UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City
Course Title: SPECIAL TOPICS IN FM
Credit Units: 3 units
Course Description:
Learning Outcomes:
Cognitive
Affective
Psychomotor
MIDTERM-MODULE 5- Personal, Risk Profiling and Life Cycle Analysis
Intended Learning Outcomes:
In this module, students should be able to:
1. Explain personal profiling.
2. Discuss risk profiling.
3. Understand the meaning of Life Cycle Analysis
4. Grasp the limitation of Life Cycle Analysis
PERSONAL PROFILING
Personal Profiling- The process used to accurately analyze a person’s non-financial background
In order to construct an optimal financial plan.
ELEMENTS OF PERSONAL PROFILING
1. Personality
2. Family Values
3. Cultural Values
4. Lifestyle Preferences
5. Psychological Health
6. Experience Of Major Life Events.
UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City
RISK PROFILING
Risk Profiling- The Process of determining a person’s risk tolerance level using utility-based or
psychometric methods.
RISK PROFILING METHODS
Utility-Based Survey- Employs the utility to construct a series of questions to determine the
client’s equilibrium point which indicates his or her risk aversion.
Psychometric Survey- Employs life events and investment gamble involving various levels of
risk in order to assess client’s risk tolerance.
Asset Allocation- Refers to how investors spread their investment funds among various financial
instruments.
Validity- A measure of how successful the instrument is in assessing outcomes.
Reliability- A measure of how persistent an outcome is generated by the instrument.
LIFE-CYCLE ANALYSIS
Life cycle analysis (LCA) - is a method used to evaluate the environmental impact of a product
through its life cycle encompassing extraction and processing of the raw materials,
manufacturing, distribution, use, recycling, and final disposal.
- is a method which the energy and raw materials consumption, different types of emissions
and other important factors related to a specific product are being measured, analyzed and
summoned over the products entire life cycle from an environmental point of view.
LIFE- CYCLE STAGES
A life cycle - is defined as the developmental stages that occur during an organism's lifetime.
- ends when an organism dies
- can be comprised of more than the three basic stages depending on the species.
- the life of an individual is divided into several life cycle stages. The exact number of life
cycle stages differs among individuals. There is also no theoretical consensus on how many
stages should be used in financial planning. As financial planning focuses on clients who have
income or wealth that they can use and control,, we normally excluded the childhood stage and
start with the young single. In general, five to six stages can be identified for the purpose of
financial planning.
UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City
YOUNG SINGLE
The young single individual should have insurance protection against disability due to sickness
and injury, which will affect their earning ability. As they are still young and their parents have
not reached retirement stage, there I little need for financial protection against early death. In
addition, if they have excess funds, they can also think about making investment and pension
plans.
NEWLY MARRIED
- When young single individual marry, their needs become substantially different. The needs and
financial planning priorities of the newly married couple depend on their employment status. If
both parents work, they would have more surplus funds to fulfill their financial planning needs.
If the couple have surplus funds, they may start making savings for retirement, emergency funds
for food and investment plan. If only one parent works, the top priority is to protect against the
financial consequences of early and accidental death of the breadwinner, so life insurance is
important.
MARRIED WITH YOUNG CHILDREN
With the addition of children to the family, expenditure goes up, and the needs for
financial protection increases. The couple will have to provide for both the present physical
needs and future education needs of their children. When there is a change in the employment
status of the couple, the availability of funds for family expenditure may be affected. If there is
surplus fund, the family may use it for investment and pension plans.
MARRIED WITH OLDER CHILDREN
The couple should be in the middle of their careers by time their children are older. This is the
stage where the couple should have more surplus funds to invest. Investment income can be used
to repay loans, to finance the educational expense of children, to pay for leisure, and to
prepare retirement.
UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City
COUPLE AT PRERETIREMENT
In the preretirement stage, the children should have grown up. Therefore, the need for
life insurance to protect the children against the financial consequences of early and
accidental death of the parent is reduced. When the children become financially independent, the
parents can put their first priority on retirement. They should try to maximize their investment
income to supplement their retirement income.
RETIRED COUPLE
- At this stage, the objective of the retired couple is to maintain their living standard. If there is
a shortage of funds, they may have to invest more in order to generate additional income. If there
is a surplus of funds, they may consider making arrangements for the disposal of their estates
upon death. While tax planning should be done throughout the different life cycle stages during
retirement, the objective of tax planning is to minimize the tax liability of the deceased when the
estates have to be passed to the children. We can see then that financial planning is important at
every life cycle stages of the individual.
COMMON FINANCIAL GOALS AND ACTIVITES
1. Obtain appropriate career training
2. Create an effective financial recordkeeping system
3. Develop a regular savings and investment program
4. Accumulate an appropriate emergency fund
5. Purchase appropriate types and amounts of insurance coverage
UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City
6. Create and implement a flexible budget
7. Evaluate and select appropriate investments
8. Establish and implement a plan for retirement goals
9. Make a will and develop an estate plan
THE ROLE OF FAMILY IN THE LIFE CYCLE
Family life cycle
- Theory suggests that successful transitioning may also help to prevent disease and emotional or
stress-related disorders.
- is a series of stages through which a family may pass over time.
- emphasizes the effects of marriage, divorce, births, and deaths on families, as well as changes
in income, expenses, and assets.
- It is a common assumption that an individual will get married and form a family. Therefore,
many decisions in the financial planning process made throughout the different stages of the
family life cycle. The key elements in the family life cycle include the marital status of the
individual, and the number and age of children. The family life cycle is especially
important when dealing with Asian clan because of the importance of family values and the
extended definition of family which includes noncore relatives
THE FINANCIAL LIFE CYCLE
The lifetime pattern of financial position and earning power of an individual is referred to as the
financial life cycle. One of the critical determinants of the earning power of an individual is the
UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City
investment in human capital. The investment in human capital already exist during the dependent
stage. The financial life cycle commences when an individual leaves his or her parents and start
to be independent.
In the very early stage of the financial life cycle, the consumption level of an individual is more
likely to exceed the income level, particularly when the individual is making an investment in
human capital. At this stage, financial help comes primarily from the parents
and/or students loans.
When individual has worked for certain number of years, his or her net worth begins to grow as
earning power grows. The individual may have started a family by this time. The income earned
by the individual at this stage would then be needed to cover the consumption expenses of the
family unit, to pay off debt, to save, and to invest. As most of the income earned is used to cover
the expenses of the family unit, the individual’s net worth grows more slowly during the stage.
Once the children become independent financially and most of the debt is paid off, the individual
should have surplus income and savings. The ability to save should be the highest at this stage of
the life cycle. Consequently, there is a significant increase in the individual’s net worth at this
age. When the individual retires, the earning power becomes very low or zero. The retired
individual starts to draw upon his or her pension and to consume the accumulated savings. In the
retirement stage, the savings rate is zero or negative and the individual’s net worth declines.
The financial life cycle- based on age consists of three stages, namely the stage of accumulating
wealth, namely the age of 20-40 years, the stage of multiplying wealth, namely the age of 41-50
years and the stage of distributing wealth which is 51 years and above.
These three stages are:
1. Wealth Accumulation - This is where you embrace the daily grind and put in all your work.
- is all about your savings.
2. Wealth Preservation - This stage is when you start thinking about retirement planning after
years of accumulation in your work life.
3. Wealth Distribution - This is where all that money you’ve saved and all the investments
you’ve made finally pay off.
UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City
THE ROLE OF WORK IN THE LIFE CYCLE
Works plays an important role as it affects both financial and nonfinancial aspects of the life
cycle. Work is the single most important factor in one's financial life as works creates income.
We need income to be self-sufficient financially and to provide the necessities and luxuries at
different stages of the life cycle.
LIFE CYCLE MODEL-Is the standard framework which economists use to think about the inter-
temporal allocation of time, money, and efforts.
ASSUMPTIONS AND LIMITATIONS OF APPLYING THE LIFE-CYCLE
MODEL TO FINANCIAL PLANNING
The life-cycle model is very useful in providing some generalizations of clients' needs in
financial planning. However, there are certain assumptions and limitations that financial
planners have to consider when using life-cycle analysis for their clients.
CULTURAL EFFECTS- the consumption and savings behavior are dependent on the culture of
a people. The influence of cultural values in people's behavior throughout their life cycle.
COHORT EFFECTS- are due to different generations being subject to
different economic conditions and potentially different pensions and tax systems, so financial
planner should be careful in comparing consumption and savings behaviors of consumers in the
same category but from different generations. The effect of generation specific values on
people's savings behavior throughout their life cycle.
WEALTH AND INCOME EFFECTS – assumption that the wealth and income of an
individual are limited resources, and the individual has to make an effort to earn an income and
save for the future.
UNCERTAINTY ABOUT THE FUTURE - one assumption of the permanent-
income hypothesis is that we have a reasonable idea of the expected income of the individual.
UNIQUE CHARACTERISTIC OF INDIVIDUALS - every client has his
own unique background and timing of different life stages.
UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance
Balzain Hi-Way, Tuguegarao City