Week 1: Financial planning and the life course

Introduction

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Martin Upton is your educator and guide through the course. He is Director of the True Potential Centre for the Public Understanding of Finance, based at The Open University Business School. He’ll meet you at the start of each week of the course to tip you off about highlights and challenges, to remind you of what you’ve learned and to help you make the most of Managing my money. Note that each of the eight weeks of the course is designed to be studied over a period of three hours, ideally with one week being studied per week.

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Martin Upton

Hello, and welcome to Managing my money. I'm Martin Upton, Director of the True Potential Centre for the Public Understanding of Finance based at The Open University Business School.

Before working for The Open University, I spent twelve years as Treasurer to Nationwide Building Society. I'll be your guide for this course.

Ask yourself, how does the type of person you are affect the decisions you make? Are you your own worst enemy when it comes to money? Do you know where you can put your savings to get the best return? Do you need to worry about interest rates or inflation? Do you know how decisions made by the government and the Bank of England affect you?

Regardless of how much you may already know, whether you're a student or a young family, starting your first job or planning your retirement, living on benefits or banking your bonus, you'll learn how to make the most of your money.

Through the next eight weeks, you'll see how the big news stories about the economy, taxation and interest rates affect your household accounts. You'll learn how behavioural traits and social pressures affect your financial decisions.

And you'll learn life-long practical skills using UK data and real-life examples, although the issues covered are pretty well universal wherever you live.

As you work through the course, packed with high-quality audio and video, you'll find easy-to-use tools, expert discussions and bags of practical guidance. You'll become equipped with the skills to create your own personal action plan

With real incomes falling, record low returns on savings, and people facing the prospect of working ever longer to get a decent pension, there's never been a more important time to take control of your personal finances.

At the end of each week, you'll have the chance to gauge how much you've learned in a test. Your score from these weekly tests will be added to the results of a longer test you'll take in the final week. By the end of the course, not only will you have picked up some fantastic knowledge, but you'll also have developed skills that will be really useful for further studies in finance.

We have a group of experts who'll respond to and moderate discussions. Please join in and share ideas - you can post comments on anything in the course along the way

So, Week 1. Let's start by looking at how you can structure your financial planning. We look at a model that can be applied routinely when making financial decisions. We'll also start to explore a theme that we'll return to throughout the course - how financial resources and needs change through the course of our lives. Enjoy the journey.

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As the course progresses you’ll also meet personal finance expert Jonquil Lowe from The Open University.

1.1 The economic backdrop

Everyone – directly or indirectly – is affected by the good and bad events in the economy. One way or another, those of us in wealthy societies are all shoppers in the financial supermarkets. The video highlights some of the many issues that have had an impact on households and personal finances in recent years.

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Martin Upton:

When managing your money, it's important to understand the features of the current economic backdrop that have a direct affect on your finances. So let's set the scene:

After the recession, our economy is growing again, though it's still quite fragile.

Interest rates have been at an historic low.

House prices in the UK are on the up again, getting closer and closer to their peak in the late 2000s. London property is especially booming.

Shares are enjoying a strong recovery.

Flooding is threatening to push up insurance premiums.

No gender price discrimination on insurance is now permitted in Europe.

Unemployment is falling, though it's still high, particularly for 18 to 25 year olds.

Meanwhile, university fees are at an all time high - at widely 9000 pounds per annum. Students are now graduating with debts of tens of thousands of pounds.

There is a planned pensions revolution - slated to kick in in April 2015 - where many people moving into retirement will have access to their pension pots to spend or invest their funds in the way they want.

From July 2014 a major change to the savings market will unfold with the annual limit on investments in tax-free ISA accounts ballooning to 15,000 pounds.

All in all, things are cautiously on the up after the 2007-2009 financial crisis and the double dip recession that followed it.

But in reality, real incomes - that is, the value of our earnings once inflation has eaten into them - have been falling for many if not most of us.

The price of food, fuel, and energy has been rising fast in recent years. This is quite a change from the long uptrend in living standards we saw in recent decades.

All things to keep in mind when managing your money, today and for the future!

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1.1.1 The life course

Considering the life course as a series of stages provides a means of thinking ahead and seeing an overall pattern.

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Figure 1 Flows of income and expenditure alter over the life course for everyone

Figure 1 illustrates a ‘typical’ pattern where youth, adolescence and young adulthood lead on to becoming part of a couple, where adulthood entails working and having dependent children who later on become independent themselves. The later part of the life course is usually marked by old age and retirement from working.

Of course, the life course won’t be the same for everyone; some people won’t form part of a couple or won’t have children, and some will experience family breakdown or bereavement.In relation to personal finance, the idea of the life course is helpful because it encourages planning ahead for the financial implications of each stage. For example, many people delay thinking about their provision for retirement because they don’t want to think about growing older, but they often come to regret this later in life when they realise that they would have benefited from earlier planning. Thinking in terms of stages in the life course might help to overcome this natural aversion. It provides a framework for thinking about possible life events such as marriage, parenthood, retirement, or even death, and this can make it easier to think ahead constructively.

No one can know exactly what will happen in the future. Financial capability – the ability to understand finances and make sound financial decisions – involves thinking ahead and planning for what might happen in the future; this includes not only things that we hope for, but also things that we hope will not happen.

Sensible planning takes into account the fact that the future may bring events that can be anticipated, as well as unexpected events with financial implications – unexpected bills or periods of illness or unemployment. Planning for the unexpected is one important aspect of financial capability.

1.1.2 The life course game

Try to work out what could happen to the Pennys’ financial position in the scenarios given below. Avoid overcomplicating your analysis – just ascertain whether these would be good or bad financial events for Mr and Mrs Penny, and how important they would be.

• Mrs Penny becomes permanently disabled.
• Mr Penny is made redundant.
• The Pennys’ car breaks down.
• The Pennys’ children move out of the family home after they finish college.

Now look at the Pennys’ spending. In terms of covering the cost of life’s events, are they taking any risks? You might want to draw up a revised budget for them.

1.1.3 Your life plan

Here’s the life course graph again. What do you think your own personal and financial circumstances might be in five years’ time?

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Figure 2 Where are you in your own life course?

If you had answered this question five years ago what would your expectations have been? How closely would your answer have matched what has actually happened to you?

Does this lead you to revise what you think your circumstances might be in another five years?

What factors are influencing your thinking about the outlook for your personal and financial circumstances?

1.1.4 Starting your financial plan

Your first step in exploring financial capability is to think in a systematic way about the goals you have in your life. The process is called financial planning. In order to plan effectively you need to take into account the end goal.

This is the first occasion on which we want you to make use of your personal financial plan and fact find  (from now on, called simply the ‘fact find’). A fact find is a means of setting out your current financial position and linking it to your goals in life. It’s a summary of your financial health, and can be used when you’re in discussions with advisers about financial decisions that need to be made. Download this now if you haven’t done so already, and when you’ve identified your goals record them in the first two rows, under the heading ‘Assess’.

Try noting down your three most important goals.

Goals are affected by individual circumstances and backgrounds, and by the kind of society in which the person or household is living.

People don’t form goals in a social vacuum. Many goals in life are ‘self-interested’, while others relate to political, ethical or religious commitments. Some people have a goal of helping achieve social fairness; they might be altruistic with their money and give to charity, or they might buy Fairtrade products that don’t exploit individuals or communities. Developments in ethical banking reflect these changes. Similarly, increasing awareness of environmental issues has affected some people’s goals by changing their pattern of consumption, which might lead them, for example, to cut back on unnecessary travel.

It’s very likely that goals will change in the course of a life as events unfold – as people form or leave relationships, have children, experience illness or disability, learn to cope with bereavement, move in and out of different household or family groupings, or live and work in different countries.

Think about goals with financial implications that, say, a young, single adult might have:

• take a holiday abroad next year
• buy a flat within ten years
• help the homeless
• get married in three years’ time
• have a comfortable retirement.

These goals relate to different time periods. In financial terms, ‘short term’ is normally taken to be under five years, ‘medium term’ is around five to ten years, and ‘long term’ is normally more than ten years. Taking a holiday next year and getting married in three years’ time are short-term goals. Buying a flat within ten years is a medium-term goal. Providing for a comfortable retirement is a long-term goal. Helping the homeless is an ongoing goal.

Figure 3 The ingredients of your financial plan

1.1.5 Prioritising

Thinking about goals is one starting point for financial planning, but the achievement of those goals may be constrained by the resources that a household has, together with its commitments.

For most households, achieving their goals is subject to the financial constraint of the resources that are available. Some households have goals that are not as affected by the available resources. In these cases the resources are not functioning as a constraint on financial plans. This may be because the household is rich, or because it has goals that are not financially demanding. Other households have goals that are severely constrained by available resources. In these cases, money difficulties are a constant source of anxiety and severely inhibit goals. Here the main goal might be basic financial survival.

So, an important question is whether all the goals can be achieved, given the financial constraints. Whether a person is able simultaneously to take a holiday next year, help the homeless, get married and buy a flat depends on their financial constraints. If the person can’t afford to do all these things, then choices have to be made. There’s a trade-off between using money and resources in some ways rather than in others. A trade-off involves giving up something in order to have something else that is preferred: taking lavish holidays means not being able to buy a flat. Which is more important? It’s necessary to prioritise.

• Take another look at your list of three most important goals. Have you listed the goals in any particular order?
• Try listing the goals in order of priority for you, given your circumstances and resources.
• Are there trade-offs between your goals?
• Has this prompted you to rethink any of your goals?

When doing (or buying) something involves giving up something else, the real cost is what would have been done (or bought) instead. This is called the opportunity cost. For example, the opportunity cost of buying a car is what would have been done (or bought) instead. The money might be spent on other things, or it might be saved or given away; it might be used to reduce or pay off existing debt. The opportunity cost of buying the car is the best alternative that is forgone (done without) in order to buy the car, such as buying a holiday with the money instead.

Time, as well as money, is a scarce resource. Most of us can’t do all the things we want to partly because we don’t have the time. The opportunity cost of you spending your time studying this course is what you would have done with your time if you hadn’t been doing this. It’s the best alternative use of your time. (If you wouldn’t have done anything else, then you’re not giving up anything to study the course, and so the opportunity cost would be zero.) Some busy people are particularly ‘time-poor’, even though they may be rich in a monetary sense.

Sometimes trade-offs have to be made between doing something now and doing it in the future. If you spend money now, it’s not available for later. There’s a tendency for people to place a greater value on £100 to spend now than on £100 to spend in one or two years’ time. You’ll find there are good economic reasons for this – especially because of inflation, which you’ll look into in Week 2.

But there are also rewards for not spending now in order to have more to spend later. If you’re hoping to build up a target amount for a future purchase or a pension, then just a few years’ delay in starting to put the money aside can greatly increase theamountyou have to put aside to be sure of meeting the target.

In addition, many financial products involve trade-offs of their own. For instance, financial investment tends to involve a trade-off between risk and return: the higher the expected return, the higher the risk attached. Which is the right product depends not only on how much risk – if any – can be afforded, but also on how risk averse a person is. Risk-aversion is the preference for a lower, but more certain, return rather than a higher, but less certain, return, other things being equal.

Figure 4

1.2 Your personality can seriously affect your finances

Are you risk averse or a risk taker? Find out about the behaviours that can lead to poor financial decisions and start to build your financial planning model.

Have you ever thought about how far your personality and, in particular your approach to risk taking, affects your financial decision making?

In this video Mark Fenton-O’Creevy, Professor of Organisational Psychology at The Open University Business School and an expert in behavioural finance, introduces the way behavioural biases affect personal financial decisions.

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Mark Fenton-O'Creevy:

So I want to start off by introducing you to a chap called Phineas Gage. Phineas Gage was a railway worker and they used to make tunnels, they'd drill holes in the rock and then they'd have tamping iron which they used to compress the blasting powder with, and sometimes what would happen; as they were compressing the blasting powder is a spark would trigger the blasting powder, which would shoot the rod out with quite high speed and that's what happened to Phineas Gage and it went straight through his head. It took out a very particular part of his brain that is responsible for emotional processing.

So that was a very early example of how we started to get to learn about what bits of the brain do. It used to be that psychologists treated cognition, thinking and emotions as two completely separate processes. Different people studied them. But what we're learning more and more through neuroscience is that cognitions and emotions are completely intertwined and that as humans, emotions are a very important part of our thinking processes.

A quite simple way of thinking about how emotions and thinking come together is the dual process model of cognition. If we have a situation, we've got to make a decision, a sort of classical way of thinking about this might be: well there's some facts, we've got some options for making decisions, we can represent the future in some way, maybe do a bit of internal modelling of what's going to happen. Going on in parallel with that though, is a completely different process.

It's the activation - and biases is perhaps the wrong word but if you like, pre-existing scripts for deciding; based on our emotional experience of comparable situations. And the first process in blue is quite slow and this process is like that - perceiving is deciding. But what about consumers? we've got responses from about 110,000 people across the UK on their psychological and emotional relationships with money. So one of the things we did is we looked at people's impulsive buying behaviour.

And in a lot of the marketing literature this impulsive buying gets talked about as if it were mostly a good thing. Actually there's good evidence that people who are very impulsive buyers are often doing this as a not very effective way of regulating their emotions. They're not good at managing bad emotions, going shopping turns out to be a form of emotion repair. It turns out that people who are impulsive buyers are typically much more likely to get into financial trouble.

They are for example about three times more likely to go bankrupt. It's also the case of course that retailers invest significant resources in engaging with impulsive shoppers. There's a lot of effort goes into: how can we get the impulsive spend? We need an investment into education, which promotes emotional literacy about money. We also looked at a series of scales, which measure people's attitudes to money. People see money as power, money as love, money as freedom, money as security.

Money as love tends to be the female vice, money as power tends to be the male vice. There are quite strong gender differences here. Again we find a strong relationship to financial outcomes. Those who see money as security are much more likely to have a positive financial earn. So a final observation to finish with.

Policy makers often seek to influence behaviour by providing information.

Firms, through their advertisements, often seek to influence behaviour through engaging with emotions.

Guess who is more pessimistic about influencing consumer behaviour? Thanks very much.

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1.2.1 Betting the house

Most of us like to have a gamble once in a while – even if it’s just buying a lottery ticket or backing a horse in the Grand National. How big is your appetite for risk taking? How much are you prepared to lose on a bet – £5? £20? £100? Maybe even £1000? Ashley Revell was prepared to take on a huge gamble. Was it bravery or madness?

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Martin Upton

Some people are BIG risk takers. Take Ashley Revell from Kent. In 2004, Ashley entered the Plaza Hotel and Casino in Las Vegas with only one thing on his mind: taking a big gamble! He'd raised thousands of pounds and he was now ready to put it all on the line - a total of 76,840 pounds' worth to be precise!

He contemplated a roulette wheel. Whether he chose to place his two piles of chips on red or on black would mean the difference between loosing it all and gaining thousands more. He had a 50/50 chance of winning or losing... but he felt lucky. He chose red at the very last minute... and that's where the ball settled.

On a whim, in one moment, he'd doubled his money to 153,680 pounds! But he could just as easily have lost it all. Would you be able to take such a gamble? Would you describe yourself as a risk taker? Or are you risk averse?

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1.3 Building your financial planning model

Martin introduces you to the financial planning model – a process with which you’ll become very familiar as you progress through the course and develop your financial capability.

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Martin Upton

Financial planning is a process. It goes through different stages. In this course you look at one way of describing this staged financial process. It is a 'model' or, to put it another way, a simplification designed to help clarify a more complex process.

Stage 1 - Assess the situation

This involves clarifying and prioritising goals, working out constraints and resources, finding out relevant information and perhaps seeking out well-informed advice.

Stage 2 - Decide on a financial plan

This entails working out possible actions to take or changes to make, such as deciding on which type of financial product or service might be required to achieve a particular goal, or setting a budget to adjust income and/or expenditure.

Stage 3 - Act on the financial plan

This means acting on what has been decided: for example, making the planned changes to income and/or expenditure; shopping around and selecting which financial product is the best buy, given needs and constraints (such as a specific savings account or a specific insurance policy).

Stage 4 - Review the plan

This involves regularly reviewing the outcome of the action and taking into account recent changes or events - is your financial plan still the best option? Does further advice need to be sought?

Perhaps moving into a new cycle of financial planning is necessary.

The financial planning model shows each stage in the planning process and how each one - assessing, deciding, acting, reviewing - leads into the next stage. Planning is a continuous process over time, with one complete sequence through the four stages leading naturally into another such sequence. This demonstrates that financial planning is not a one-off matter but an ongoing process over time. Financial plans need to respond and think ahead to the different stages in a person's life course, and also to take into account possible future events.

You've seen how goals need to be clarified and prioritised: this is part of Stage 1. You've also seen, in Stage 2, how deciding on a financial plan aims to fulfil the goals, given the constraints.

Stage 3 entails acting on the financial plan; there's little point in devising brilliant financial plans if they're not actually acted upon! This stage might involve shopping around for best buys of specific financial products.

Stage 4 is the important one of reviewing the outcome and checking progress in the light of changing circumstances. This, in turn, may lead to another round of financial planning.

There may well be some to-ing and fro-ing between the stages. Financial plans are worked out on the basis of existing goals, but some goals may have to be revised in view of the financial plans that they turn out to require. Someone might have a goal of climbing Everest, but then they learn that the financial plan required to do it is too demanding, and so the goal is revised. Alternatively, perhaps, a financial plan has to be revised when more information is acquired about the actual financial products available. In reality, the lines dividing the separate stages of the financial planning process may be blurred. But not withstanding this, these stages of the four golden rules of effective personal financial management.

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Financial capability involves being able to work out a financial plan for achieving a goal, given the constraints that you face. Constraints include things like income and existing savings, personal circumstances such as having to care for children or elderly relatives, and emotional factors such as how you feel about taking risks. For example, if your goal is to reduce debt worries, then financial capability involves better debt management. If you decide to consolidate debts into one package and then pay them all off systematically, some of these packages cost less than others (other things being equal). If there are debt problems, it’s better to seek advice from professional bodies like the government’s Money Advice Service (MAS), or from Citizens Advice or StepChange, rather than going to a ‘loan shark’ who charges extremely high rates of interest. Alternatively, if you’re saving to buy a flat, some savings schemes offer a better return than others (other things being equal), and all of them are likely to be better than stuffing cash under the proverbial mattress.

Seeking out well-informed advice and choosing better products, given constraints and goals, would be evidence of greater financial capability.

1.3.1 Applying the financial planning model

To make sure that your financial decisions are well managed, you should start to apply the financial planning model to financial decision making.

Think of a recent financial decision that you’ve taken and analyse your own process of financial planning. Try to remember each stage of your decision and have a go at analysing the stages in terms of the financial planning model. The decision could be something to do with moving house, buying a car, changing jobs, borrowing money for a project.

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Figure 5 Assess, decide, act, review – the four golden rules

You’ll apply the financial planning model to your own financial circumstances as you work through the course to help you build your financial plan and complete your fact find.

If you were to make a similar financial decision right now, would you approach it differently?

1.3.2 Goals – the social and economic context

So far you’ve seen that financial planning can be understood as a sequence of stages: assess, decide, act and review – a continuous process. But as you see in this developed version of the financial planning model, these four stages also need to be understood in a broader context, as shown by the arrows pointing into and out of the process.

Thinking about your own life, you’ll be aware that your financial goals, and the ways you go about trying to achieve them, can be influenced by social factors such as your values, culture or religion as well as by economic factors. In terms of religious values, for example, the taking or paying of interest is prohibited under sharia law, as it was by the Roman Catholic Church in earlier centuries. Approaches to charitable donations, the giving of care and financial support to family members are also affected by contextual social factors.

The planning process impacts not only on individuals but also on the wider society. In the financial planning model this is shown by the arrows pointing outwards. Take a couple of instances: if many people decide to buy a flat, there is likely to be a rise in the price of flats which will have knock-on effects; or if many people decide to reduce their indebtedness, spending will fall and high-street retailers will face falling profits.

These examples – of increases in property prices and falling retail sales – illustrate the cumulative effect of many individual decisions, and how far the impact of individual decisions can spread. The effects were not an intended consequence of the individuals’ decisions at the time, and they can be different from what people individually expect. For instance, if an individual person or household goes on a spending spree, the consequences mainly affect that individual; but if a significant proportion of households go on a spending spree, there will be cumulative effects which have an impact throughout the economy.

Sometimes the effects of many people doing the same thing can become a ‘bubble’, and this can impact much more widely: every bubble eventually bursts, and when it does it sends ripples throughout society. In the late 1980s a large number of people wanted to buy property. Prices rose steeply in 1988 and 1989, but the bubble burst and property prices fell sharply in the early 1990s. This had severe consequences for some of those who bought when prices were at their peak. In the late 1990s there was a stock market bubble, with many people buying shares, especially in companies related to new technology and the internet. But from 2000 to 2002 the value of many stocks and shares fell dramatically, with negative financial impacts for those holding such stocks and shares. Similarly, throughout the 2000s property prices again rose sharply before falling with the onset of the financial crisis in 2007. After 2009, however, property prices started to rise again as the UK economy recovered from the economic recession that followed the financial crisis.

As you see, what individuals and households do with their money is not separate from the larger economy; in fact, it helps to define that larger economy.

Now take another look at the goals you listed earlier in your fact find. Think about social and economic influences on these goals. If the influences had been different, would your goals have been different?

It can be hard to imagine having had different influences. But if any of your economic circumstances or your social and cultural background were different, it is likely that your goals would be too. As you work through the next few weeks of the course, take time to reflect on some specific examples.

1.4 Try the bad habits test

As you heard earlier from Mark Fenton-O’Creevy, there are good reasons why we sometimes make bad financial decisions, even if we’re pretty smart about most other things in life.

Find out if you’re suffering from some of the factors that make personal financial choices particularly difficult – perhaps we should call them the ‘perils of personal finance’.

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Martin Upton

There are reasons why we sometimes make bad financial decisions. Find out if you're suffering from some of the factors that make personal financial choices particularly difficult - perhaps we should call them the 'perils of personal finance'! Try this Bad Habit Test!

Which would you rather have: £500 to spend today? Or £500 in a savings account... and then have £700 to spend in five years' time, when interest is added?

If you chose to have £500 today, you're in good company; despite the 7% per annum return on the savings account. Most people don't like delayed rewards. If our choice means putting money aside, there's an immediate pain of having less to spend in exchange for a very distant and uncertain gain. So, not surprisingly, making the right choices for the long-term future can be very hard. Prioritising the present over the future can even be due to capitulation, which means that some personal financial challenges seem so daunting you may be tempted to assign them to the category of 'things I could never afford to do'. For example, many young people today may give up on the aspiration of buying their own home when they look at the deposit required and the bills that go with home ownership.

Here are two groups of loans - Group A and Group B. If you needed to borrow £100 for one year which group of loans contains the best deal?

In Group A we have two loans -

Loan 1: pay back £120 at the end of the year.

Loan 2: pay back £115 at the end of year.

In Group B,

Loan 3: pay a £10 arrangement fee and then equal monthly repayments; the interest rate is 5% per annum.

Loan 4: you pay a £5 arrangement fee and equal monthly repayments; the interest rate is 8% per annum.

Loan 5: you pay off the loan in equal monthly instalments at an interest rate of 7% per annum, plus a final charge of £3.

And finally loan 6: there are no repayments for the first 6 months, then there are equal monthly repayments with a 3% per month interest charge.

Did you choose Group A? You may be surprised to discover the cheapest loans are Loans 5 and 6 in Group B. But we human beings do not like complexity. As options become more complex, the reliability of our decision making quickly deteriorates and we become more inclined to go for the simplest options or make no choice at all, just letting things carry on as they are. Moreover infrequency doesn't help. Many of our really big financial choices like changing jobs, taking a training course, buying a house besides being very complex, aren't taken very often. So there's not much opportunity to practise, but there is much scope to forget what we have learned from one time to the next.

Each year, you are 80% sure your boiler will not break down. How likely are you to take out a service contract for boiler repairs costing £15 a month?

a) Very or fairly likely

b) Not likely

We're very good at not expecting 'the unexpected'. In fact, we really don't like unpredictability at all. Financial planning involves projecting ourselves into situations we don't want to think about. So we may be tempted not to make financial provisions for unexpected events. Like major repairs to our cars or having to replace our boilers or finding that the roof needs retiling. But unexpected events not only happen, they are surprisingly likely. Take that boiler. Over a period of say four years, the chance of it not breaking down is 80% x 80% x 80% x 80% and this equals 41%. So viewed over a four year period there is a 59% chance that you would have to pay for boiler repairs. The unexpected event should now be expected within four years!

Imagine you inherit £20,000. The inheritance comes to you in the form of £5,000 in cash and £15,000 in shares. Would you:

a) Increase the amount invested in shares.

b) Make no changes.

c) Reduce the amount invested in shares.

Chances are you said 'make no changes'! That's because we all have a tendency towards inertia. That means we tend to feel uncomfortable making changes and so often stick with existing arrangements even when they might not be the best option. To help people deal with these problems, policy makers have become very interested in the idea of giving the rest of us a 'nudge'. This is a way of structuring financial choices so that, while people are still free to choose, the design of the choice steers them in a direction that's likely to be best for them.

For example, in the UK, the Government has argued that it's good for people to save for retirement, so it decided to enrol all employees into workplace pensions, unless they actively choose to opt out. Think about how you make choices, about what bad financial habits you might have. Have they ever created problems, or proved costly? Over to you - identify your bad habits and change them.

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You’re almost at the end of the first week. When you’ve explored your bad habits, see what you’ve learned so far in the first test.

1.5 Week 1 quiz

This quiz allows you to test and apply your knowledge of the material in Week 1.

Complete the Week 1 quiz  now.

Open the quiz in a new window or tab then come back here when you're done.

1.6 Week 1 round-up

In Week 1 you’ve seen:

• how to construct and use a financial planning model
• how our financial resources and needs alter over the life course.

Next week you’ll look at income as you meet one of the key financial challenges for all households – how to draw up and run a household budget.

You can now go to Week 2: Income, taxation and benefits

Figure 6

1.7 Further reading

The Open University Business School's True Potential Centre for the Public Understing of Finance (PUFin)

If you want to know more about the work of the True Potential Centre for the Public Understanding of Finance (PUFin) and its mission to improve personal financial capability, check out the centre’s website. The centre, generously funded by True Potential LLP, has a mission to develop teaching and undertake research to help improve public financial capability.

References

Acknowledgements

This unit was written by Martin Upton and Jonquil Lowe

Except for third party materials and otherwise stated in the acknowledgements section, this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 Licence.

The material acknowledged below is Proprietary and used under licence (not subject to Creative Commons Licence). Grateful acknowledgement is made to the following sources for permission to reproduce material in this unit:

Unit image

Figures

Figure 4 © iStockphoto.com/cherezoff

AV

The economic backdrop © The Open University (contains archive © BBC)

Your personality can seriously affect your finances © The Open University (contains © 123RF and Patrick Landmann/Science Photo Library)

Betting the house © The Open University (contains © BBC archive, 123RF images and REX/Ken McKay)

Every effort has been made to contact copyright owners. If any have been inadvertently overlooked, the publishers will be pleased to make the necessary arrangements at the first opportunity.

You can now go to Week 2: Income, taxation and benefits

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