I. And Brown, V. Higgenson, M. (eds) Personal Finance, Chichester, John Whiley/The Open University.
Department for Communities and Local Government (2004) via Calderdale Coucil ‘Table A Household Projections’ [online], http://www.calderdale.gov.uk/council/statistics/factsheets/households.html (accessed 02 May 2008)
Fribbance, I. (2007) ‘Insurance and life events’, in Callaghan, G., Fribbance, I. And Brown, V. Higgenson, M. (eds) Personal Finance, Chichester, John Whiley/The Open University.
Higginson, M. (2007) ‘Expenditure and Budgeting’, in Callaghan, G., Fribbance, I. And Brown, V. Higgenson, M. (eds) Personal Finance, Chichester, John Whiley/The Open University.
Lowe, J. (2007) ‘Pensions’, in Callaghan, G., Fribbance, I. And Brown, V. Higgenson, M. (eds) Personal Finance, Chichester, John Whiley/The Open University.
Office for National Statistics (2008) ‘Households and Families’ [online], http://www.statistics.gov.uk/cci/nugget.asp?id=1925 (accessed 02 May 2008)
Rutherford, J. (2007) ‘Savings and Investments’, in Callaghan, G., Fribbance, I. And Brown, V. Higgenson, M. (eds) Personal Finance, Chichester, John Whiley/The Open University.
The Open University (2007) DB123 ‘You and your money: Personal finance in context’, DVD, Milton Keynes, The Open University.