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Since preparing for an emergency fund is about financial preparation, it could be suggested that this relates to an individual’s personal financial planning behaviour. This is because the reason for allocating the emergency fund, which had been discussed

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previously, is to prepare for future emergency events. Financial planners are found to encourage individuals to have an emergency fund (Anong & DeVaney, 2010; Hilgert, Hogarth & Beverly, 2003a). Consequently, the discussions in the existing literatures on emergency fund, such as the adequacy level, are mainly referring to the suggestion by the financial planner. Therefore, this section will discuss the overview of personal financial planning, which later will be used to relate to the emergency fund perspective.

2.5.1.1 Definition of Personal Financial Planning (PFP)

Personal financial planning (PFP) is recognised as knowledge that provides the best practice in managing an individual’s income and wealth. The implementation of PFP depends on individuals, as there are differences of the individual’s goals and needs. The existing literature presents several definitions for personal financial planning. The following table summarises the definitions, together with some of the key terms used:

Table ‎2.2: Summaries of Personal Financial Planning Definitions

Authors Definition Key Terms

Warschauer (2002, p.204)

“Financial Planning is the process that takes into account client’s personality, financial status and the socio-economic and legal environments and leads to adoption of strategies and use of financial tools that are expected to aid in achieving the client’s financial goals.”

1. Process 2. Adoption of strategies

3. Financial tools 4. Financial goals

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Authors Definition Key Terms

Altfest (2004, p.53) “Personal financial planning is a method of preparing for future household financial needs in an efficient manner.”

1. Method 2. Preparing 3. Financial needs

Redhead (2008, p.5) “Personal financial planning is the process of planning one’s spending, financing, and investing so as to optimise one’s financial situation.” 1. Process 2. Optimised financial situation 3. Planning 4. Financial situation

CFP Board (n.d.-b) “Financial planning is the

process of meeting your life goals through the proper management of your finances.”

1. Process 2. Life goals 3. Management

FPA® (n.d.-b) “Financial planning is the long- term process of wisely managing your finances so you can achieve your goals and dreams, while at the same time negotiating the financial barriers that inevitably arise in every stage of life.”

1. Process 2. Managing

3. Goals and dreams 4. Negotiate the financial barriers

Cited and adopted from: Warschauer (2002), Altfest (2004), Redhead (2008, p.5), CFP Board (n.d.-b), FPA® (n.d.-b).

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From the definitions stated, there is no one specific and agreed meaning for PFP. Most definitions show that the main term used to describe PFP is the word “process.” By contrast, Altfest (2004) used the term “method” to explain the meaning of personal financial planning. One question that needs to be asked, however, is whether these words will affect to the “what” and “when” to use PFP?. This question could contribute to the understanding of the purpose and the implementation of the PFP itself.

The approach of defining the purpose and usage of PFP could be developed by the answer on the “when” question, besides, the purpose of the PFP presented differently among each other’s definition. The CFP Board (n.d.-b), for instance, used the word “management” and Warschauer (2002) used the word “adoption”. However, both words represent the function of PFP that should be used for the current situation that already exists. In spite of this, other definitions that used the words “planning” and “preparing” are more related to implementing PFP for future events.

Furthermore, the implementation of PFP also will contribute to similar achievements, but yet the degrees of the achievement are different. This could answer the question of the degree to which PFP usage impacts on the individual. The definition by the CFP Board (n.d.-b) is broader, indicating that using PFP can contribute to the achievement of a personal life goal, possibly explaining any high achievements that an individual might have as a consequence of their PFP. Overall, most authors agreed that the benefit to apply PFP will contribute to the accomplishment of an individual’s financial goals and financial needs.

The differences between words that are used in these definitions, clearly, could be suggested because of differences in background, role and perspective. The practitioners

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(client-oriented organisation) specifically show the usage of PFP for the current situation. The academicians, however, argue that the PFP is purposely implemented as a planning tool. This research, therefore, suggests the definition of PFP as an approach in the financial decision-making process that serves the achievement of an individual’s personal financial goals.

Very few studies have looked in detail at the benefits of financial planning (Hanna, 2010). However, the benefit of PFP could be found addressed in some books. It has been argued that the understanding and use of PFP knowledge benefits the individual, especially during the decision-making processes of managing money (Madura, 2006; Gitman, Joehnk & Billingsley, 2010, p.2). The importance of PFP could be central to financial success by utilising limited financial resources to gain the maximum benefit, but different techniques of managing money would influence an individual’s success and failure would result in managing their own limited financial resources (Frasca, 2008).

2.5.1.2 Major Areas of Personal Financial Planning

PFP is used to set an individual’s personal financial plan. PFP is the specification of the approach and time target to achieve personal financial goals or financial needs. A personal financial plan should be flexible and allow access to individual current situations (Harrison, 2004) .

Most of the literatures (such as Chieffe & Rakes, 1999; Altfest, 2004) conclude that PFP covers six major areas. These can be summarised as:

34 2. Tax planning 3. Investment planning 4. Insurance planning 5. Retirement planning 6. Estate planning

Although the discussion brings us to the same meanings, the terms that are used are different. For instance, Altfest (2004) stated that risk management is considered the same as insurance management. Besides, liquidity management is considered as banking, money and credit management, and financing management covers personal loans and mortgages (Madura, 2006).

In particular, this thesis will concentrate only on the areas that relate to the formation of an emergency fund by individuals. The following section will discuss this in more detail.

2.5.1.3 Emergency Fund Behaviour: a Part of Personal Financial Planning

Personal financial planning has been defined before as mainly about planning for future events. Emergency funds have also previously been described as planning specifically for future emergency events. In relation to this, it could be suggested that emergency fund in behavioural perspective is a part of financial planning. Saving-consumption and investment planning, which are the main areas in financial planning, are also found when looked at from an emergency fund perspective.

It can be suggested that previous emergency fund studies discussions break into three main issues: (i) adequacy of levels of emergency fund holding; (ii) factors affecting the

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adequacy of emergency fund; and (iii) categories of emergency fund. However, this chapter will focus on the discussion of (i) and (ii), with the discussion of (iii) being discussed in Chapter 3.