, ss s s ss ss
Personal Financial Planning 15th Edition by Randy
Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Understanding the vv
Financial Planning vv
ProcessChapter 1
vv v vv
How ss Will s s This s s Affect s s Me?
The s s heart s s of s s financial s s planning s s is s s making s s sure s s your s s values s s line s s up s s with s s how
s s you s s spend s s and sssave.That s s means s s knowing s s where s s you s s are s s financially ssand
s s planning s s on sshow s s to s s get s s where s s you sswant s s to s s bein s s the s s future s s no s s matter s s what
s s life s s throws s s at s s you. s s For s s example, s s how s s should s s your ssplan s s handle s s the s s projection
s s that s s Social s s Security s s costs s s may s s exceed s s revenues s s by s s 2035? s s And sswhat s s if s s the
s s governmentdecides s s to s s raise s s tax s s rates s s to s s help s s cover s s the s s federal s s deficit? s s An
ssinformed s s financial s s plan s s should s s reflect s s such ssuncertainties s s and s s more.
This s s chapter s s overviews s s the s s financial s s planning s s process s s and s s explains s s its s s context.
s s Topics ssinclude s s how s s financial ssplans s s change s s to s s accommodate s s your s s current s s stage
s s in s s life s s and s s the s s role ssthat s s financialplanners s s can s s play s s in s s helping s s you s s achieve
s s your s s objectives. s s After s s reading s s this sschapter s s you s s will s s have s s a s s good s s perspective
s s on s s how s s to s s organize s s your s s overall sspersonal ssfinancial ssplan.
LEARNING GOALS ss
LG1 s s Identify s s the s s benefits s s of s s using sspersonal ssfinancial ssplanning s s techniques s s to
ssmanage ssyourfinances.
Key s s concept s s in s s this s s section s s is s s the s s planning s s model s s as s s displayed s s in s s Exhibit
s s 1.1. s s Your ssstandard s s of s s living s s is s s greatly s s impacted s s by s s your s s spending s s habits
s s and s s your s s commitment s s to sssaving. s s Your s s spending s s is s s measured s s by s s your
s s propensity s s to s s consume. s s Wealth s s is s s the s s total ssvalue s s of s s all s s propertyyou s s own
s s less s s the s s amount s s that s s you s s owe ssto s s others.
ACTIVITY: Ask s s the s s students ssto s s assume ssthat s s they sshave s s just s s inherited
s s $100,000. s s What sswill s s youdo s s with s s the s s money? s s Write s s down ssthree s s ways s s you
s s will s s spend s s or s s use ssthe s s money.
,Ask s s the s s students s s to s s share s s one s s item s s with s s the s s class s s and s s record s s what s s they
s s say s s so s s that s s the ssentire s s class sscan s s reflect s s on s s the s s answers. s s Hopefully, s s at s s least
s s a s s few s s will s s mention s s investing sseven s s if s s only s s $10,000 s s of ssthe s s amount. s s Use s s their
s s answers s s to s s discuss s s taking s s care s s of s s current ssneeds s s versus s s future s s needs.
Focus s s on s s their s s propensity s s to s s consume s s and s s its s s impact s s on s s accumulating
s s wealth. s s Point ssout s s the Financial ssPlanning s s Tip, s s ―Be s s SMART s s in ssPlanning
vv
s s Your s s Financial ssGoals.‖
Use s s Exhibit s s 1.2 s s to s s show s s how s s the s s average s s person s s earns s s and s s spends s s their s s money s s and s s Exhibit
1.6 ssto help s s the s s student s s identify sswhere s s they ssare s s now.
vv
LG2 s s Describe s s the s s personal ss financial ss planning s s process s s and s s define s s your ssgoals.
Dwight s s Eisenhower, s s army s s general ssand s s president, s s is s s quoted s s as s s saying s s ―Plans s s are
s s useless; ssPlanning s s is s s priceless‖. s s The s s process s s of s s planning s s allows s s you s s to s s focus
s s on s s the s s issues s s that s s are ssmost s s important s s and s s to s s be s s ready sswhen ssthings s s change.
Exhibit s s 1.3 s s lists s s the s s Six s s Step s s Financial s s Planning s s Process. s s The s s first s s and s s most
s s important s s is ssdefining s s your s s financial s s goals. s s Exhibit s s 1.6 s s lists s s goals s s by s s age s s to
s s demonstrate s s how s s goals sschange s s over sstime. s s Use s s the s s examples s s in ssExhibit s s 1.5 s s to
s s ask s s students ssif ssthe s s assumptions ssare ssrealistic. s s Yes,the s s answer s s is s s in s s the s s exhibit,
s s but s s many s s will s s not s s have s s read s s chapter s s at s s this sspoint. s s For s s your s s use,
s s theassumptions s s are:
Assumption ss1: ssSaving ssa ssfew ssthousand ssdollars ssa ssyear ssshould ssprovide ssenough ssto ssfund ssmy
sschild‘scollege s s Education.
Assumption s s 2: s s An ssemergency s s fund s s lasting s s 3 s s months s s should s s be s s adequate.
Assumption ss3: ssI sswill ssbe ssable ssto ssretire ssat ss65 ssand ssshould sshave ssplenty ssto sslive sson ssin
ssretirement.Assumption ss4: ssI‘m ssrelying sson ssthe ssrule ssof ssthumb ssthat ssI sswill ssneed ssonly ss70
sspercent s s of s s my s s pre- retirement s s income s s to s s manage s s nicely s s in s s retirement.
vv
There s s are s s several s s worksheets s s in s s the s s book. s s Worksheet s s 1.1 s s gives s s the s s student
s s a s s format s s to sswrite s s down s s their s s Personal s s Financial s s Goals. s s There s s is s s power s s in
s s writing s s down s s goals s s [and ssmost s s any s s otherplan]. s s Recording s s the s s goal s s and s s then
s s reviewing s s three s s months s s later s s will s s help ssyou s s to s s keep s s focus s s on the s s goal.
vv
LG3 s s Explain s s the s s life s s cycle s s of s s financial ss plans, s s their s s role s s in s s achieving
s s your s s financial ssgoals, s s how s s to s s deal s s with ss special s s planning s s concerns, s s and
s s the s s use s s of s s professional ssfinancial ssplanners.
Exhibit s s 1.7 s s can s s help s s focus s s the s s attention s s on s s how s s goals s s differ s s between s s the
s s various s s stages s s of sslife. s s Section s s 1-3b s s lists s s various s s decisions s s that s s you s s will
s s have s s to s s make s s over s s your s s life. s s The sssection s s 1-3c s s addresses s s Special s s Planning
s s Concerns. s s Worksheet s s 1.2 s s focuses s s on s s the s s financial ssbenefit s s to s s the s s family s s of
s s the s s second s s income. s s If s s the s s second s s income s s is s s from s s a s s minimum sswage s s job,
s s it s s may s s not s s be s s a good s s financial ssdecision. s s Of sscourse s s having s s a s s job, s s even s s a
vv
ssminimum sswage s s job, s s may ssgive s s the ssperson psychic s s income s s that s s will ssoverride s s the
vv
s s financial ssimpact.
While s s perhaps s s off s s topic, s s I s s recall s s a s s high s s school s s science s s teacher s s who s s was s s a
s s smoker. s s He sswalked ssthrough ssthe ssamount ssof ssmoney sshe ssspent sson sspurchasing sstobacco
ssproducts. ssThat sscomputation s s had s s a
, lot s s to s s do s s with s s my s s decision s s to s s not s s smoke. s s How ssthis s s relates s s to s s the s s course s s is
s s that s s this s s is ssan illustration ssof sshow s s the s s financial s s impact s s of ssa s s decision sscan ssdrive
vv
s s the s s decision.
LG4 s s Examine s s the s s economic s s environment’s s s influence s s on s s personal s s financial s s planning.
For s s older s s folks, s s the s s financial s s crisis s s of s s 2008-2009 s s is s s fresh s s in s s our s s memory.
s s To s s the s s student ssof s s 2021, that s s crisis s s is s s more s s of s s history s s than s s life. s s If s s you s s can
vv
s s share s s a s s war s s story s s on s s how s s you
were s s personally s s impacted, s s it s s will s s help s s bring s s the s s impact s s of s s the s s world
s s economy s s on s s financial ssplans s s to s s life. s s The s s bookspeaks s s how s s to s s manage s s this
s s type s s of s s crisis, s s but s s you s s had s s to s s go ssthrough s s it s s to s s really s s understand s s the
s s impact s s it s s had.
The s s value s s of s s professional s s advice s s is s s greatly s s understated. s s If s s by s s talking s s to s s a
s s professional s s you sscan s s prevent s s making s s a s s mistake s s -- s s that s s can s s be s s of s s a s s great
s s value. s s Section s s 1-3e s s speaks s s to s s the ssuse s s of s s professional s s financial ssplanners.
s s Exhibit s s 1.9 s s lists ssout ssthe ssvarious sscertifications s s that ssplanners s s have.
Economic s s or s s business s s cycles s s are s s real. s s Perhaps s s the s s most s s useful s s thing s s about
s s the s s cycles s s is ssthe s s knowledge s s that s s if s s things s s are s s bad, s s you s s know s s they s s will
s s get s s better. s s Of s s course, s s when s s life ssis s s good, s s you s s know s s that s s the s s bad s s cycle
s s will sscome s s around s s again. s s Thus, s s financial ssplanning ssrequires sssaving s s inthe s s good
sstimes s s for s s the s s bad s s times. See ssthe s s ―Test s s Yourself‖ s s question
ss1- ss17 s s for s s a s s short s s discussion ssof s s business s s cycles.
The s s power s s of s s compounding s s is s s rarely s s understood. s s Exhibit s s 1.8 s s shows s s how s s the s s amount
$10,000 will s s grow s s over s s time. s s The s s longer s s the s s investment s s stays s s invested, s s the
vv
s s greater s s the ssamount s s – s s the s s power ssof sscompound s s interest.
LG5 s s Evaluate s s the s s impact s s of s s age, s s education, s s and s s geographic s s location s s on s s personal s s income.
Exhibit s s 1.12 ss says s s it s s all.
LG6 s s Understand s s the ssimportance ssof sscareer sschoices ssand s s their ssrelationship s s to
sspersonal financial ssplanning.
vv
Exhibit s s 1.13 s s shows s s that s s the s s choice s s of ssa s s college s s major s s has s s a s s financial
s s impact. s s Of sscourse ssmoneycannot s s buy s s happiness, s s but s s having s s a s s bit s s helps. s s If s s you
s s really s s want s s to s s be s s an s s elementary ssschool s s teacher, s s you s s must s s recognize s s that s s you
s s will s s not s s have s s as s s much s s wealth s s as s s a s s lawyer s s or ssfinancial s s analyst.
The sssummary ssof ssthe sslearning ssgoals ssat ssthe ssend ssof ssthe sschapter ssshould ssaid ssthe ssstudent ssin
s s reviewing ssthe s s chapter s s when s s exam s s time s s comes. s s It s s will s s be s s useful s s to s s point
s s out s s to s s the s s student s s how s s to s s use s s this s s material.
Link ss to s s Solutions s s to s s Financial ssPlanning s s Exercises
Pre-tests
Personal Financial Planning 15th Edition by Randy
Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Understanding the vv
Financial Planning vv
ProcessChapter 1
vv v vv
How ss Will s s This s s Affect s s Me?
The s s heart s s of s s financial s s planning s s is s s making s s sure s s your s s values s s line s s up s s with s s how
s s you s s spend s s and sssave.That s s means s s knowing s s where s s you s s are s s financially ssand
s s planning s s on sshow s s to s s get s s where s s you sswant s s to s s bein s s the s s future s s no s s matter s s what
s s life s s throws s s at s s you. s s For s s example, s s how s s should s s your ssplan s s handle s s the s s projection
s s that s s Social s s Security s s costs s s may s s exceed s s revenues s s by s s 2035? s s And sswhat s s if s s the
s s governmentdecides s s to s s raise s s tax s s rates s s to s s help s s cover s s the s s federal s s deficit? s s An
ssinformed s s financial s s plan s s should s s reflect s s such ssuncertainties s s and s s more.
This s s chapter s s overviews s s the s s financial s s planning s s process s s and s s explains s s its s s context.
s s Topics ssinclude s s how s s financial ssplans s s change s s to s s accommodate s s your s s current s s stage
s s in s s life s s and s s the s s role ssthat s s financialplanners s s can s s play s s in s s helping s s you s s achieve
s s your s s objectives. s s After s s reading s s this sschapter s s you s s will s s have s s a s s good s s perspective
s s on s s how s s to s s organize s s your s s overall sspersonal ssfinancial ssplan.
LEARNING GOALS ss
LG1 s s Identify s s the s s benefits s s of s s using sspersonal ssfinancial ssplanning s s techniques s s to
ssmanage ssyourfinances.
Key s s concept s s in s s this s s section s s is s s the s s planning s s model s s as s s displayed s s in s s Exhibit
s s 1.1. s s Your ssstandard s s of s s living s s is s s greatly s s impacted s s by s s your s s spending s s habits
s s and s s your s s commitment s s to sssaving. s s Your s s spending s s is s s measured s s by s s your
s s propensity s s to s s consume. s s Wealth s s is s s the s s total ssvalue s s of s s all s s propertyyou s s own
s s less s s the s s amount s s that s s you s s owe ssto s s others.
ACTIVITY: Ask s s the s s students ssto s s assume ssthat s s they sshave s s just s s inherited
s s $100,000. s s What sswill s s youdo s s with s s the s s money? s s Write s s down ssthree s s ways s s you
s s will s s spend s s or s s use ssthe s s money.
,Ask s s the s s students s s to s s share s s one s s item s s with s s the s s class s s and s s record s s what s s they
s s say s s so s s that s s the ssentire s s class sscan s s reflect s s on s s the s s answers. s s Hopefully, s s at s s least
s s a s s few s s will s s mention s s investing sseven s s if s s only s s $10,000 s s of ssthe s s amount. s s Use s s their
s s answers s s to s s discuss s s taking s s care s s of s s current ssneeds s s versus s s future s s needs.
Focus s s on s s their s s propensity s s to s s consume s s and s s its s s impact s s on s s accumulating
s s wealth. s s Point ssout s s the Financial ssPlanning s s Tip, s s ―Be s s SMART s s in ssPlanning
vv
s s Your s s Financial ssGoals.‖
Use s s Exhibit s s 1.2 s s to s s show s s how s s the s s average s s person s s earns s s and s s spends s s their s s money s s and s s Exhibit
1.6 ssto help s s the s s student s s identify sswhere s s they ssare s s now.
vv
LG2 s s Describe s s the s s personal ss financial ss planning s s process s s and s s define s s your ssgoals.
Dwight s s Eisenhower, s s army s s general ssand s s president, s s is s s quoted s s as s s saying s s ―Plans s s are
s s useless; ssPlanning s s is s s priceless‖. s s The s s process s s of s s planning s s allows s s you s s to s s focus
s s on s s the s s issues s s that s s are ssmost s s important s s and s s to s s be s s ready sswhen ssthings s s change.
Exhibit s s 1.3 s s lists s s the s s Six s s Step s s Financial s s Planning s s Process. s s The s s first s s and s s most
s s important s s is ssdefining s s your s s financial s s goals. s s Exhibit s s 1.6 s s lists s s goals s s by s s age s s to
s s demonstrate s s how s s goals sschange s s over sstime. s s Use s s the s s examples s s in ssExhibit s s 1.5 s s to
s s ask s s students ssif ssthe s s assumptions ssare ssrealistic. s s Yes,the s s answer s s is s s in s s the s s exhibit,
s s but s s many s s will s s not s s have s s read s s chapter s s at s s this sspoint. s s For s s your s s use,
s s theassumptions s s are:
Assumption ss1: ssSaving ssa ssfew ssthousand ssdollars ssa ssyear ssshould ssprovide ssenough ssto ssfund ssmy
sschild‘scollege s s Education.
Assumption s s 2: s s An ssemergency s s fund s s lasting s s 3 s s months s s should s s be s s adequate.
Assumption ss3: ssI sswill ssbe ssable ssto ssretire ssat ss65 ssand ssshould sshave ssplenty ssto sslive sson ssin
ssretirement.Assumption ss4: ssI‘m ssrelying sson ssthe ssrule ssof ssthumb ssthat ssI sswill ssneed ssonly ss70
sspercent s s of s s my s s pre- retirement s s income s s to s s manage s s nicely s s in s s retirement.
vv
There s s are s s several s s worksheets s s in s s the s s book. s s Worksheet s s 1.1 s s gives s s the s s student
s s a s s format s s to sswrite s s down s s their s s Personal s s Financial s s Goals. s s There s s is s s power s s in
s s writing s s down s s goals s s [and ssmost s s any s s otherplan]. s s Recording s s the s s goal s s and s s then
s s reviewing s s three s s months s s later s s will s s help ssyou s s to s s keep s s focus s s on the s s goal.
vv
LG3 s s Explain s s the s s life s s cycle s s of s s financial ss plans, s s their s s role s s in s s achieving
s s your s s financial ssgoals, s s how s s to s s deal s s with ss special s s planning s s concerns, s s and
s s the s s use s s of s s professional ssfinancial ssplanners.
Exhibit s s 1.7 s s can s s help s s focus s s the s s attention s s on s s how s s goals s s differ s s between s s the
s s various s s stages s s of sslife. s s Section s s 1-3b s s lists s s various s s decisions s s that s s you s s will
s s have s s to s s make s s over s s your s s life. s s The sssection s s 1-3c s s addresses s s Special s s Planning
s s Concerns. s s Worksheet s s 1.2 s s focuses s s on s s the s s financial ssbenefit s s to s s the s s family s s of
s s the s s second s s income. s s If s s the s s second s s income s s is s s from s s a s s minimum sswage s s job,
s s it s s may s s not s s be s s a good s s financial ssdecision. s s Of sscourse s s having s s a s s job, s s even s s a
vv
ssminimum sswage s s job, s s may ssgive s s the ssperson psychic s s income s s that s s will ssoverride s s the
vv
s s financial ssimpact.
While s s perhaps s s off s s topic, s s I s s recall s s a s s high s s school s s science s s teacher s s who s s was s s a
s s smoker. s s He sswalked ssthrough ssthe ssamount ssof ssmoney sshe ssspent sson sspurchasing sstobacco
ssproducts. ssThat sscomputation s s had s s a
, lot s s to s s do s s with s s my s s decision s s to s s not s s smoke. s s How ssthis s s relates s s to s s the s s course s s is
s s that s s this s s is ssan illustration ssof sshow s s the s s financial s s impact s s of ssa s s decision sscan ssdrive
vv
s s the s s decision.
LG4 s s Examine s s the s s economic s s environment’s s s influence s s on s s personal s s financial s s planning.
For s s older s s folks, s s the s s financial s s crisis s s of s s 2008-2009 s s is s s fresh s s in s s our s s memory.
s s To s s the s s student ssof s s 2021, that s s crisis s s is s s more s s of s s history s s than s s life. s s If s s you s s can
vv
s s share s s a s s war s s story s s on s s how s s you
were s s personally s s impacted, s s it s s will s s help s s bring s s the s s impact s s of s s the s s world
s s economy s s on s s financial ssplans s s to s s life. s s The s s bookspeaks s s how s s to s s manage s s this
s s type s s of s s crisis, s s but s s you s s had s s to s s go ssthrough s s it s s to s s really s s understand s s the
s s impact s s it s s had.
The s s value s s of s s professional s s advice s s is s s greatly s s understated. s s If s s by s s talking s s to s s a
s s professional s s you sscan s s prevent s s making s s a s s mistake s s -- s s that s s can s s be s s of s s a s s great
s s value. s s Section s s 1-3e s s speaks s s to s s the ssuse s s of s s professional s s financial ssplanners.
s s Exhibit s s 1.9 s s lists ssout ssthe ssvarious sscertifications s s that ssplanners s s have.
Economic s s or s s business s s cycles s s are s s real. s s Perhaps s s the s s most s s useful s s thing s s about
s s the s s cycles s s is ssthe s s knowledge s s that s s if s s things s s are s s bad, s s you s s know s s they s s will
s s get s s better. s s Of s s course, s s when s s life ssis s s good, s s you s s know s s that s s the s s bad s s cycle
s s will sscome s s around s s again. s s Thus, s s financial ssplanning ssrequires sssaving s s inthe s s good
sstimes s s for s s the s s bad s s times. See ssthe s s ―Test s s Yourself‖ s s question
ss1- ss17 s s for s s a s s short s s discussion ssof s s business s s cycles.
The s s power s s of s s compounding s s is s s rarely s s understood. s s Exhibit s s 1.8 s s shows s s how s s the s s amount
$10,000 will s s grow s s over s s time. s s The s s longer s s the s s investment s s stays s s invested, s s the
vv
s s greater s s the ssamount s s – s s the s s power ssof sscompound s s interest.
LG5 s s Evaluate s s the s s impact s s of s s age, s s education, s s and s s geographic s s location s s on s s personal s s income.
Exhibit s s 1.12 ss says s s it s s all.
LG6 s s Understand s s the ssimportance ssof sscareer sschoices ssand s s their ssrelationship s s to
sspersonal financial ssplanning.
vv
Exhibit s s 1.13 s s shows s s that s s the s s choice s s of ssa s s college s s major s s has s s a s s financial
s s impact. s s Of sscourse ssmoneycannot s s buy s s happiness, s s but s s having s s a s s bit s s helps. s s If s s you
s s really s s want s s to s s be s s an s s elementary ssschool s s teacher, s s you s s must s s recognize s s that s s you
s s will s s not s s have s s as s s much s s wealth s s as s s a s s lawyer s s or ssfinancial s s analyst.
The sssummary ssof ssthe sslearning ssgoals ssat ssthe ssend ssof ssthe sschapter ssshould ssaid ssthe ssstudent ssin
s s reviewing ssthe s s chapter s s when s s exam s s time s s comes. s s It s s will s s be s s useful s s to s s point
s s out s s to s s the s s student s s how s s to s s use s s this s s material.
Link ss to s s Solutions s s to s s Financial ssPlanning s s Exercises
Pre-tests
