The financial planning model is a cyclical model, and is designed to help individuals or households achieve financial goals by managing their income and expenditure.
Figure 1: Stages of Financial Planning
(Brown, 2007, pg 38)
I will explain the model using a male individual as reference.
At Stage one he assesses his current situation, and prioritises any financial goals while considering relevant constraints (e.g. low income) and resources (e.g. limited time). At Stage two he decides on a financial plan and works out possible actions to take or changes to make to achieve his goal. Stage three requires him to act on his decisions in order to bring is plans to fruition. Stage four is where he reviews the success of his plans and actions to determine whether he is on track to achieve his goal. Here, the cyclical nature of the model becomes important.
Financial decisions are not taken in isolation from the social and economic context and those financial decisions in turn affect the social and economic context (Brown, 2007, pg 29). This is because the three inter-dependent parts of the economy – households, corporations and government – are linked by flows of goods, services and money. Changes made in one sector may affect the other sectors either positively or adversely.
Figure 2 Inter-dependence: money flows between sectors of the economy
(Brown, 2007, pg 27)
For example, an individual wishes to buy a flat in the next 3 years. He may believe that owning a property is important for his status because his peer group is doing the same (Social Context). He begins saving and each year reviews whether he is close to achieving his goal. But many households