Solution Manual for Personal Financial
il il il il
il Planning15th Edition by Randy Billingsley,
li il il il il
il Lawrence J. Gitman, Michael D. Joehnk
il il il il il
,Understanding the il
Financial Planning
il il
ProcessChapter 1
il li il
How ilWill ilThis ilAffect ilMe?
The ilheart ilof ilfinancial ilplanning ilis ilmaking ilsure ilyour ilvalues illine ilup ilwith ilhow ilyou ilspend
iland ilsave.liThat ilmeans ilknowing ilwhere ilyou ilare ilfinancially iland ilplanning ilon ilhow ilto ilget
ilwhere ilyou ilwant ilto ilbeliin ilthe ilfuture ilno ilmatter ilwhat illife ilthrows ilat ilyou. ilFor ilexample,
ilhow ilshould ilyour ilplan ilhandle ilthe ilprojection ilthat ilSocial ilSecurity ilcosts ilmay ilexceed
ilrevenues ilby il2035? ilAnd ilwhat ilif ilthe ilgovernmentlidecides ilto ilraise iltax ilrates ilto ilhelp ilcover
ilthe ilfederal ildeficit? ilAn ilinformed ilfinancial ilplan ilshould ilreflect il such iluncertainties iland
il more.
This ilchapter iloverviews ilthe ilfinancial ilplanning ilprocess iland ilexplains ilits ilcontext. ilTopics
ilinclude ilhow ilfinancial ilplans ilchange ilto ilaccommodate ilyour ilcurrent ilstage ilin illife iland ilthe
ilrole ilthat ilfinancialliplanners ilcan ilplay ilin ilhelping ilyou ilachieve ilyour ilobjectives. ilAfter
ilreading ilthis ilchapter ilyou ilwill ilhave ila ilgood ilperspective ilon ilhow ilto ilorganize il your
iloverall ilpersonal ilfinancial ilplan.
LEARNING ilGOALS
LG1 ilIdentify ilthe ilbenefits ilof ilusing ilpersonal ilfinancial ilplanning iltechniques ilto ilmanage
ilyourlifinances.
Key ilconcept ilin ilthis ilsection ilis ilthe ilplanning ilmodel ilas ildisplayed ilin ilExhibit il1.1. ilYour
ilstandard ilof illiving ilis ilgreatly ilimpacted ilby ilyour ilspending ilhabits iland ilyour ilcommitment
ilto ilsaving. ilYour ilspending ilis ilmeasured ilby ilyour ilpropensity ilto ilconsume. ilWealth ilis
ilthe iltotal ilvalue ilof ilall ilpropertyliyou ilown illess ilthe ilamount ilthat il you ilowe ilto ilothers.
ACTIVITY: i l Ask ilthe ilstudents ilto ilassume ilthat ilthey ilhave iljust il inherited il$100,000. ilWhat
il will ilyoulido ilwith ilthe il money? ilWrite ildown ilthree ilways il you ilwill ilspend ilor iluse ilthe
il money.
,Ask ilthe ilstudents ilto ilshare ilone ilitem ilwith ilthe ilclass iland ilrecord ilwhat ilthey ilsay ilso ilthat ilthe
ilentire ilclass lican ilreflect ilon ilthe ilanswers. ilHopefully, ilat illeast ila ilfew ilwill ilmention ilinvesting
ileven ilif ilonly il$10,000 ilof ilthe ilamount. ilUse iltheir ilanswers ilto ildiscuss iltaking il care ilof
ilcurrent il needs ilversus ilfuture ilneeds.
Focus ilon iltheir ilpropensity ilto ilconsume iland ilits ilimpact ilon ilaccumulating ilwealth.
ilPoint ilout iltheliFinancial ilPlanning ilTip, il ―Be ilSMART i l in ilPlanning il Your ilFinancial
ilGoals.‖
Use ilExhibit il1.2 ilto ilshow ilhow ilthe ilaverage ilperson ilearns iland ilspends iltheir ilmoney iland
ilExhibit il1.6 iltolihelp ilthe ilstudent i l identify ilwhere ilthey ilare il now.
LG2 ilDescribe ilthe ilpersonal ilfinancial ilplanning ilprocess iland ildefine ilyour ilgoals.
Dwight il Eisenhower, ilarmy il general iland ilpresident, ilis ilquoted ilas ilsaying il―Plans ilare iluseless;
ilPlanning ilis ilpriceless‖. ilThe ilprocess ilof ilplanning ilallows ilyou ilto ilfocus ilon ilthe ilissues ilthat
ilare ilmost ilimportant iland ilto il be ilready ilwhen ilthings ilchange.
Exhibit il1.3 illists ilthe ilSix ilStep ilFinancial ilPlanning ilProcess. ilThe ilfirst iland ilmost
ilimportant ilis ildefining ilyour ilfinancial ilgoals. ilExhibit il1.6 illists ilgoals ilby ilage ilto
ildemonstrate ilhow ilgoals ilchange ilover iltime. ilUse ilthe ilexamples ilin ilExhibit il 1.5 ilto ilask
ilstudents ilif ilthe ilassumptions ilare ilrealistic. ilYes,lithe ilanswer ilis ilin ilthe ilexhibit, ilbut ilmany
ilwill ilnot ilhave ilread ilchapter ilat ilthis ilpoint. ilFor ilyour iluse, iltheliassumptions ilare:
Assumption il1: ilSaving ila ilfew ilthousand ildollars ila ilyear ilshould ilprovide ilenough ilto ilfund
ilmy ilchild‘slicollege ilEducation.
Assumption il2: ilAn ilemergency ilfund illasting il3 il months ilshould ilbe iladequate.
Assumption il3: ilI ilwill ilbe ilable ilto ilretire ilat il65 iland ilshould ilhave ilplenty ilto illive ilon
ilin ilretirement. liAssumption il4: ilI‘m ilrelying ilon ilthe ilrule ilof ilthumb ilthat ilI ilwill ilneed
ilonly il70 ilpercent ilof ilmy ilpre-liretirement i l income ilto il manage ilnicely ilin ilretirement.
There ilare ilseveral ilworksheets ilin ilthe ilbook. ilWorksheet il1.1 ilgives ilthe ilstudent ila ilformat ilto
ilwrite ildown iltheir ilPersonal ilFinancial ilGoals. ilThere ilis ilpower ilin ilwriting ildown ilgoals il[and
ilmost ilany ilotherliplan]. ilRecording ilthe ilgoal iland ilthen ilreviewing ilthree ilmonths illater ilwill
ilhelp ilyou ilto ilkeep ilfocus ilonlithe ilgoal.
LG3 ilExplain ilthe illife ilcycle ilof ilfinancial ilplans, iltheir ilrole ilin ilachieving ilyour
ilfinancial ilgoals, ilhow ilto ildeal ilwith ilspecial ilplanning ilconcerns, iland ilthe iluse ilof
ilprofessional ilfinancial ilplanners.
Exhibit il1.7 ilcan ilhelp ilfocus ilthe ilattention ilon ilhow ilgoals ildiffer ilbetween ilthe ilvarious
ilstages ilof illife. ilSection il1-3b illists ilvarious ildecisions ilthat ilyou ilwill ilhave ilto ilmake ilover
ilyour illife. ilThe ilsection il1-3c iladdresses ilSpecial ilPlanning ilConcerns. ilWorksheet il1.2
ilfocuses ilon ilthe ilfinancial ilbenefit ilto ilthe ilfamily ilof ilthe ilsecond ilincome. ilIf ilthe ilsecond
ilincome ilis ilfrom ila ilminimum ilwage iljob, ilit ilmay ilnot ilbe ilaligood ilfinancial ildecision. il Of
ilcourse ilhaving ila il job, ileven ila il minimum ilwage il job, il may ilgive ilthe ilpersonlipsychic il income
ilthat il will iloverride ilthe il financial ilimpact.
While ilperhaps iloff iltopic, ilI ilrecall ila ilhigh ilschool ilscience ilteacher ilwho ilwas ila ilsmoker. ilHe
ilwalked ilthrough ilthe ilamount ilof ilmoney ilhe ilspent il on ilpurchasing iltobacco il products. ilThat
ilcomputation ilhad ila
, lot ilto ildo ilwith ilmy ildecision ilto ilnot il smoke. ilHow ilthis ilrelates ilto ilthe ilcourse ilis ilthat ilthis ilis
ilanlii llustration ilof ilhow ilthe ilfinancial ilimpact ilof ila ildecision ilcan ildrive ilthe ildecision.
LG4 ilExamine ilthe ileconomic ilenvironment’s ilinfluence ilon ilpersonal ilfinancial ilplanning.
For ilolder ilfolks, ilthe ilfinancial ilcrisis ilof il2008-2009 ilis ilfresh ilin ilour ilmemory. ilTo ilthe
ilstudent ilof il2021,lti hat ilcrisis ilis ilmore ilof ilhistory ilthan illife. ilIf ilyou ilcan ilshare ila ilwar ilstory
ilon ilhow ilyou ilwere ilpersonally ilimpacted, ilit ilwill ilhelp ilbring ilthe ilimpact ilof ilthe ilworld
ileconomy ilon ilfinancial ilplans ilto illife. ilThe ilbooklispeaks ilhow ilto ilmanage ilthis iltype ilof
ilcrisis, ilbut ilyou ilhad ilto ilgo ilthrough ilit ilto ilreally ilunderstand ilthe ilimpact i l it il had.
The ilvalue ilof ilprofessional iladvice ilis ilgreatly ilunderstated. ilIf ilby iltalking ilto ila ilprofessional
ilyou ilcan ilprevent ilmaking ila ilmistake il-- ilthat il can ilbe ilof ila ilgreat ilvalue. ilSection il1-3e ilspeaks
ilto ilthe iluse ilof ilprofessional ilfinancial ilplanners. il Exhibit il 1.9 illists ilout ilthe ilvarious
ilcertifications ilthat il planners ilhave.
Economic ilor ilbusiness ilcycles ilare ilreal. ilPerhaps ilthe ilmost iluseful ilthing ilabout ilthe ilcycles
ilis ilthe ilknowledge ilthat ilif ilthings ilare ilbad, ilyou ilknow ilthey ilwill ilget ilbetter. ilOf ilcourse,
ilwhen illife ilis ilgood, ilyou ilknow ilthat ilthe ilbad ilcycle ilwill ilcome ilaround ilagain. ilThus,
il financial ilplanning ilrequires ilsaving il inlit he ilgood iltimes il for ilthe ilbad iltimes. il i l See ilthe il ―Test
il Yourself‖ ilquestion il1-17 il for il a ilshort il discussion ilof ilbusiness ilcycles.
The ilpower ilof ilcompounding ilis ilrarely ilunderstood. ilExhibit il1.8 ilshows ilhow ilthe ilamount
il$10,000liwill ilgrow ilover iltime. ilThe illonger ilthe ilinvestment ilstays ilinvested, ilthe ilgreater
ilthe ilamount il– ilthe ilpower ilof ilcompound il interest.
LG5 ilEvaluate ilthe ilimpact ilof ilage, ileducation, iland ilgeographic illocation ilon ilpersonal ilincome.
Exhibit il1.12 ilsays ilit ilall.
LG6 ilUnderstand ilthe ilimportance ilof ilcareer ilchoices iland iltheir ilrelationship ilto
ilpersonallifinancial ilplanning.
Exhibit il 1.13 ilshows ilthat ilthe ilchoice ilof ila ilcollege il major ilhas ila ilfinancial ilimpact. ilOf ilcourse
ilmoneylicannot ilbuy ilhappiness, ilbut ilhaving ila ilbit ilhelps. ilIf ilyou ilreally ilwant ilto ilbe ilan
ilelementary ilschool ilteacher, ilyou ilmust ilrecognize ilthat ilyou ilwill ilnot ilhave ilas ilmuch ilwealth
ilas ila illawyer ilor ilfinancial ilanalyst.
The ilsummary ilof ilthe illearning ilgoals ilat ilthe ilend ilof ilthe ilchapter ilshould ilaid ilthe ilstudent
ilin ilreviewing lti he ilchapter ilwhen ilexam iltime ilcomes. ilIt ilwill ilbe iluseful ilto ilpoint ilout ilto ilthe
ilstudent ilhow ilto iluse ilthis ilmaterial.
Link ilto ilSolutions ilto ilFinancial ilPlanning ilExercises
Pre-tests
il il il il
il Planning15th Edition by Randy Billingsley,
li il il il il
il Lawrence J. Gitman, Michael D. Joehnk
il il il il il
,Understanding the il
Financial Planning
il il
ProcessChapter 1
il li il
How ilWill ilThis ilAffect ilMe?
The ilheart ilof ilfinancial ilplanning ilis ilmaking ilsure ilyour ilvalues illine ilup ilwith ilhow ilyou ilspend
iland ilsave.liThat ilmeans ilknowing ilwhere ilyou ilare ilfinancially iland ilplanning ilon ilhow ilto ilget
ilwhere ilyou ilwant ilto ilbeliin ilthe ilfuture ilno ilmatter ilwhat illife ilthrows ilat ilyou. ilFor ilexample,
ilhow ilshould ilyour ilplan ilhandle ilthe ilprojection ilthat ilSocial ilSecurity ilcosts ilmay ilexceed
ilrevenues ilby il2035? ilAnd ilwhat ilif ilthe ilgovernmentlidecides ilto ilraise iltax ilrates ilto ilhelp ilcover
ilthe ilfederal ildeficit? ilAn ilinformed ilfinancial ilplan ilshould ilreflect il such iluncertainties iland
il more.
This ilchapter iloverviews ilthe ilfinancial ilplanning ilprocess iland ilexplains ilits ilcontext. ilTopics
ilinclude ilhow ilfinancial ilplans ilchange ilto ilaccommodate ilyour ilcurrent ilstage ilin illife iland ilthe
ilrole ilthat ilfinancialliplanners ilcan ilplay ilin ilhelping ilyou ilachieve ilyour ilobjectives. ilAfter
ilreading ilthis ilchapter ilyou ilwill ilhave ila ilgood ilperspective ilon ilhow ilto ilorganize il your
iloverall ilpersonal ilfinancial ilplan.
LEARNING ilGOALS
LG1 ilIdentify ilthe ilbenefits ilof ilusing ilpersonal ilfinancial ilplanning iltechniques ilto ilmanage
ilyourlifinances.
Key ilconcept ilin ilthis ilsection ilis ilthe ilplanning ilmodel ilas ildisplayed ilin ilExhibit il1.1. ilYour
ilstandard ilof illiving ilis ilgreatly ilimpacted ilby ilyour ilspending ilhabits iland ilyour ilcommitment
ilto ilsaving. ilYour ilspending ilis ilmeasured ilby ilyour ilpropensity ilto ilconsume. ilWealth ilis
ilthe iltotal ilvalue ilof ilall ilpropertyliyou ilown illess ilthe ilamount ilthat il you ilowe ilto ilothers.
ACTIVITY: i l Ask ilthe ilstudents ilto ilassume ilthat ilthey ilhave iljust il inherited il$100,000. ilWhat
il will ilyoulido ilwith ilthe il money? ilWrite ildown ilthree ilways il you ilwill ilspend ilor iluse ilthe
il money.
,Ask ilthe ilstudents ilto ilshare ilone ilitem ilwith ilthe ilclass iland ilrecord ilwhat ilthey ilsay ilso ilthat ilthe
ilentire ilclass lican ilreflect ilon ilthe ilanswers. ilHopefully, ilat illeast ila ilfew ilwill ilmention ilinvesting
ileven ilif ilonly il$10,000 ilof ilthe ilamount. ilUse iltheir ilanswers ilto ildiscuss iltaking il care ilof
ilcurrent il needs ilversus ilfuture ilneeds.
Focus ilon iltheir ilpropensity ilto ilconsume iland ilits ilimpact ilon ilaccumulating ilwealth.
ilPoint ilout iltheliFinancial ilPlanning ilTip, il ―Be ilSMART i l in ilPlanning il Your ilFinancial
ilGoals.‖
Use ilExhibit il1.2 ilto ilshow ilhow ilthe ilaverage ilperson ilearns iland ilspends iltheir ilmoney iland
ilExhibit il1.6 iltolihelp ilthe ilstudent i l identify ilwhere ilthey ilare il now.
LG2 ilDescribe ilthe ilpersonal ilfinancial ilplanning ilprocess iland ildefine ilyour ilgoals.
Dwight il Eisenhower, ilarmy il general iland ilpresident, ilis ilquoted ilas ilsaying il―Plans ilare iluseless;
ilPlanning ilis ilpriceless‖. ilThe ilprocess ilof ilplanning ilallows ilyou ilto ilfocus ilon ilthe ilissues ilthat
ilare ilmost ilimportant iland ilto il be ilready ilwhen ilthings ilchange.
Exhibit il1.3 illists ilthe ilSix ilStep ilFinancial ilPlanning ilProcess. ilThe ilfirst iland ilmost
ilimportant ilis ildefining ilyour ilfinancial ilgoals. ilExhibit il1.6 illists ilgoals ilby ilage ilto
ildemonstrate ilhow ilgoals ilchange ilover iltime. ilUse ilthe ilexamples ilin ilExhibit il 1.5 ilto ilask
ilstudents ilif ilthe ilassumptions ilare ilrealistic. ilYes,lithe ilanswer ilis ilin ilthe ilexhibit, ilbut ilmany
ilwill ilnot ilhave ilread ilchapter ilat ilthis ilpoint. ilFor ilyour iluse, iltheliassumptions ilare:
Assumption il1: ilSaving ila ilfew ilthousand ildollars ila ilyear ilshould ilprovide ilenough ilto ilfund
ilmy ilchild‘slicollege ilEducation.
Assumption il2: ilAn ilemergency ilfund illasting il3 il months ilshould ilbe iladequate.
Assumption il3: ilI ilwill ilbe ilable ilto ilretire ilat il65 iland ilshould ilhave ilplenty ilto illive ilon
ilin ilretirement. liAssumption il4: ilI‘m ilrelying ilon ilthe ilrule ilof ilthumb ilthat ilI ilwill ilneed
ilonly il70 ilpercent ilof ilmy ilpre-liretirement i l income ilto il manage ilnicely ilin ilretirement.
There ilare ilseveral ilworksheets ilin ilthe ilbook. ilWorksheet il1.1 ilgives ilthe ilstudent ila ilformat ilto
ilwrite ildown iltheir ilPersonal ilFinancial ilGoals. ilThere ilis ilpower ilin ilwriting ildown ilgoals il[and
ilmost ilany ilotherliplan]. ilRecording ilthe ilgoal iland ilthen ilreviewing ilthree ilmonths illater ilwill
ilhelp ilyou ilto ilkeep ilfocus ilonlithe ilgoal.
LG3 ilExplain ilthe illife ilcycle ilof ilfinancial ilplans, iltheir ilrole ilin ilachieving ilyour
ilfinancial ilgoals, ilhow ilto ildeal ilwith ilspecial ilplanning ilconcerns, iland ilthe iluse ilof
ilprofessional ilfinancial ilplanners.
Exhibit il1.7 ilcan ilhelp ilfocus ilthe ilattention ilon ilhow ilgoals ildiffer ilbetween ilthe ilvarious
ilstages ilof illife. ilSection il1-3b illists ilvarious ildecisions ilthat ilyou ilwill ilhave ilto ilmake ilover
ilyour illife. ilThe ilsection il1-3c iladdresses ilSpecial ilPlanning ilConcerns. ilWorksheet il1.2
ilfocuses ilon ilthe ilfinancial ilbenefit ilto ilthe ilfamily ilof ilthe ilsecond ilincome. ilIf ilthe ilsecond
ilincome ilis ilfrom ila ilminimum ilwage iljob, ilit ilmay ilnot ilbe ilaligood ilfinancial ildecision. il Of
ilcourse ilhaving ila il job, ileven ila il minimum ilwage il job, il may ilgive ilthe ilpersonlipsychic il income
ilthat il will iloverride ilthe il financial ilimpact.
While ilperhaps iloff iltopic, ilI ilrecall ila ilhigh ilschool ilscience ilteacher ilwho ilwas ila ilsmoker. ilHe
ilwalked ilthrough ilthe ilamount ilof ilmoney ilhe ilspent il on ilpurchasing iltobacco il products. ilThat
ilcomputation ilhad ila
, lot ilto ildo ilwith ilmy ildecision ilto ilnot il smoke. ilHow ilthis ilrelates ilto ilthe ilcourse ilis ilthat ilthis ilis
ilanlii llustration ilof ilhow ilthe ilfinancial ilimpact ilof ila ildecision ilcan ildrive ilthe ildecision.
LG4 ilExamine ilthe ileconomic ilenvironment’s ilinfluence ilon ilpersonal ilfinancial ilplanning.
For ilolder ilfolks, ilthe ilfinancial ilcrisis ilof il2008-2009 ilis ilfresh ilin ilour ilmemory. ilTo ilthe
ilstudent ilof il2021,lti hat ilcrisis ilis ilmore ilof ilhistory ilthan illife. ilIf ilyou ilcan ilshare ila ilwar ilstory
ilon ilhow ilyou ilwere ilpersonally ilimpacted, ilit ilwill ilhelp ilbring ilthe ilimpact ilof ilthe ilworld
ileconomy ilon ilfinancial ilplans ilto illife. ilThe ilbooklispeaks ilhow ilto ilmanage ilthis iltype ilof
ilcrisis, ilbut ilyou ilhad ilto ilgo ilthrough ilit ilto ilreally ilunderstand ilthe ilimpact i l it il had.
The ilvalue ilof ilprofessional iladvice ilis ilgreatly ilunderstated. ilIf ilby iltalking ilto ila ilprofessional
ilyou ilcan ilprevent ilmaking ila ilmistake il-- ilthat il can ilbe ilof ila ilgreat ilvalue. ilSection il1-3e ilspeaks
ilto ilthe iluse ilof ilprofessional ilfinancial ilplanners. il Exhibit il 1.9 illists ilout ilthe ilvarious
ilcertifications ilthat il planners ilhave.
Economic ilor ilbusiness ilcycles ilare ilreal. ilPerhaps ilthe ilmost iluseful ilthing ilabout ilthe ilcycles
ilis ilthe ilknowledge ilthat ilif ilthings ilare ilbad, ilyou ilknow ilthey ilwill ilget ilbetter. ilOf ilcourse,
ilwhen illife ilis ilgood, ilyou ilknow ilthat ilthe ilbad ilcycle ilwill ilcome ilaround ilagain. ilThus,
il financial ilplanning ilrequires ilsaving il inlit he ilgood iltimes il for ilthe ilbad iltimes. il i l See ilthe il ―Test
il Yourself‖ ilquestion il1-17 il for il a ilshort il discussion ilof ilbusiness ilcycles.
The ilpower ilof ilcompounding ilis ilrarely ilunderstood. ilExhibit il1.8 ilshows ilhow ilthe ilamount
il$10,000liwill ilgrow ilover iltime. ilThe illonger ilthe ilinvestment ilstays ilinvested, ilthe ilgreater
ilthe ilamount il– ilthe ilpower ilof ilcompound il interest.
LG5 ilEvaluate ilthe ilimpact ilof ilage, ileducation, iland ilgeographic illocation ilon ilpersonal ilincome.
Exhibit il1.12 ilsays ilit ilall.
LG6 ilUnderstand ilthe ilimportance ilof ilcareer ilchoices iland iltheir ilrelationship ilto
ilpersonallifinancial ilplanning.
Exhibit il 1.13 ilshows ilthat ilthe ilchoice ilof ila ilcollege il major ilhas ila ilfinancial ilimpact. ilOf ilcourse
ilmoneylicannot ilbuy ilhappiness, ilbut ilhaving ila ilbit ilhelps. ilIf ilyou ilreally ilwant ilto ilbe ilan
ilelementary ilschool ilteacher, ilyou ilmust ilrecognize ilthat ilyou ilwill ilnot ilhave ilas ilmuch ilwealth
ilas ila illawyer ilor ilfinancial ilanalyst.
The ilsummary ilof ilthe illearning ilgoals ilat ilthe ilend ilof ilthe ilchapter ilshould ilaid ilthe ilstudent
ilin ilreviewing lti he ilchapter ilwhen ilexam iltime ilcomes. ilIt ilwill ilbe iluseful ilto ilpoint ilout ilto ilthe
ilstudent ilhow ilto iluse ilthis ilmaterial.
Link ilto ilSolutions ilto ilFinancial ilPlanning ilExercises
Pre-tests
