Solution Manual for Personal Financial Planning1
x x x x x x
5th Edition by Randy Billingsley, Lawrence J. Git
x x x x x x x
man, Michael D. Joehnk
x x x
,SOLUTION MANUAL FOR x x
Personal Financial Planning 15th Edition by Randy Billingsley
x x x x x x x
, Lawrence J. Gitman, Michael D. Joehnk
x x x x x x
Understanding the Financi x x
al Planning ProcessChapter
x x x
1
x
HowxWillxThisxAffectxMe?
Thexheartxofxfinancialxplanningxisxmakingxsurexyourxvaluesxlinexupxwithxhowxyouxspendxandxsave.xTh
atxmeansxknowingxwherexyouxarexfinanciallyxandxplanningxonxhowxtoxgetxwherexyouxwantxtoxbexinxthe
xfuturexnoxmatterxwhatxlifexthrowsxatxyou.xForxexample,xhowxshouldxyourxplanxhandlexthexprojectionx
thatxSocialxSecurityxcostsxmayxexceedxrevenuesxbyx2035?xAndxwhatxifxthexgovernmentxdecidesxtoxrai
sextaxxratesxtoxhelpxcoverxthexfederalxdeficit?xAnxinformedxfinancialxplanxshouldxreflectx suchxuncerta
intiesxandx more.
Thisxchapterxoverviewsxthexfinancialxplanningxprocessxandxexplainsxitsxcontext.xTopicsxincludexho
wxfinancialxplansxchangextoxaccommodatexyourxcurrentxstagexinxlifexandxthexrolexthatxfinancialxplan
nersxcanxplayxinxhelpingxyouxachievexyourxobjectives.xAfterxreadingxthisxchapterxyouxwillxhavexaxg
oodxperspectivexonxhowxtoxorganizex yourxoverallxpersonalxfinancialxplan.
LEARNING GOALS x
LG1xIdentifyxthexbenefitsxofxusingxpersonalxfinancialxplanningxtechniquesxtoxmanagexyourxfina
nces.
KeyxconceptxinxthisxsectionxisxthexplanningxmodelxasxdisplayedxinxExhibitx1.1.xYourxstandardxofxli
vingxisxgreatlyximpactedxbyxyourxspendingxhabitsxandxyourxcommitmentxtoxsaving.xYourxspendingx
isxmeasuredxbyxyourxpropensityxtoxconsume.xWealthxisxthextotalxvaluexofxallxpropertyxyouxownxle
ssxthexamountxthatx youxowextoxothers.
ACTIVITY:x Askxthexstudentsxtoxassumexthatxtheyxhavex justx inheritedx$100,000.x Whatx willxyouxdox
withxthex money?xWritexdownxthreexwaysx youxwillxspendxorxusexthex money.
,Askxthexstudentsxtoxsharexonexitemxwithxthexclassxandxrecordxwhatxtheyxsayxsoxthatxthexentirexclassxca
nxreflectxonxthexanswers.xHopefully,xatxleastxaxfewxwillxmentionxinvestingxevenxifxonlyx$10,000xofxt
hexamount.xUsextheirxanswersxtoxdiscussxtakingx carexofxcurrentx needsxversusxfuturexneeds.
Focusxonxtheirxpropensityxtoxconsumexandxitsximpactxonxaccumulatingxwealth.xPointxoutxthexF
inancialxPlanningxTip,x ―BexSMARTx inxPlanningx YourxFinancialxGoals.‖
UsexExhibitx1.2xtoxshowxhowxthexaveragexpersonxearnsxandxspendsxtheirxmoneyxandxExhibitx1.6xtoxhe
lpxthexstudentx identifyxwherextheyxarex now.
LG2xDescribexthexpersonalxfinancialxplanningxprocessxandxdefinexyourxgoals.
Dwightx Eisenhower,xarmyxgeneralxandxpresident,xisxquotedxasxsayingx ―Plansxarexuseless;xPlanningxis
xpriceless‖.xThexprocessxofxplanningxallowsx youxtoxfocusxonxthexissuesxthatxarexmostximportantxandx
tox bexreadyxwhenxthingsxchange.
Exhibitx1.3xlistsxthexSixxStepxFinancialxPlanningxProcess.xThexfirstxandxmostximportantxisxdefinin
gxyourxfinancialxgoals.xExhibitx1.6xlistsxgoalsxbyxagextoxdemonstratexhowxgoalsxchangexoverxtime.
xUsexthexexamplesxinxExhibitx 1.5xtoxaskxstudentsxifxthexassumptionsxarexrealistic.xYes,xthexanswerxi
sxinxthexexhibit,xbutxmanyxwillxnotxhavexreadxchapterxatxthisxpoint.xForxyourxuse,xthexassumptionsxa
re:
Assumptionx1:xSavingxaxfewxthousandxdollarsxax yearxshouldxprovidexenoughxtoxfundxmyxchild‘sxc
ollegexEducation.
Assumptionx2:xAnxemergencyxfundxlastingx3x monthsxshouldxbexadequate.
Assumptionx3:xIxwillxbexablextoxretirexatx65xandxshouldxhavexplentyxtoxlivexonxinxretirement.xA
ssumptionx4:xI‘mxrelyingxonxthexrulexofxthumbxthatxIxwillxneedxonlyx70xpercentxofxmyxpre-
xretirementx incomextox managex nicelyxinxretirement.
Therexarexseveralxworksheetsxinxthexbook.xWorksheetx1.1xgivesxthexstudentxaxformatxtoxwritexdown
xtheirxPersonalxFinancialxGoals.xTherexisxpowerxinxwritingxdownxgoalsx[andxmostxanyxotherxplan].xR
ecordingxthexgoalxandxthenxreviewingxthreexmonthsxlaterxwillxhelpxyouxtoxkeepxfocusxonxthexgoal.
LG3xExplainxthexlifexcyclexofxfinancialxplans,xtheirxrolexinxachievingxyourxfinancialxgoals,xho
wxtoxdealxwithxspecialxplanningxconcerns,xandxthexusexofxprofessionalxfinancialxplanners.
Exhibitx1.7xcanxhelpxfocusxthexattentionxonxhowxgoalsxdifferxbetweenxthexvariousxstagesxofxlife.xSec
tionx1-3bxlistsxvariousxdecisionsxthatxyouxwillxhavextoxmakexoverxyourxlife.xThexsectionx1-
3cxaddressesxSpecialxPlanningxConcerns.xWorksheetx1.2xfocusesxonxthexfinancialxbenefitxtoxthexfa
milyxofxthexsecondxincome.xIfxthexsecondxincomexisxfromxaxminimumxwagexjob,xitxmayxnotxbexaxgoo
dxfinancialxdecision.x Ofxcoursexhavingxaxjob,xevenxax minimumxwagex job,x mayxgivexthexpersonxpsych
icx incomexthatx willxoverridexthex financialximpact.
Whilexperhapsxoffxtopic,xIxrecallxaxhighxschoolxsciencexteacherxwhoxwasxaxsmoker.xHexwalkedxthro
ughxthexamountxofxmoneyxhexspentx onxpurchasingxtobaccox products.xThatxcomputationxhadxa
, lotxtoxdoxwithxmyxdecisionxtoxnotx smoke.xHowxthisxrelatesxtoxthexcoursexisxthatxthisxisxanxillustrationx
ofxhowxthexfinancialximpactxofxaxdecisionxcanxdrivexthexdecision.
LG4xExaminexthexeconomicxenvironment’sxinfluencexonxpersonalxfinancialxplanning.
Forxolderxfolks,xthexfinancialxcrisisxofx2008-
2009xisxfreshxinxourxmemory.xToxthexstudentxofx2021,xthatxcrisisxisxmorexofxhistoryxthanxlife.xIfxyouxc
anxsharexaxwarxstoryxonxhowxyouxwerexpersonallyximpacted,xitxwillxhelpxbringxtheximpactxofxthexwor
ldxeconomyxonxfinancialxplansxtoxlife.xThexbookxspeaksxhowxtoxmanagexthisxtypexofxcrisis,xbutxyouxh
adxtoxgoxthroughxitxtoxreallyxunderstandxtheximpactx itx had.
Thexvaluexofxprofessionalxadvicexisxgreatlyxunderstated.xIfxbyxtalkingxtoxaxprofessionalxyouxcanxprev
entxmakingxaxmistakex--xthatxcanxbexofxaxgreatxvalue.xSectionx1-
3exspeaksxtoxthexusexofxprofessionalxfinancialxplanners.x Exhibitx 1.9xlistsxoutxthexvariousxcertifications
xthatx plannersxhave.
Economicxorxbusinessxcyclesxarexreal.xPerhapsxthexmostxusefulxthingxaboutxthexcyclesxisxthexknowl
edgexthatxifxthingsxarexbad,xyouxknowxtheyxwillxgetxbetter.xOfxcourse,xwhenxlifexisxgood,xyouxknowxt
hatxthexbadxcyclexwillxcomexaroundxagain.xThus,x financialxplanningxrequiresxsavingx inxt hexgoodxtime
sx forxthexbadxtimes.xx Seexthex ―Testx Yourself‖xquestionx1-
17x forxaxshortx discussionxofxbusinessxcycles.
Thexpowerxofxcompoundingxisxrarelyxunderstood.xExhibitx1.8xshowsxhowxthexamountx$10,000x
willxgrowxoverxtime.xThexlongerxthexinvestmentxstaysxinvested,xthexgreaterxthexamountx–
xthexpowerxofxcompoundx interest.
LG5xEvaluatextheximpactxofxage,xeducation,xandxgeographicxlocationxonxpersonalxincome.
Exhibitx1.12xsaysxitxall.
LG6xUnderstandxtheximportancexofxcareerxchoicesxandxtheirxrelationshipxtoxpersonalxfinancialx
planning.
Exhibitx 1.13xshowsxthatxthexchoicexofxaxcollegex majorxhasxaxfinancialximpact.xOfxcoursexmoneyxcanno
txbuyxhappiness,xbutxhavingxaxbitxhelps.xIfxyouxreallyxwantxtoxbexanxelementaryxschoolxteacher,xyoux
mustxrecognizexthatxyouxwillxnotxhavexasxmuchxwealthxasxaxlawyerxorxfinancialxanalyst.
Thexsummaryxofxthexlearningxgoalsxatxthexendxofxthexchapterxshouldxaidxthexstudentxinxreviewingxth
exchapterxwhenxexamxtimexcomes.xItxwillxbexusefulxtoxpointxoutxtoxthexstudentxhowxtoxusexthisxmat
erial.
LinkxtoxSolutionsxtoxFinancialxPlanningxExercises
Pre-tests
x x x x x x
5th Edition by Randy Billingsley, Lawrence J. Git
x x x x x x x
man, Michael D. Joehnk
x x x
,SOLUTION MANUAL FOR x x
Personal Financial Planning 15th Edition by Randy Billingsley
x x x x x x x
, Lawrence J. Gitman, Michael D. Joehnk
x x x x x x
Understanding the Financi x x
al Planning ProcessChapter
x x x
1
x
HowxWillxThisxAffectxMe?
Thexheartxofxfinancialxplanningxisxmakingxsurexyourxvaluesxlinexupxwithxhowxyouxspendxandxsave.xTh
atxmeansxknowingxwherexyouxarexfinanciallyxandxplanningxonxhowxtoxgetxwherexyouxwantxtoxbexinxthe
xfuturexnoxmatterxwhatxlifexthrowsxatxyou.xForxexample,xhowxshouldxyourxplanxhandlexthexprojectionx
thatxSocialxSecurityxcostsxmayxexceedxrevenuesxbyx2035?xAndxwhatxifxthexgovernmentxdecidesxtoxrai
sextaxxratesxtoxhelpxcoverxthexfederalxdeficit?xAnxinformedxfinancialxplanxshouldxreflectx suchxuncerta
intiesxandx more.
Thisxchapterxoverviewsxthexfinancialxplanningxprocessxandxexplainsxitsxcontext.xTopicsxincludexho
wxfinancialxplansxchangextoxaccommodatexyourxcurrentxstagexinxlifexandxthexrolexthatxfinancialxplan
nersxcanxplayxinxhelpingxyouxachievexyourxobjectives.xAfterxreadingxthisxchapterxyouxwillxhavexaxg
oodxperspectivexonxhowxtoxorganizex yourxoverallxpersonalxfinancialxplan.
LEARNING GOALS x
LG1xIdentifyxthexbenefitsxofxusingxpersonalxfinancialxplanningxtechniquesxtoxmanagexyourxfina
nces.
KeyxconceptxinxthisxsectionxisxthexplanningxmodelxasxdisplayedxinxExhibitx1.1.xYourxstandardxofxli
vingxisxgreatlyximpactedxbyxyourxspendingxhabitsxandxyourxcommitmentxtoxsaving.xYourxspendingx
isxmeasuredxbyxyourxpropensityxtoxconsume.xWealthxisxthextotalxvaluexofxallxpropertyxyouxownxle
ssxthexamountxthatx youxowextoxothers.
ACTIVITY:x Askxthexstudentsxtoxassumexthatxtheyxhavex justx inheritedx$100,000.x Whatx willxyouxdox
withxthex money?xWritexdownxthreexwaysx youxwillxspendxorxusexthex money.
,Askxthexstudentsxtoxsharexonexitemxwithxthexclassxandxrecordxwhatxtheyxsayxsoxthatxthexentirexclassxca
nxreflectxonxthexanswers.xHopefully,xatxleastxaxfewxwillxmentionxinvestingxevenxifxonlyx$10,000xofxt
hexamount.xUsextheirxanswersxtoxdiscussxtakingx carexofxcurrentx needsxversusxfuturexneeds.
Focusxonxtheirxpropensityxtoxconsumexandxitsximpactxonxaccumulatingxwealth.xPointxoutxthexF
inancialxPlanningxTip,x ―BexSMARTx inxPlanningx YourxFinancialxGoals.‖
UsexExhibitx1.2xtoxshowxhowxthexaveragexpersonxearnsxandxspendsxtheirxmoneyxandxExhibitx1.6xtoxhe
lpxthexstudentx identifyxwherextheyxarex now.
LG2xDescribexthexpersonalxfinancialxplanningxprocessxandxdefinexyourxgoals.
Dwightx Eisenhower,xarmyxgeneralxandxpresident,xisxquotedxasxsayingx ―Plansxarexuseless;xPlanningxis
xpriceless‖.xThexprocessxofxplanningxallowsx youxtoxfocusxonxthexissuesxthatxarexmostximportantxandx
tox bexreadyxwhenxthingsxchange.
Exhibitx1.3xlistsxthexSixxStepxFinancialxPlanningxProcess.xThexfirstxandxmostximportantxisxdefinin
gxyourxfinancialxgoals.xExhibitx1.6xlistsxgoalsxbyxagextoxdemonstratexhowxgoalsxchangexoverxtime.
xUsexthexexamplesxinxExhibitx 1.5xtoxaskxstudentsxifxthexassumptionsxarexrealistic.xYes,xthexanswerxi
sxinxthexexhibit,xbutxmanyxwillxnotxhavexreadxchapterxatxthisxpoint.xForxyourxuse,xthexassumptionsxa
re:
Assumptionx1:xSavingxaxfewxthousandxdollarsxax yearxshouldxprovidexenoughxtoxfundxmyxchild‘sxc
ollegexEducation.
Assumptionx2:xAnxemergencyxfundxlastingx3x monthsxshouldxbexadequate.
Assumptionx3:xIxwillxbexablextoxretirexatx65xandxshouldxhavexplentyxtoxlivexonxinxretirement.xA
ssumptionx4:xI‘mxrelyingxonxthexrulexofxthumbxthatxIxwillxneedxonlyx70xpercentxofxmyxpre-
xretirementx incomextox managex nicelyxinxretirement.
Therexarexseveralxworksheetsxinxthexbook.xWorksheetx1.1xgivesxthexstudentxaxformatxtoxwritexdown
xtheirxPersonalxFinancialxGoals.xTherexisxpowerxinxwritingxdownxgoalsx[andxmostxanyxotherxplan].xR
ecordingxthexgoalxandxthenxreviewingxthreexmonthsxlaterxwillxhelpxyouxtoxkeepxfocusxonxthexgoal.
LG3xExplainxthexlifexcyclexofxfinancialxplans,xtheirxrolexinxachievingxyourxfinancialxgoals,xho
wxtoxdealxwithxspecialxplanningxconcerns,xandxthexusexofxprofessionalxfinancialxplanners.
Exhibitx1.7xcanxhelpxfocusxthexattentionxonxhowxgoalsxdifferxbetweenxthexvariousxstagesxofxlife.xSec
tionx1-3bxlistsxvariousxdecisionsxthatxyouxwillxhavextoxmakexoverxyourxlife.xThexsectionx1-
3cxaddressesxSpecialxPlanningxConcerns.xWorksheetx1.2xfocusesxonxthexfinancialxbenefitxtoxthexfa
milyxofxthexsecondxincome.xIfxthexsecondxincomexisxfromxaxminimumxwagexjob,xitxmayxnotxbexaxgoo
dxfinancialxdecision.x Ofxcoursexhavingxaxjob,xevenxax minimumxwagex job,x mayxgivexthexpersonxpsych
icx incomexthatx willxoverridexthex financialximpact.
Whilexperhapsxoffxtopic,xIxrecallxaxhighxschoolxsciencexteacherxwhoxwasxaxsmoker.xHexwalkedxthro
ughxthexamountxofxmoneyxhexspentx onxpurchasingxtobaccox products.xThatxcomputationxhadxa
, lotxtoxdoxwithxmyxdecisionxtoxnotx smoke.xHowxthisxrelatesxtoxthexcoursexisxthatxthisxisxanxillustrationx
ofxhowxthexfinancialximpactxofxaxdecisionxcanxdrivexthexdecision.
LG4xExaminexthexeconomicxenvironment’sxinfluencexonxpersonalxfinancialxplanning.
Forxolderxfolks,xthexfinancialxcrisisxofx2008-
2009xisxfreshxinxourxmemory.xToxthexstudentxofx2021,xthatxcrisisxisxmorexofxhistoryxthanxlife.xIfxyouxc
anxsharexaxwarxstoryxonxhowxyouxwerexpersonallyximpacted,xitxwillxhelpxbringxtheximpactxofxthexwor
ldxeconomyxonxfinancialxplansxtoxlife.xThexbookxspeaksxhowxtoxmanagexthisxtypexofxcrisis,xbutxyouxh
adxtoxgoxthroughxitxtoxreallyxunderstandxtheximpactx itx had.
Thexvaluexofxprofessionalxadvicexisxgreatlyxunderstated.xIfxbyxtalkingxtoxaxprofessionalxyouxcanxprev
entxmakingxaxmistakex--xthatxcanxbexofxaxgreatxvalue.xSectionx1-
3exspeaksxtoxthexusexofxprofessionalxfinancialxplanners.x Exhibitx 1.9xlistsxoutxthexvariousxcertifications
xthatx plannersxhave.
Economicxorxbusinessxcyclesxarexreal.xPerhapsxthexmostxusefulxthingxaboutxthexcyclesxisxthexknowl
edgexthatxifxthingsxarexbad,xyouxknowxtheyxwillxgetxbetter.xOfxcourse,xwhenxlifexisxgood,xyouxknowxt
hatxthexbadxcyclexwillxcomexaroundxagain.xThus,x financialxplanningxrequiresxsavingx inxt hexgoodxtime
sx forxthexbadxtimes.xx Seexthex ―Testx Yourself‖xquestionx1-
17x forxaxshortx discussionxofxbusinessxcycles.
Thexpowerxofxcompoundingxisxrarelyxunderstood.xExhibitx1.8xshowsxhowxthexamountx$10,000x
willxgrowxoverxtime.xThexlongerxthexinvestmentxstaysxinvested,xthexgreaterxthexamountx–
xthexpowerxofxcompoundx interest.
LG5xEvaluatextheximpactxofxage,xeducation,xandxgeographicxlocationxonxpersonalxincome.
Exhibitx1.12xsaysxitxall.
LG6xUnderstandxtheximportancexofxcareerxchoicesxandxtheirxrelationshipxtoxpersonalxfinancialx
planning.
Exhibitx 1.13xshowsxthatxthexchoicexofxaxcollegex majorxhasxaxfinancialximpact.xOfxcoursexmoneyxcanno
txbuyxhappiness,xbutxhavingxaxbitxhelps.xIfxyouxreallyxwantxtoxbexanxelementaryxschoolxteacher,xyoux
mustxrecognizexthatxyouxwillxnotxhavexasxmuchxwealthxasxaxlawyerxorxfinancialxanalyst.
Thexsummaryxofxthexlearningxgoalsxatxthexendxofxthexchapterxshouldxaidxthexstudentxinxreviewingxth
exchapterxwhenxexamxtimexcomes.xItxwillxbexusefulxtoxpointxoutxtoxthexstudentxhowxtoxusexthisxmat
erial.
LinkxtoxSolutionsxtoxFinancialxPlanningxExercises
Pre-tests
