Textbook Notes (368,430)
Canada (161,877)
Finance (362)
FIN 502 (69)
Joan Lobo (33)
Chapter 6

CFIN502- Chapter 6- The Life Cycle and Financial Intermediation.docx

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FIN 502
Joan Lobo

CFIN502- Chapter 6- The Life Cycle and Financial Intermediation THE FINANCIAL LIFE CYCLE  Financial life cycle- lifetime pattern of differing financial positions and earning power  Model of a financial goal o  You start to earn more then you can consume: E t Ct> 0  As your children grow—so likely does your earning power until it peaks in middle age  As children become independent and you pay your debts off—you find yourself with surplus income or savings  Reach retirement—earning power becomes very low or zero  Essence of personal financial planning is arranging to meet the differences in earnings and consumption through borrowing and savings as appropriate  Practical matter—we don’t do our financial planning alone—however we do it as a family unit THE FAMILY LIFE CYCLE  Group families into different categories in the family life cycle by looking at age and other factors  John Lansing and James Morgan relationship between persons financial position and his or her stage in the family life cycle  Clair Matthews differences in family life cycle and the consequent differences in complexity of banking relationships are related to the perception of switching costs in banking choice  Barry Mayhew and Neil Murphy and Ronald Rogers family life cycle is more useful than age as a variable for identifying and analyzing demand for consumer financial services  Modern family life cycle segmentation o Initial diagnosis—subject to revisions as the specific circumstances of a family becomes clearer—helps to keep on track o No single scheme of family life cycle groupings is perfect—there are always some families that don’t fit into any category Category Description 1 Younger, single 2 Younger couple, no children 3 Couple, dependent children 4 Single, dependent children 5 Older couple, children independent or nearly so 6 Older, Single 7 Couple, retired 8 Single, retired DIAGNOSING PERSONAL FINANCE NEEDS WITH  Rough diagnosis—most important issues by matching the stage in life cycle against the different elements in the book 1 CFIN502- Chapter 6- The Life Cycle and Financial Intermediation FINANCIAL INTERMEDIATION  Financial intermediation- process of transferring money from surplus economic units to economic units that have productive use for the money  Surplus units in one period may need more money for productive investments in another period o Collects rent on money the economists call interest in a general sense, or in other forms such a dividends  Financial intermediary collects fee for effecting the transfer  Different stages the same family is borrower and leader  Canada—we could not maintain our sophisticated economy if it did  People would spend much more of their productive time on financial transactions—would be able to achieve fewer objectives  Financial intuitions- emerged to act as intermediaries between all the different families and organizations that have money to invest or need money to consume o Collects deposits or money for investment, risk pooling or transactions from all families and organizations—repackage this money in the amounts and forms that different units need  Deficits units get money in return for paying interest that goes to the surplus units CANADIAN FINANCIAL INSTITUTIONS  Regulatory stance in Canada has been for specific types of products to be reserved for 1 group of companies o Lead to—four pillars—banks, trusts companies, life insurance, and investment dealers o Reasoning—less conflict of interest and incompe
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