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Managing my money
Managing my money

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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.