Definition Of Personal Financial Planning

Published Date: 02 Nov 2017

Abstract

Young adults in their coming twenties and early thirties face a variety of challenges in their quest for financial security. Financial planning educates individual on how to handle their money and make a right financial decisions. The purpose of this study is to examine the motivation factors that drive the young adults to practice proper personal financial planning. This research uses the Self-determination theory (SDT) which is an empirically based theory of human motivation, development, and wellness (Deci & Ryan, 2008). The motivation factors which are retirement, investment, health and family are included in this research model. This research uses cross-sectional survey to analyze the relationship between motivation factors and personal financial planning. 300 copies of self-administered questionnaires will be distributed to target participants in Kuala Lumpur, Johor and Perak which are from 18 to 30 years old that are graduate soon and prepare to find job. The significance of this study is hoped that the importance of personal financial planning is found and create more opportunities for job to the financial planners.

CHAPTER 1: Introduction

1.0 Introduction

In Chapter One, the background of the study is discussed. Readers can briefly know the scope of this research and its objectives. The research questions and the significance of the study are discussed thereafter. Lastly, the outline of the study is highlighted.

1.1 Background of the study

Malaysian Department of Insolvency (MDI) has reported a number of 224,943 individual bankruptcy cases from 1990 to 2010 and this number keep increasing yearly. According to Kim, Garman, and Sorhaindo’s study (as cited in Salikin et al., 2013), the MDI report has shown that in year 2005, the 8% of 15,868 bankruptcy cases were users aged 30 or below, which represent the high rate of financial debt and credit card use. It is necessary for young adults to deal with financial planning since young because they have to pay back the loan that was borrowed to pay for fees in universities (Norasikin Hj Salikin, Norailis Ab. Wahab, Nurazalia Zakaria& Siti Nurulhuda Nordin, 2013). Based on Roberts, and Jones’s study (as cited in Salikin et al., 2013), this age group is likely to be exposed to financial problems and dissatisfaction. Failure to manage finance properly caused a greater problem in later life (Salikin et al., 2013).

Financial planning educates individual on how to handle their money and monetary decisions in a suitable method. According to Madura’s study (as cited in ChiangLin, and Lin, 2008), personal financial planning deals with the managing of money activities during an individual’s life time, such as fulfilling one’s life goals, increasing one’s wealth and managing risks from diverse sources. Furthermore, it also provides young adults with the opportunity for a higher level education, healthcare, entrepreneurship and other asset-building chances (Chowa & Ansong, 2010).

1.2 Problem Statement

In prior research, some researchers found out that young adults are most probably spending their income immediately on buying goods and therefore ignored the personal financial planning (Erskine, Kier, Leung & Sproule, 2005). Previous research has found that low financial literacy will cause the young adults unable to make precise decision and hence lead to low level of financial well-being (Sohn, Joo, Grable, Lee & Kim, 2012). A number of current studies also discovered that the young adults are actually facing financial risk as a result of misuse and mismanagement of credit cards (Shim et al., 2009).

Prior research was conducted to solve the problems. According to Falahati et al. (2011), it is necessary to recognize the financial skills of students because their financial behavior will influence their financial decision in the future and personal well-being. The researchers stated that to lessen the financial problem among young adults, financial education is needed. Based on Brennan, and Ritters’s study (as cited in Falahati et al., 2011), financial education helps people to learn the skills, right attitudes and relevant knowledge needed in making financial decisions.

However, there are deficiencies in this past studies. It focused on the financial skills and financial knowledge rather than the practice of financial planning. In addition, it focused on the employee and ignored the young adults that are working soon. Due to the past deficiency, a research on motivation factors that drive young adults to practice proper personal financial planning is conducted.

1.3 Research Objectives

1.3.1 General Objectives

To identify the motivation factors that drives the young adults to practice proper personal financial planning.

1.3.2 Specific Objectives

To examine whether retirement motivates the young adults to practice proper personal financial planning.

To examine whether investment motivates the young adults to practice proper personal financial planning.

To examine whether health motivates the young adults to practice proper personal financial planning.

To examine whether family motivates the young adults to practice proper personal financial planning.

1.4 Research Questions

1.4.1 General Question

What are the important drivers that motivate young adults in Malaysia to practice financial planning?

1.4.2 Specific Question

Does retirement motivate the young adults to practice proper personal financial planning?

Does investment motivate the young adults to practice proper personal financial planning?

Does health motivate the young adults to practice proper personal financial planning?

Does family motivate the young adults to practice proper personal financial planning?

1.5 Significance of study

1.5.1 Theoretical contribution

Financial planning has educates individuals on how to achieve life goals through proper financial management. The life goals may include buying cars and home, dealing with special situation needs in family, planning for retirement, savings for education and other goals. It is hoped that the importance of personal financial planning is found through this research.

1.5.2 Practical contributions

The individual will realize the importance of practicing financial planning in life as they do not have the expertise in planning the financial aspects of life and they may need the help from financial planner. As a result, the demand for financial planner will increase and create more job opportunities.

Additionally, family members will understand the importance of having proper financial planning and will encourage the other family members to exercise financial planning since young to ensure a better future. Through this research, financial planning association such as Agensi Kauseling dan Pengurusan Kredit (AKPK) is able to help individuals to analyze their financial condition and provides educations, counseling and advices on financial management.

1.6 Outline of study

Chapter 1 discussed the background of the study, problem statement, research objectives, research questions, and significance of study.

Chapter 2 discussed about the comprehensive review, literature review, review of relevant theoretical model, the proposed conceptual framework, and hypothesis development.

Chapter 3 discussed the research methodology on how the research is carried out in terms of research design, population, sample and sampling procedures, data collection methods, variables and measurement, and data analysis.

Chapter 2: Literature Review

2.1 Theoretical/Conceptual Foundation

Self-determination theory (SDT) is an empirically based theory of human motivation, development, and wellness (Deci & Ryan, 2008). It is the study of human motivation and personality. SDT also examines people’s goals or aspirations, showing differential relations of intrinsic versus extrinsic life goals to performance and psychological health.

Mandell and Klein (2007) have stated that motivation is a key characteristic of financial planning. Motivation is the force and key driver that drives a person to do something. Motivational theories typically fall into two categories which are intrinsic and extrinsic motivation (Claretha, H., 2007). Measures of financial planning should be related to financial behavior that is in the consumer’s best interests (Klein, 2007).

Deci and Ryan (2008) stated that intrinsic motivation reflects the desire to do something because it is enjoyable and extrinsic motivation reflects the desire to do something because of external rewards such as awards, money, and praise.

2.2 Review of the Prior Empirical Studies

2.2.1 Definition of Personal Financial Planning

Financial planning is a strategic process for helping individuals to manage their financial resources in order to achieve a range of financial and lifestyle goals (Overton, 2008).

Based on the study by Ming Ming Lai and Wei Khong (2009), this journal analyzes about the attitude of the Malaysians toward personal financial planning, which encompassed money management, insurance planning, investment planning, retirement planning, and estate planning. This journal has implications on what motivated Malaysians to have financial planning and also relationship between those motivation factors and personal financial planning.

2.2.2 Relationship between retirement and personal financial planning

The definition of retirement is distinct as leaving from one’s occupation or position. Retirement is not a sudden occasion alike job quitting, as an alternative, retirement planning is a procedure by which young adults organize for their later life (H.L. Sterns, 2012).

Pre-retirees’ motivation to save for retirement has positive relationship with financial planning and their rationale for making decisions about investing retirement finances and planning for future (Griffin, B., Hesketh, B., Loh, V., 2012). This journal had implications on what motivated Malaysians to have financial planning and it have shown that retirement planning have significance influence on intention of people to have financial planning.

2.2.3 Relationship between investment and personal financial planning

According to Gupta (2007), investment is defined as assets held for earning the income via dividends, interest and rental for capital appreciation or for other benefits to the investing activity.

A study by Murphy and Yetmar (2010) examined on the personal financial planning attitudes of MBA students in the USA. The methodology surveyed 206 MBA students about their intention on personal financial planning. Participants were asked about their level of knowledge whether they had prepared components of a financial plan. In addition, participants were asked what make them need a financial plan. The findings indicated that most respondents felt that financial planning is important for them because of their future life.

2.2.4 Relationship between health and personal financial planning

Health care planning is widely seen as a core component of the health system governance (Oliver A, 2007). Having poor functional health might serve to increase financial worries. This is because certain health problems may raise concerns about one’s ability to fulfill tasks of daily living (Brock et al., 2011), thus, increase worry about the associated costs of such disability. In fact, it is important for individuals to consider health matters in their personal financial planning.

Based on David A. Love, M. G. (2009), this journal claims that the uncertainty surrounding medical care is greater than the uncertainty surrounding most other commodities. The findings indicated that most respondents felt that health is the main criteria to motivate them to do a financial planning.

2.2.5 Relationship between family and personal financial planning

C. Barrie & RSM Robson Rhodes (2007) stated that family financial planning defined the establishment and development of a comprehensive financial plan that is tailored to a family’s needs and which maximizes and protects financial resources, and is adapted to meet that family’s changing circumstances during the various stages of the family life.

Based on the study by Griffin, Hesketh and Loh (2012), this journal mentioned about the financial planning intention. Pertinently, Malaysia represents a unique platform for this research due to its multiracial cultures. The methodology uses a total of 300 questionnaires and were personally administered in three states in Malaysia, namely Johor, Melaka, and Selangor. The findings of this research showed that planning for family has significantly influenced people’s motivation to save, and to shape their rationale for decisions about investing and planning for future.

2.3 Proposed Conceptual Framework/Research Model

IV DV

H1

Retirement

H2

Personal Financial PlanningInvestment

H33

Health

H4

Family

Adopted from: Overton, (2008); Kym Irving, (2012); Taylor & Geldhauser, (2007); Christopher I. W, and Lisa F.B., (2011); Shijia Gao, (2007)

2.4 Hypothesis Development

According to Barbara Griff, Beryl Hesketh, Murphy & Yetmar; Gina Chowa and David Ansong; the results have shown that there were relationship between retirement, investment, health and family are able to motivate proper personal financial planning among young adults. Based on the study, 4 hypothesis have come out and stated at below.

H1: There is a relationship between investment and personal financial planning that motivate young adults to practice proper financial planning.

H2: There is a relationship between retirement and personal financial planning that motivate young adults to practice proper financial planning.

H3: There is a relationship between family and personal financial planning that motivate young adults to practice proper financial planning.

H4: There is a relationship between health and personal financial planning that motivate young adults to practice proper financial planning.

Chapter 3: Research Methodology

3.0 Introduction

This chapter covers research design, data collection method, determining population and sampling technique, and the instrument used to conduct this research.

3.1 Research Design

An empirical study is conducted to corroborate the anticipated research model and test the hypothesis. This study is designed as a research on the motivation factors that drive young adults to practice proper financial planning. There are four variables which will be studied which are retirement, investment, health, and family respectively.

The survey method is chosen to collect the data Bethlehem and Biffignandi (2012) found that survey method helped researchers to collect and obtain large amount of data within a short period and it is a cheaper data collection techniques compared to the other techniques.

The study used cross-sectional survey. Cross-sectional survey collects data at single point in time (Richardson, Ampt, & Meyburg, 1995). According to Lavrakas and Paul (2008), cross-sectional surveys have been described as snapshots of the population about which they gather data.

3.2 Population, Sample and Sampling procedures

3.2.1 Target population

Young adults who graduate soon and prepare for working and age range between 18 to 30 years old are the target population for this research. Young adult is known as the people born between years 1983 and 1995 (Saxena and Jain, 2012).

3.2.2 Sampling frame and location

This research is used non-probability sampling technique, thus this research is without sampling frame. The questionnaires will be distributed to target populations in Kuala Lumpur, Johor, and Perak. This is due to the fact that these cities have the highest numbers of population in Malaysia that amounted around 1.674 million, 1.386 million and 768,000 respectively (Department of Statistics Malaysia, 2010). It is impossible to conduct the survey in the whole of Malaysia due to the budget and time constraints.

3.2.3 Sampling elements

The target respondents for these 300 copies of self-administered questionnaires are young adults who are post-graduated, prepared for working and age range between 18 to 30 years old and from the top three cities in Malaysia which is Kuala Lumpur, Johor, and Perak. These enormous samples are capable to provide sufficient level of confidence to the study (Delafrooz, Paim, & Khatibi, 2011).

3.2.4 Sampling techniques

It is impossible to interview every young adult in the top three cities as the age range from 18-30 are huge. Due to this constraint, this research is using non-probability sampling which applied quota sampling. Quota sampling will be used to make sure that the samples matched the population on certain characteristics. Doherty (1994) stated that quota sampling is used to make a sample that indicates a population in terms of the relative proportion of populace in different groups. The purpose of quota sampling technique is allows researchers sampling a subgroup that is of great interest to the study (Castillo, 2009). The target respondents in this research are divided into several subgroups such as young adults in Kuala Lumpur, Johor and Perak. This study will distribute 100 copies of survey questionnaire to each of the 3 top cities. Eventually, quota sampling is considered as the ideal sampling technique implemented into the study.

3.2.5 Sampling size

Roscoe (1975) stated that sample size that is larger than 30 and less than 500 are suitable for most research and Cattell (1978) stated that a minimum size of 250 respondents for research with 3 to 6 independent variables. Therefore, 300 copies of survey questionnaires are sufficient and 250 samples will be chosen to conduct this survey.

3.3 Data Collection Method

In this research, the method used to collect the data is through survey questionnaires. 300 copies of survey questionnaires will be distributed to the young adults who range from 18 to 30 years old that post-graduate by face to face and social network sites (SNSs). The target respondents are required to fill in the survey questionnaires and then this will be collected back on the spot. The questionnaires will be distributed to a target respondent of Social network sites (SNSs) users such as Facebook which ranked in 8th most popular social network in Malaysia to those under the category of young adult (Lim, 2009).

According to Zikmund (2003), pilot test is a small scale assessment designed to investigate the logistics and obtain information to a larger study in order to improve the questionnaire’s quality. 30 copies of survey questionnaire will be distributed to the young adults who range from 18 to 30 years old that prepared for work soon for testing the internal reliability of the questionnaires. 30 copies of questionnaires are sufficient to conduct a pilot test (Fink, 2003).

3.4 Variables and Measurement

The survey questionnaire is used to conduct this research. The questionnaire is divided into two sections which are Section A and Section B. Section A is regarding the demographic background of respondents while Section B is regarding the personal opinion on their financial planning especially for their retirement, investment, health and family. Nominal scale is used to measure 5 questions in Section A while Five-point Likert scaling format is used to measure the independent and dependent variables in Section B which consists of 25 questions. For instance, the five-point Likert scale (1 = Strongly Disagree, 2 = Disagree, 3 = Neutral, 4 = Agree, and 5 = Strongly Agree).

Data Analysis Techniques

In this research, descriptive analysis and inferential analysis will be used for data analysis. All data will be collect and analyze using Statistical Analysis System (SAS).

Descriptive Analysis

According to Soltan (2006), descriptive analysis is used to identify and summarize variables, either graphically or numerically and conclusions based on statistical analysis to the particular group of individuals or cases observed. Descriptive analysis is used to describe the characteristics of sample (Sekaran, 2003) that included the measurement of mean, mode, frequency, range, standard deviation and variance.

Reliability Test

The purpose of reliability test is used to determine the stability and consistency of the measuring instrument (Choy, Ng & Ch’ng, 2011). Cronbach’s coefficient alpha was determined for the whole instrument and applied to each dimension to ensure inter-item consistency reliability (Sekaran, 2003). According to Sekaran (2003), reliabilities ranging from 0.5 to 0.60 are sufficient for exploratory studies, in the range of 0.70 are acceptable and over 0.80 are good.

Normality Test

According to Seier (2002), normality test classified into sub-categories which are skewness and kurtosis test, empirical distribution test, regression and correlation test. Skewness is a measure of how symmetric the observations are above the mean. The skewness of a normal distribution is 0. A distribution skewed to the right has positive skewness and a distribution skewed to the left has negative skewness. In the other hand, Kurtosis is measure of the thickness in the tails of a probability density function. The kurtosis of a normal distribution is 3.

3.5.2 Inferential Analysis

According to Zikmund et al. (2010), inferential analysis is used to make a general statement about the population characteristics founded on sample data. It used to estimate the relationship between the sample data and the population based on the data collected which comprises of hypotheses testing and true population standards estimation.

3.5.2.1 Pearson Correlation Analysis

According to Malhotra and Peterson (2006), the Pearson Correlation Coefficient analysis is to measures the direction, significance and strength of association between two variables such as independent and dependent variables. In this research, this analysis will be carried out to verify the relationships between the dependent variable and the four independent variables.

Hair, Black, Babin, Anderson and Tatham (2006) connoted the indication of the coefficient (r) magnitude and tendency of association of the variables in research. The result from this model used to clarify the relationships which the correlation coefficient ranges from -1 to +1. The strength of the relationship between variables is indicated by the numbers while the sign (+ or −) indicates the direction of the relationships. Significantly, the correlation coefficient range of positive sign +1.0 illustrates perfect positive relationship; negative sign -1.0 illustrates perfect negative relationship while range 0 illustrates no significant relationship between these variables. However, in Wei et.al (2009) supported by Wong et al (2005) indicated that if the value range from 0.01 to 0.09 is deemed to be a weak relationship. 0.10 to 0.29 presented low relationships, 0.30 to 0.49 presented moderate relationship, 0.50 to 0.69 presented strong relationship while 0.7 and above is deemed to be a very strong relationship between two variables.

3.5.2.2 Multiple Linear Regression Analysis

Multiple linear regression analysis is a statistical technique that is used to examine the linear relationships between single dependent variables and two or more independent variables by forecasting the coefficient of equation for the straight line (Hair et al, 2006).

Furthermore, according to Hair, Babin, Money and Samuel (2003), multiple linear regression analysis enables the determination of which independent variable influences dependent variable the most. The independent variables is said to have relationship with dependent variable when the p-value is less than 0.05 which is the significant level of regression coefficient or else there is no significant relationships between variables (Chan, 2010). However, the beta coefficient indicates which independent variables influencing the dependent variables the most (Hair et. al, 2006).

The general equation of the multiple linear regressions is as follow:

Y= β0 + β1X1 + β2X2 + β3X3 + β4X4 ....+ βnXn.

Y = Personal Financial Planning (PFP)

X1 = Retirement (R)

X2 = Investment (I)

X3 = Health (H)

X4 = Family (F)

Personal Financial Planning (PFP) = β0 + β1*Retirement (R) + β2*Investment (I) + β3*Health (H) + β4* Family (F).

The ‘β’ represents the slope of the regression surface which can be defined as the regression coefficient associated with each independent variables (Xn, n=1, 2,3 and 4).