Lesson 3 or Insight 3

Read Chapter 1 then answer: How do micro and macro factors affect financial thinking? What is the role of financial planning in this context?

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Amina Dorjjigjid: The main point from the chapter is that micro factors are your personal circumstances, like family, career, age, and health, and macro factors are like inflation, unemployment, and interest rates. They both affect how we think about money but in different ways. Micro factors shape your personal goals and how much risk you are comfortable with. Macro factors affect your purchasing power, income, and investments. It is also important to take business cycle into account in order to prepare for inflation/deflation. Financial planning is also important because it helps us consider both sides, as it's not just about making a budget or saving money; it's about figuring out where you are, where you want to be, and how to get there. The goals of financial planning can change depending on the life stage. For example, if you are aiming to create a short-term plan, your goal might be sparing your wages/salary to pay off debt. For an intermediate goal, it might be accumulating assets by saving up wages/salary. And for a longer-term goal, it might be creating retirement income by using the investment returns. Moreover, it's an ongoing process because both your personal life and the economy change over time, so we have to stay flexible and ready to adjust when things change. Financial advisors are available when you need advice for your future planning. However, advisors have expertise in different areas. For example, some of them get paid for advice such as selling a product and insurance policy. On the other hand, others sell services such as brokerage. Given this, it is crucial to understand what kind of advice you are looking for and how it is related to achieving your financial goals. Micro and Macro factors can also interact with each other when we make financial decisions. For example, an economic downturn may affect someone's job or income, but the effect can be different depending on their personal situation. Someone with fewer financial responsibilities may respond differently from someone who has a family or debt. This shows that the same macroeconomics change can lead to different financial decisions depending on a person's Micro factors.

Micro factors are mostly personal circumstances and things that you directly choose or are impacted by you, ex: family, career, age, health. Macro factor are conditions in the wider economy, such as business cycle, GDP, employment and unemployment, and changes in currency value as inflation or deflation. When conducting financial planning, all of these factors have to be taken into consideration at every single step in accordance with this chapter's financial planning process. The financial planning process this chapter discusses is: Defining goals, Assessing the current situation, Identifying choices, Evaluating choices, Choosing, Assessing the resulting situation, Redefining goals, Identifying new choices, Evaluating new choices, Choosing, Assessing the resulting situation over and over again. The chapter also explains that costs are not always just the money we pay. Some choices can have hidden or future costs, such as losing time or reducing our future options. This means we should look at the full cost of a choices before making a final decision. Another important idea is that financial decisions involve trade-offs. Choosing ti spend money now means that we may have less money available for saving or investing in the future. This means we need to consider both our current needs and future goals when making financial decisions. Within each of these steps, it is critical to have a balance between the micro factors and the macro factors, especially when you're conducting analysis and assessment of situations and identification. As the previous respondent suggested, it has to be an ongoing process because "your personal life and the economy change over time" and so we have to be "ready to adjust when things change." However, I find that the hardest thing with most people in financial planning is almost always getting started or it is "The Gambler's Fallacy" where people are so stuck thinking that whatever they are currently doing they have invested too much money or time into to abandon. Additionally, many of the resources that people use are too expensive or not practical for many people to use, ESPECIALLY the financial planning services. Financial planning services are restrictively expensive for most people and also are susceptible to most macro factors as well, meaning that if there is a macro factor issue like economic downturn, stock market crashes, etc. they will ALSO be unable to help you. But all of the macro and micro issues are important to consider when you financially plan, whether you use a service or work on your own.

They also affect one another. For example, when the economy is doing poorly, people react differently depending on their financial situation. This is why financial planning has to consider both how much risk someone can handle financially and how much risk they are okay with taking. These types of risk tolerance do not always move in the same direction. For example, as people get order and more assets, their ability to take risk may increase, while their willingness to take risk may decrease because they have more assets and responsibilities to protect. It’s also important to think about how one decision affects the next. A choice that seems good now might not be the best if it leads to debt or limits future choices. The chapter also shows that risk itself can be a cost. When comparing different choices, we should think about not only the possible benefits, but also the risk and how they may affect our future choices.

Summary: (1)How do micro and macro factors affect financial thinking?

Micro: Personal circumstances (family structure, health, career choices, age) -> Micro factors affect individual financial thinking by making decisions by yourself. Understanding what happens now, as well as what happens in the future is important in being able to think in that regard. Being aware of personal changes, your goals as well as the goals of those around you, what you or your loved ones might need in the future, the career you pick, it all comes together as one big picture.

Macro: Business cycles (GDP), employment rate (For example, during a recession, higher unemployment can make wage income less stable or even cause a temporary loss of income. This shows how a macroeconomic change can directly affect an individual's financial situation) , other indicators of economic health(labor market, capital market, credit market),, currency value (purchasing power, inflation, deflation) -> Personal financial planning should consider those factors.

Things like having a family or choosing a career affect how much money you need and how you plan for the future. The economy plays a role too, when prices risk because of inflation, the purchasing power of money decrease. This means that even if the amount of saving stays the same, it can buy few goods and servicer

(2)What is the role of financial planning in this context?

Financial planning: 1)Defining goals 2)assessing the current situation 3 )identifying choices 4)evaluating choices 5)choosing 6) assessing the resulting situation 7) redefining goals 8) identifying new choices 9) evaluating new choices 10) choosing 11) assessing the resulting situation Its role: to make the most of its resource in both macro and micro situation when you make financial decisions. After assessing the result, the process continues by redefining goals and considering new choices as circumstances. It's a repeating cycle instead of a one time process, because once you make a choice you have to check whether it worked or not.

Financial goals - SMART S-Specific M-Measurable A-Attainable R-Realistic T-Timely The chapter also suggests that useful financial goals should be SMART. This makes it easier to evaluate whether the financial plan is actually making progress towards the goal Based on the chapter, financial planning isn't just about wanting something, it's also about turning what we want into an actual plan. For this reason, the term S.M.A.R.T. is used. If we take the example of wanting to save up for a car, we get the following: S = Specific, meaning that before starting to plan financially for our goal, it's crucial to be very specific about exactly what we want to buy. If we use the example of the car, it can be wanting to save up for it in order to take the kids to school, or to drive to work instead of taking public transportation. Then, the letter M = Measurable, which is useful for tracking the progress of wanting to save up for a car. It makes the goal much more achievable when we have an idea of exactly what we want. In that example, it would be setting aside a certain amount of money every month to know how far we have to go until we reach the goal. Then, A = Attainable, meaning is the goal truly possible based on our life situation, our personal expenses, our income, etc. After that, R = Realistic, which basically means taking into account all the realistic, and sometimes unexpected, expenses that we may have in life. These can include health, accidents, unexpected bills, repairs around the house, etc. Usually, this interrupts the saving process, but in financial planning, it's important to consider that not everything will always go as planned. Finally, there's T = Timely, which includes the actual timeframe needed to reach the goal. In the example of the car, this is usually about how long it will take to save up enough money for it. Having a timeframe makes the goal much more attainable because it pushes us to work toward it.

Macro and Micro factors affect financial thinking because our economic decisions are impacted by both our own life and the society around us. Micro factors such as family, health, career, and age, will shape what we personality need and want. On the other hand, macro factors such as inflation, employment, and economic cycle, shape the condition which we cannot control. The key takeaway is two these factors do not work separately. For example, A person saving money might face the issue of inflation decreasing the purchasing power/value of their savings over time. Under these situation, the role of financial planning is to connect one's own goal with their personal situation. It does not simply mean how much you save money or use, but also it is the process of cross referencing your current situation with your goals, understanding what needs to be done in order to achieve them, and then making a decision to move forward. Financial planning is also helpful for adjusting judgement if you need. I think more like a way of thinking about financial decisions rather than just fixed plan. Because being able to understand what shapes the economic landscape, alongside your own aspirations, situations, and capabilities, is crucial in order to comprehend each step of the way when financial planning.

Micro and Macro factors can to a great extent affect financial thinking. In considering Micro factors, it is somewhat easily considered and brought into the control zone for the individual while financial planning or even financial thinking. Micro factors are more personal factors which are directly impacted and influenced by you. While Macro Factors are the ones out of your control but still do influence the plan. All of these factors do significantly influence financial thinking, as whenever making a plan or decision, all costs, expenses and such things need to be considered. All of the costs, expenditure, expenses and profit are based or sourced from the micro factors as well as the macro factors. Financial planning is to understand the possible expenses, losses and benefits, and how the financial standing would be to make any other financial decisions. Financial planning is important to make any decisions during emergency, or even any important financial decisions. I believe, financial planning is the goal ore result of financial thinking and the effects of the micro and macro factors. Conversely, micro factors and macro factors affect financial thinking, which is the basis of financial planning, which can include, understanding and making important informed financial decisions.

Also, policies, the government, national regulations, geography are important macro factors. Politics can constantly reshape a broad amount of peoples financial plans and honestly should be monitored and taken into consideration.

Ishaan Roy: Having read the chapter, I think micro factors would be considered as the personal circumstances of our lives, which could be practically anything, including family structure, health, career choice, health, income, or even our tolerance for financial risk. I think any person who is just about to begin their career would be more willing to take financial risks, as there are fewer responsibilities involved. A person like me wouldn't be at financial stake as I don't have any assets to lose. A family member or someone who has children is more likely to consider the bigger picture focus more on financial security and protecting their income and assets. I also think career choice plays a big role in how we manage finance because different careers come with different salaries, benefits, job security, and opportunities for advancement.

Macro factors on the other hand, come from the larger economy and it is often beyond an individual's control, so in that regard, the emphasis is heavily placed on factors such as business cycles, employment and unemployment, GDP, inflation, deflation, and changes in currency value. These factors do affect peoples' personal finances, but our choices and actions have little to no effect when macro factors come into play. A good example of micro factors being involved could be of an economic downturn, making it much harder for people to find jobs and that would lead to income being less predictable. Even things like inflation have a significant impact on the way we handle finance, as same amount of money will not buy as much as it used to before. So yes, even though macro factors are involved in situations that go beyond individual transactions and financing, we are still being affected by what is happening around us in the economy at the end of the day.

I think this is where financial planning plays a huge role. I strongly agree with the chapter on its emphasis on financial planning, as it describes it as something lifelong due to the circumstances and the economy constantly changing. It is really important for us young people to know where we stand financially, where we want to get to, and doing what exactly would help us get to that point. In this world where nothing is really predictable, I believe that it's high time we start managing our finances more efficiently as unfavorable outcomes are not uncommon, such as losing a job, experiencing an economic downturn, or facing higher costs. One takeaway from the chapter would be that financial planning is not just about saving money or making a budget. It is about understanding your own situation while also taking actions in accordance to the volatile economic conditions.

There is a lot of non-monetary risks and consequences that can be affected by someone's financial planning, like if someone chose to work as a welder because trade school was cheaper than college and they could start making money quicker. But it can also raise their risks of developing health issues being in the environment, which could raise costs in the future like medical bills or a shortened life which are implicit costs. Having a thought out financial plan that is constantly adapting or moving rather than sticking to one immediate financial benefit can help mitigate risks in the future.

As my peers have written above, I also believe both micro and macro factors affect financial planning greatly. Micro factors are more personal and it is in our hands to take control of it, and macro factors are bigger of a scale and there are not so much we can do about it. Reflecting back on my experiences, I have surely been affected by both. Micro factors like my age/status (university student), lifestyle (living with my family), income (part-time job), expenses (my hobbies, hanging out with friends) and macro factors like the inflation, weak Japanese Yen etc have all influenced me on how I plan financially. I will share one example here: recently, having been considering to study abroad (micro factor), I have often thought about the inflation and weak Japanese Yen (macro factors), which have influenced me to work more at my part-time job now and not to spend much to save up so I will have a good amount of money while I am abroad, under the situation where I need to spend more compared to when I am living in Japan. So in short, we make our plans surrounded by the macro factors, to align with our own micro factors. I would say financial planning plays a role to guide the person to their goal while making sure it is achievable under the given circumstances of the world (macro factors), and tightly aligned with their own situation and their goals/paths.

The most significant difference between Micro and macroeconomics is the size of the economy. Micro factors can change according to small organizations and individual circumstances, such as household, family structure, health, age, and career choice. On the other hand, "macro" factors are affected by big organizations and indicators, such as business cycles, employment rates, and other indicators of economic health. Macroeconomics and microeconomics are affected by different scales of factors. Family matters are affected by microeconomics, because the cost of children's education and living expenses can change how much money people have available to use freely, so they need to consider their financial situation. In my case, I transferred from a Japanese university to an American university in TUJ. If I had stayed at a Japanese university, my family could have reduced the cost of education by about one-fourth. Therefore, children's education costs have a big impact on microeconomic factors because they affect a household's financial situation. Macroeconomics is affected by the business cycle. For example, GDP, consumer spending, and increases or decreases in unemployment are affected by the business cycle. If the cycle starts with an expansion, sales increase and companies can afford to hire more employees. As a result, income increases, which leads to increased spending by households. This leads to economic growth. However, this is a cycle, so it can also lead to a recession. In recent years, Japan has experienced inflation. When I go to the grocery store, I feel that everything is expensive. We need to think about financial planning because we have less money available to spend on our lives.