1.2: Individual or “Micro” Factors That Affect Financial Thinking
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 protect those wants and needs, will depend on how you live now and how you hope to live in the future. Everyone is different, but ordinary life circumstances affect everyone’s personal financial concerns, which in turn impact their financial planning. Factors that influence personal financial concerns include family structure, health, career choices, and age.
Family Structure
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 the quality of life for their children and may choose to limit their fulfillment to achieve that end.
Providing for others increases your need for income. Being responsible for others also affects your attitude toward and tolerance of ri sk. Typically, the willingness and ability to assume risk diminishes with fewer dependents, and a desire for more financial protection grows. People often seek protection for their i ncome or assets past their lifetimes to ensure the continued well-being of partners and dependents. Life insurance that names a spouse or dependents as beneficiaries is a good example.
Health
Your health is another key factor that influences your expected income needs and risk tolerance, and therefore your financial planning. Personal financial planning should include protection against the risks of chronic illness, accidents, or long-term disability, as well as provisions for short-term events, such as pregnancy and childbirth. If health issues limit your earnings or ability to work, or significantly increase your expenditures, your income needs may also increase. The need to protect yourself against further limitations or increased costs may also increase. At the same time, your risk tolerance may decrease, which can further impact your financial decisions.
Career Choice
Your career choices affect your financial planning. Careers have different hours, pay, benefits, risk factors, and advancement patterns over time. Your financial planning will need to reflect these realities. Table 1.2.1 displays 2023 data from the U.S. Bureau of Labor Statistics Occupational Outlook Handbook (www.bls.gov/ooh/most-new-jobs.htm), and compares the median salaries of several careers.
| Profession | 2023 Median Salary |
|---|---|
| Financial managers | $ 156,100 |
| Lawyers | $ 145,760 |
| Software developers | $ 132,270 |
| Management analysts | $ 99,410 |
| Accountants and auditors | $ 79,880 |
| Market research analysts and marketing specialists | $ 74,680 |
| Construction laborers | $ 45,300 |
| Medical assistants | $ 42,000 |
| Stock and order fillers | $ 36,390 |
| Cooks, restaurant | $ 35,780 |
| Home health and personal care aides | $ 33,530 |
Most people begin their independent financial lives by selling their labor to earn an income through work. Over time, they may choose to change careers, develop additional sources of income, transition between employment and self-employment, become unemployed, or re-employed. Along with career choices, these changes affect personal financial management and planning.
Age
Needs, desires, values, and priorities 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 changes. Although everyone is different, some financial concerns are common to most adults in various stages of life. Analysis of life stages is part of financial planning.
As income, spending, and asset base grow, the ability to assume risk grows, but the 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 establish alternative sources of income, such as a retirement fund, to serve as insurance against the loss of employment or income. Table 1.2.2 suggests the effects of life stages on financial decision making.
| Young Adulthood | Middle Adulthood | Older Adulthood | Retirement | |
|---|---|---|---|---|
| Source of Income | Wages | Wages/ Investment | Wages/ Investment | Investment |
| Asset Base | None | Accumulating | Growing | Using up |
| Expenses | Low | Growing | Growing | Low |
| Risk: Ability | Low | Higher | Higher | High |
| Risk: Willingness | High | Lower | Lower | Low |
Early and middle adulthood are periods of building: building a family, advancing a career, increasing earned income, and accumulating assets. Spending needs to grow, but so do investments and alternative sources of income.
Later adulthood is a period of spending down one’s assets. 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 have passed on, and so without the responsibility of providing for them, your expenses are lower. You are likely to have more leisure time, especially after retirement.
Effective financial planning primarily depends on being aware of how current and future life stages may impact your financial decisions.
Summary
- Personal circumstances that influence financial thinking include family structure, health, career choice, and age.
- Family structure and health affect income needs and risk tolerance.
- Career choice has a significant impact on income and wealth, as well as asset accumulation.
- Age and stage of life affect sources of income, asset accumulation, spending needs, and risk tolerance.
- Sound personal financial planning is based on a thorough understanding of your personal circumstances and goals.
Exercises
- Create a personal financial journal to keep a written record of observations and insights about your financial thinking and behavior. Review How Journaling for Personal Finance Can Help You Manage Money (www.journling.com/journaling-for-personal-finance/). You may be surprised at what you discover. As you read, consider how the information in this text relates specifically to your observations and insights. After reading this chapter, for example, identify and describe your current life stage. How does your current age or life stage affect your financial thinking and behavior? To what extent and in what ways does your financial thinking anticipate your next stage of life? What financial goals are you aware of that you have set? How are your current experiences informing your financial planning for the future?
- Continue your personal financial journal by describing how other micro factors, such as your present family structure, health, career choices, and other individual factors, affect your financial planning.
- Consider the age range for your stage of life and read What To Know About Life Cycle Financial Planning (www.asset-map.com/blog/life-cycle-financial-planning). According to the articles on this page, what should be your top priorities in financial planning right now? Read the articles on the next life stage. How are your financial planning priorities likely to change?
This page titled 1.2: Individual or “Micro” Factors That Affect Financial Thinking is shared under a CC BY-NC-SA 3.0 license and was authored, remixed, and/or curated by Anonymous via source content that was edited to the style and standards of the LibreTexts platform.
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Personal Finance
Personal finance involves managing an individual or household’s financial activities to achieve stability and meet financial goals. It includes budgeting, saving, investing, and planning for future needs such as emergencies, education, and retirement. Effective personal finance management requires understanding and balancing income, expenses, debt, and investments to build wealth, avoid financial pitfalls, and ensure long-term security. By making informed decisions and setting realistic goals, individuals can enhance their financial well-being and work toward achieving their goals.
If you need professional guidance, hiring a financial planner can be a valuable option. To choose the right planner, determine your goals, research potential candidates, check their qualifications, read reviews, and understand their fees. Reviewing contracts and asking for recommendations from family and friends can also be helpful. Consider engaging a Certified Financial Planner (CFP) and explore industry association websites like the Financial Planning Association (FPA) External and the National Association of Personal Financial Advisors (NAPFA) External for assistance in locating a qualified financial planner.
There has been an increase in the use of robo-advisors for financial planning. Robo-advisors are algorithm driven digital platforms that provide automated investment advice and management services with minimal human intervention. You can read more about this and other disruptive financial technologies in the Fintech: Financial Technology Research Guide.
Print Resources
The following titles link to fuller bibliographic information in the Library of Congress Online Catalog. Links to additional online content are included when available.
Call Number: HG173 .O425 2016
Published/Created: 2016-01-05The authors draw on years of experience researching and reporting on financial lives to present an accessible, one-stop guide to taking back your financial future. Beyond outlining rules for financial success, the authors also explain why so few people follow them. The answers to healthy finance, it turns out, are simple enough to fit on an index card. Armed with The Index Card, readers will gain the tools, knowledge and confidence to make the right decisions regarding their money.
Call Number: HG179 .P3747 2015
Published/Created: 2015-04-14This jargon-free resource explains the who, what, why, and where of contemporary personal finance in simple, easy-to-grasp language, covering the key people, events, terms, tools, policies, and products that make up modern money management. The ideal roadmap to 21st-century financial literacy, this layman’s encyclopedia discusses ideas, concepts, events, and people that inform money management and personal finance. It explains the intricacies of things like investing, saving, debt, credit, and mortgages, and it drills down into complexities like the difference between 401(k) and 403(b) retirement plans. Entries invite the reader to explore common financial topics, such as seeking credit counseling, using credit cards, buying a home, and choosing insurance. Issues such as identity theft, derivatives, and taxes are explored as well.
Published/Created: 2023-09-26
Get familiar with the financial pillars of earning, saving, investing, borrowing, budgeting, and protecting your assets. Dig into modern concerns like navigating the housing market, weathering the highs and lows of an unpredictable market, evaluating new stuff like cryptocurrency, and budgeting to achieve your financial goals. Take the anxiety out of money matters by building a solid financial plan, learning to spend and invest wisely, and managing your debt. Learn the basics of investing and start making smart investment choices Demystify insurance so you can protect your health and your assets. Control your spending and build better budgets so you can afford the big stuff.
Call Number: HG179 .R5495 2020
Published/Created: 2020-10-19In this book, you will learn: – How to build a positive money mindset, analyze your own money habits, and secure your own financial freedom for good times and bad – How to effectively manage and pay down debt, the difference between good and bad debt, and how to raise your credit score (and keep it high!) – How to translate your dreams into a financial reality without beating yourself up over daily spending or restrictive budgeting – The best ways to financially prepare for major life events such as home buying, weddings, and sending children off to college.
U.S. Government Finance Facts
The U.S. government collects a wide range of statistics on personal finance to help understand the financial behavior, income, expenditures, and wealth of households across the country. Key sources include those listed below. These resources offer valuable data for understanding trends in personal finance and are useful for research and personal education.
The American Community Survey (ACS) is an ongoing survey that provides vital information on a yearly basis about our nation and its people. Information from the survey generates data that help inform how trillions of dollars in federal funds are distributed each year. It provides details on our population, housing, occupations, and more.
FRED has data on the balance sheet of households and nonprofit organizations in the United States. During much of the past decade, financial assets such as pensions, stocks, and mutual funds have made up more than half of their net worth.
The BEA offers data that you can search by topic, including consumer spending, income & savings, price & inflation, as well as employment.
The BLS’ CE provides detailed data on how Americans spend their money, including expenditures, income, and demographic information. Check out the BLS website for access to reports and data.
Go to the Data & Research page for information on consumer credit and mortgage trends, as well as for research and reports on the consumer financial market.
The Act (Title VI of the Consumer Credit Protection Act) protects information collected by consumer reporting agencies such as credit bureaus, medical information companies and tenant screening services. Information in a consumer report cannot be provided to anyone who does not have a purpose specified in the Act.
This site provides economic data series, including interest rates, unemployment, the Consumer Price Index, and more.
The U.S. Census Bureau, in collaboration with multiple federal agencies, is in a unique position to produce data on critical social and economic matters affecting American households. The Household Pulse Survey was designed to deploy quickly and efficiently, collecting data to measure how emergent issues are impacting U.S. households from a social and economic perspective. Data will be disseminated in near real-time to inform federal and state action.
Provides information about specific occupations and occupational groups, including median pay, projected number of new jobs, and growth rate. Includes a list of highest paying jobs, most new jobs (projected), and fastest growing (projected).
The SCF provides comprehensive data on the assets, liabilities, income, and financial behavior of U.S. households. You can access reports and datasets on the Federal Reserve’s website.
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