Solution and Answer Guide
Personal Financial Planning, 16e Chapter 01: Understanding the Financial Process
TABLE OF CONTENTS
Financial Planning Exercises.......................................................................................1
Critical Thinking Cases................................................................................................7
FINANCIAL PLANNING EXERCISES
1. LG1, Benefits of Personal Financial Planning. How can using personal financial
planning tools help you improve your financial situation? Describe changes you
can make in at least three areas.
The best way to achieve financial objectives is through personal financial
planning, which helps define financial goals and develop appropriate strategies to
reach them. Creating flexible plans and regularly revising them is
the key to building a sound financial future.
Changes to make are specific to the individual. The important point is to examine your
current lifestyle and identify areas to change. Common areas for college students are
spending on entertainment, eating out, transportation (car, bus, bicycle, other), clothing,
vacations, and dating.
To examine your status in obtaining your goals you need information that is reported in
your Balance Sheet and Income and Expense Statement. With this basic information
and clearly stated goals, you can identify areas for change.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
,2. LG2, Personal Financial Goals and the Life Cycle. Use Worksheet 1.1. Describe
your current status based on the personal financial planning life cycle shown in
Exhibit 1.7. Fill out Worksheet 1.1, “Summary of Personal Financial Goals,” with
goals reflecting your current situation and your expected life situation in 5 and 10
years. Discuss the reasons for the changes in your goals and how you’ll need to
adapt your financial plans as a result. Which types of financial plans do you need
for your current situation, and why?
Students’ answers will vary. From exhibit 1.7, their first 20 years are preparatory for
their life. During their 20’s they will start their family and begin acquiring assets.
Insurance decisions will be made to protect their family through life insurance and their
assets through casualty insurance. By the time they reach their 30’s, they begin to look
long term with a saving and investment plan perhaps focused on future purchases (car,
college for kids, larger houses, and so on), more concern for employee benefits from
their workplace, and hopefully starting a modest retirement plan.
Examples of financial goals are given in Worksheet 1.1. It will be useful to discuss each
section of the worksheet and ask students for additional goals.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
,3. LG2, Personal Financial Goals. Recommend three financial goals and related
important questions to answer for someone in each of the following
circumstances:
• A senior in college
• A 35-year-old sales representative who plans to earn an MBA degree
• A couple in their 30s with two children, ages 4 and 7
• A single 52-year-old man with a 17-year-old child and an 80-year-old father
who is ill
Again, answers will vary among the students. Here are some suggested goals.
Senior in college—pay off all credit card debt by graduation; pay off all
student loans within 10 years of graduation; save $5,000 for a down
payment on another vehicle during the next 3 years.
35-year-old sales representative who plans to earn an MBA—pay off auto
loan before beginning degree; find a cheaper place to live; set aside $5,000
for emergency use during school.
Couple in their 30s with two children, ages 4 and 7—begin college fund for
each child; fund Roth IRAs for both parents; max out [that is, put as much as
you can in plan up to the legal limits] employer-sponsored retirement plan,
such as 401k, each year.
A single 52-year-old man with a 17-year-old child and an 80-year-old father
who is ill—engage the help of friends or family in carpooling teenager to
school and activities; explore community or church programs which might
assist the father, such as Meals on Wheels or a visitation program; help
father with estate planning needs, hiring an attorney if needed.
4. LG3, Life Cycle of Financial Plans. Noah Davis and Amelia Lopez are
planning to get married in six months. Both are 30 years old and have been
out of college for several years. Noah uses three credit cards and has a bank
account balance of $7,500 while Amelia only uses one credit card and has
$9,500 in her bank account. What financial planning advice would you give the
couple?
Two issues are presented here: the number of credit cards and number of checking
accounts. Having too many credit cards can lower your FICO score and your credit
rating because you have the potential of maxing out on each of the cards and getting
into financial difficulty. Noah should reduce his cards to one. Amelia should keep her
card.
Two bank accounts can work okay if the various expenses are allocated between
the two spouses. If one spouse has the job of paying all the bills, that spouse needs
to have access to all accounts, which defeats the purpose of multiple accounts. Most
couples have only one checking account. Here the combined balances are more
than they need in their checking account. They should move about half of their
$17,000 to an investment account.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, 5. LG4, Impact of Economic Environment on Financial Planning. Summarize
current and projected trends in the economy with regard to GDP growth,
unemployment, and inflation. How should you use this information to make
personal financial and career planning decisions?
Answers about economic trends will depend on current economic conditions. If the GDP
is growing, the economy is expanding, and general economic conditions are considered
favorable. Unemployment is probably low, and jobs are available. If the GDP is slowing,
the economy may not be doing well, and jobs may be scarce. Changes in the CPI
indicate the level of inflation. If inflation is rising, purchasing power is declining, and you
will need more money to achieve your financial goals. In periods of high inflation,
interest rates rise making it more difficult to afford big-ticket items. Knowledge of current
economic conditions can help you plan the level of savings versus spending. In a period
of inflation, physical assets [such as real estate] are better than financial assets such as
saving accounts.
6. LG4, Effects of Inflation. How does inflation affect interest rates, security
prices, and financial planning?
Inflation is a measure of the increase in the prices of items sold in the economy. The
most common measure of inflation is the consumer price index (CPI). With inflation the
price of consumer goods increases, thus those who lend money to others will have
reduced purchasing power and will need more income to support their lifestyle. So,
interest rates will increase. Security prices reflect the buyers and sellers’ beliefs about
the future income of the entity. If inflation is causing consumers to purchase less, the
future of the business represented by the security may produce less income. So, the
price of securities will decrease. Financial planning is necessary to be prepared for
inflation or deflation. Inflation does not change the need for financial planning.
7. LG5, Effect of Age and Geography on Income. Evaluate the impact of age and
geographic location on personal income.
Typically, people with low incomes fall into the very young or very old age groups,
with the highest earnings generally occurring between the ages of 35 and 44. The
younger (below 35) are developing their careers in school or beginning to move up in
their jobs. The older age worker may be reducing the hours worked to part-time or may
have retired. The middle aged worker (35 – 44, perhaps up to 50) tend to have the
highest average income. At this age, their career is established, and they are most
productive. However, with good retirement planning, the income of the retired worker
may still be close to that of the middle-aged worker.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
Personal Financial Planning, 16e Chapter 01: Understanding the Financial Process
TABLE OF CONTENTS
Financial Planning Exercises.......................................................................................1
Critical Thinking Cases................................................................................................7
FINANCIAL PLANNING EXERCISES
1. LG1, Benefits of Personal Financial Planning. How can using personal financial
planning tools help you improve your financial situation? Describe changes you
can make in at least three areas.
The best way to achieve financial objectives is through personal financial
planning, which helps define financial goals and develop appropriate strategies to
reach them. Creating flexible plans and regularly revising them is
the key to building a sound financial future.
Changes to make are specific to the individual. The important point is to examine your
current lifestyle and identify areas to change. Common areas for college students are
spending on entertainment, eating out, transportation (car, bus, bicycle, other), clothing,
vacations, and dating.
To examine your status in obtaining your goals you need information that is reported in
your Balance Sheet and Income and Expense Statement. With this basic information
and clearly stated goals, you can identify areas for change.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
,2. LG2, Personal Financial Goals and the Life Cycle. Use Worksheet 1.1. Describe
your current status based on the personal financial planning life cycle shown in
Exhibit 1.7. Fill out Worksheet 1.1, “Summary of Personal Financial Goals,” with
goals reflecting your current situation and your expected life situation in 5 and 10
years. Discuss the reasons for the changes in your goals and how you’ll need to
adapt your financial plans as a result. Which types of financial plans do you need
for your current situation, and why?
Students’ answers will vary. From exhibit 1.7, their first 20 years are preparatory for
their life. During their 20’s they will start their family and begin acquiring assets.
Insurance decisions will be made to protect their family through life insurance and their
assets through casualty insurance. By the time they reach their 30’s, they begin to look
long term with a saving and investment plan perhaps focused on future purchases (car,
college for kids, larger houses, and so on), more concern for employee benefits from
their workplace, and hopefully starting a modest retirement plan.
Examples of financial goals are given in Worksheet 1.1. It will be useful to discuss each
section of the worksheet and ask students for additional goals.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
,3. LG2, Personal Financial Goals. Recommend three financial goals and related
important questions to answer for someone in each of the following
circumstances:
• A senior in college
• A 35-year-old sales representative who plans to earn an MBA degree
• A couple in their 30s with two children, ages 4 and 7
• A single 52-year-old man with a 17-year-old child and an 80-year-old father
who is ill
Again, answers will vary among the students. Here are some suggested goals.
Senior in college—pay off all credit card debt by graduation; pay off all
student loans within 10 years of graduation; save $5,000 for a down
payment on another vehicle during the next 3 years.
35-year-old sales representative who plans to earn an MBA—pay off auto
loan before beginning degree; find a cheaper place to live; set aside $5,000
for emergency use during school.
Couple in their 30s with two children, ages 4 and 7—begin college fund for
each child; fund Roth IRAs for both parents; max out [that is, put as much as
you can in plan up to the legal limits] employer-sponsored retirement plan,
such as 401k, each year.
A single 52-year-old man with a 17-year-old child and an 80-year-old father
who is ill—engage the help of friends or family in carpooling teenager to
school and activities; explore community or church programs which might
assist the father, such as Meals on Wheels or a visitation program; help
father with estate planning needs, hiring an attorney if needed.
4. LG3, Life Cycle of Financial Plans. Noah Davis and Amelia Lopez are
planning to get married in six months. Both are 30 years old and have been
out of college for several years. Noah uses three credit cards and has a bank
account balance of $7,500 while Amelia only uses one credit card and has
$9,500 in her bank account. What financial planning advice would you give the
couple?
Two issues are presented here: the number of credit cards and number of checking
accounts. Having too many credit cards can lower your FICO score and your credit
rating because you have the potential of maxing out on each of the cards and getting
into financial difficulty. Noah should reduce his cards to one. Amelia should keep her
card.
Two bank accounts can work okay if the various expenses are allocated between
the two spouses. If one spouse has the job of paying all the bills, that spouse needs
to have access to all accounts, which defeats the purpose of multiple accounts. Most
couples have only one checking account. Here the combined balances are more
than they need in their checking account. They should move about half of their
$17,000 to an investment account.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, 5. LG4, Impact of Economic Environment on Financial Planning. Summarize
current and projected trends in the economy with regard to GDP growth,
unemployment, and inflation. How should you use this information to make
personal financial and career planning decisions?
Answers about economic trends will depend on current economic conditions. If the GDP
is growing, the economy is expanding, and general economic conditions are considered
favorable. Unemployment is probably low, and jobs are available. If the GDP is slowing,
the economy may not be doing well, and jobs may be scarce. Changes in the CPI
indicate the level of inflation. If inflation is rising, purchasing power is declining, and you
will need more money to achieve your financial goals. In periods of high inflation,
interest rates rise making it more difficult to afford big-ticket items. Knowledge of current
economic conditions can help you plan the level of savings versus spending. In a period
of inflation, physical assets [such as real estate] are better than financial assets such as
saving accounts.
6. LG4, Effects of Inflation. How does inflation affect interest rates, security
prices, and financial planning?
Inflation is a measure of the increase in the prices of items sold in the economy. The
most common measure of inflation is the consumer price index (CPI). With inflation the
price of consumer goods increases, thus those who lend money to others will have
reduced purchasing power and will need more income to support their lifestyle. So,
interest rates will increase. Security prices reflect the buyers and sellers’ beliefs about
the future income of the entity. If inflation is causing consumers to purchase less, the
future of the business represented by the security may produce less income. So, the
price of securities will decrease. Financial planning is necessary to be prepared for
inflation or deflation. Inflation does not change the need for financial planning.
7. LG5, Effect of Age and Geography on Income. Evaluate the impact of age and
geographic location on personal income.
Typically, people with low incomes fall into the very young or very old age groups,
with the highest earnings generally occurring between the ages of 35 and 44. The
younger (below 35) are developing their careers in school or beginning to move up in
their jobs. The older age worker may be reducing the hours worked to part-time or may
have retired. The middle aged worker (35 – 44, perhaps up to 50) tend to have the
highest average income. At this age, their career is established, and they are most
productive. However, with good retirement planning, the income of the retired worker
may still be close to that of the middle-aged worker.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
