TEST BANK
Solution Manual for Personal Financial Planning 15th Edition
by Randy Billingsley, Lawrence J. Gitman, Michael D.
Joehnk
,Understanding the Financi ` ``
al Planning Process Chapter
` ` ` `
1
How`Will`This`Affect`Me?
The`heart`of`financial`planning`is`making`sure`your`values`line`up`with`how`you`spend`and`save.`
That`means`knowing`where`you`are`financially`and`planning`on`how`to`get`where`you`want`to`be`i
n`the`future`no`matter`what`life`throws`at`you.`For`example,`how`should`your`plan`handle`the`proj
ection`that`Social`Security`costs`may`exceed`revenues`by`2035?`And`what`if`the`government`deci
des`to`raise`tax`rates`to`help`cover`the`federal`deficit?`An`informed`financial`plan`should`reflect`s
uch`uncertainties`and`more.
This`chapter`overviews`the`financial`planning`process`and`explains`its`context.`Topics`include`ho
w`financial`plans`change`to`accommodate`your`current`stage`in`life`and`the`role`that`financial`plan
ners`can`play`in`helping`you`achieve`your`objectives.`After`reading`this`chapter`you`will`have`a`g
ood`perspective`on`how`to`organize`your`overall`personal`financial`plan.
LEARNING`GOALS
LG1`Identify`the`benefits`of`using`personal`financial`planning`techniques`to`manage`your`fi
nances.
Key`concept`in`this`section`is`the`planning`model`as`displayed`in`Exhibit`1.1.`Your`standard`of`liv
ing`is`greatly`impacted`by`your`spending`habits`and`your`commitment`to`saving.`Your`spending`is
`measured`by`your`propensity`to`consume.`Wealth`is`the`total`value`of`all`property`you`own`less
`the`amount`that`you`owe`to`others.
ACTIVITY:` Ask`the`students`to`assume`that`they`have`just`inherited`$100,000.`What`will`you`do
`with`the`money?`Write`down`three`ways`you`will`spend`or`use`the`money.
,Ask`the`students`to`share`one`item`with`the`class`and`record`what`they`say`so`that`the`entire`class`c
an`reflect`on`the`answers.`Hopefully,`at`least`a`few`will`mention`investing`even`if`only`$10,000`of`
the`amount.` Use`their`answers`to`discuss`taking`care`of`current`needs`versus`future`needs.
Focus`on`their`propensity`to`consume`and`its`impact`on`accumulating`wealth.`Point`out`the`Financ
ial`Planning`Tip,`―Be`SMART`in`Planning`Your`Financial`Goals.‖
Use`Exhibit`1.2`to`show`how`the`average`person`earns`and`spends`their`money`and`Exhibit`1.6`to`
help`the`student`identify`where`they`are`now.
LG2`Describe`the`personal`financial`planning`process`and`define`your`goals.
Dwight`Eisenhower,`army`general`and`president,`is`quoted`as`saying`―Plans`are`useless;`Planning`is
`priceless‖.`The`process`of`planning`allows`you`to`focus`on`the`issues`that`are`most`important`and`
to`be`ready`when`things`change.
Exhibit`1.3`lists`the`Six`Step`Financial`Planning`Process.`The`first`and`most`important`is`definin
g`your`financial`goals.`Exhibit`1.6`lists`goals`by`age`to`demonstrate`how`goals`change`over`time.`
Use`the`examples`in`Exhibit`1.5`to`ask`students`if`the`assumptions`are`realistic.`Yes,`the`answer`is
`in`the`exhibit,`but`many`will`not`have`read`chapter`at`this`point.`For`your`use,`the`assumptions`ar
e:
Assumption`1:`Saving`a`few`thousand`dollars`a`year`should`provide`enough`to`fund`my`child‘s`
college`Education.
Assumption`2:`An`emergency`fund`lasting`3`months`should`be`adequate.
Assumption`3:`I`will`be`able`to`retire`at`65`and`should`have`plenty`to`live`on`in`retirement.`
Assumption`4:`I‘m`relying`on`the`rule`of`thumb`that`I`will`need`only`70`percent`of`my`pre-
`retirement`income`to`manage`nicely`in`retirement.
There`are`several`worksheets`in`the`book.`Worksheet`1.1`gives`the`student`a`format`to`write`dow
n`their`Personal`Financial`Goals.`There`is`power`in`writing`down`goals`[and`most`any`other`plan].
`Recording`the`goal`and`then`reviewing`three`months`later`will`help`you`to`keep`focus`on`the`goa
l.
LG3`Explain`the`life`cycle`of`financial`plans,`their`role`in`achieving`your`financial`goals,`h
ow`to`deal`with`special`planning`concerns,`and`the`use`of`professional`financial`planners.
Exhibit`1.7`can`help`focus`the`attention`on`how`goals`differ`between`the`various`stages`of`life.`Se
ction`1-3b`lists`various`decisions`that`you`will`have`to`make`over`your`life.`The`section`1-
3c`addresses`Special`Planning`Concerns.`Worksheet`1.2`focuses`on`the`financial`benefit`to`the`fa
mily`of`the`second`income.`If`the`second`income`is`from`a`minimum`wage`job,`it`may`not`be`a`goo
d`financial`decision.`Of`course`having`a`job,`even`a`minimum`wage`job,`may`give`the`person`psyc
hic`income`that`will`override`the`financial`impact.
While`perhaps`off`topic,`I`recall`a`high`school`science`teacher`who`was`a`smoker.`He`walked`thr
ough`the`amount`of`money`he`spent`on`purchasing`tobacco`products.` That`computation`had`a
, lot`to`do`with`my`decision`to`not`smoke.`How`this`relates`to`the`course`is`that`this`is`an`illustratio
n`of`how`the`financial`impact`of`a`decision`can`drive`the`decision.
LG4`Examine`the`economic`environment’s`influence`on`personal`financial`planning.
For`older`folks,`the`financial`crisis`of`2008-
2009`is`fresh`in`our`memory.`To`the`student`of`2021,`that`crisis`is`more`of`history`than`life.`If`you`
can`share`a`war`story`on`how`you`were`personally`impacted,`it`will`help`bring`the`impact`of`the`w
orld`economy`on`financial`plans`to`life.`The`book`speaks`how`to`manage`this`type`of`crisis,`but`yo
u`had`to`go`through`it`to`really`understand`the`impact`it`had.
The`value`of`professional`advice`is`greatly`understated.`If`by`talking`to`a`professional`you`can`pre
vent`making`a`mistake`--`that`can`be`of`a`great`value.`Section`1-
3e`speaks`to`the`use`of`professional`financial`planners.` Exhibit`1.9`lists`out`the`various`certificatio
ns`that`planners`have.
Economic`or`business`cycles`are`real.`Perhaps`the`most`useful`thing`about`the`cycles`is`the`knowl
edge`that`if`things`are`bad,`you`know`they`will`get`better.` Of`course,`when`life`is`good,`you`know
`that`the`bad`cycle`will`come`around`again.` Thus,`financial`planning`requires`saving`in`the`good`ti
mes`for`the`bad`times.` See`the`―Test`Yourself‖`question`1-
17`for`a`short`discussion`of`business`cycles.
The`power`of`compounding`is`rarely`understood.`Exhibit`1.8`shows`how`the`amount`$10,000`will
`grow`over`time.`The`longer`the`investment`stays`invested,`the`greater`the`amount`–
`the`power`of`compound`interest.
LG5`Evaluate`the`impact`of`age,`education,`and`geographic`location`on`personal`income.
Exhibit`1.12`says`it`all.
LG6`Understand`the`importance`of`career`choices`and`their`relationship`to`personal`financi
al`planning.
Exhibit`1.13`shows`that`the`choice`of`a`college`major`has`a`financial`impact.`Of`course`money`can
not`buy`happiness,`but`having`a`bit`helps.`If`you`really`want`to`be`an`elementary`school`teacher,`y
ou`must`recognize`that`you`will`not`have`as`much`wealth`as`a`lawyer`or`financial`analyst.
The`summary`of`the`learning`goals`at`the`end`of`the`chapter`should`aid`the`student`in`reviewing`t
he`chapter`when`exam`time`comes.`It`will`be`useful`to`point`out`to`the`student`how`to`use`this`m
aterial.
Link`to`Solutions`to`Financial`Planning`Exercises
Pre-tests
Solution Manual for Personal Financial Planning 15th Edition
by Randy Billingsley, Lawrence J. Gitman, Michael D.
Joehnk
,Understanding the Financi ` ``
al Planning Process Chapter
` ` ` `
1
How`Will`This`Affect`Me?
The`heart`of`financial`planning`is`making`sure`your`values`line`up`with`how`you`spend`and`save.`
That`means`knowing`where`you`are`financially`and`planning`on`how`to`get`where`you`want`to`be`i
n`the`future`no`matter`what`life`throws`at`you.`For`example,`how`should`your`plan`handle`the`proj
ection`that`Social`Security`costs`may`exceed`revenues`by`2035?`And`what`if`the`government`deci
des`to`raise`tax`rates`to`help`cover`the`federal`deficit?`An`informed`financial`plan`should`reflect`s
uch`uncertainties`and`more.
This`chapter`overviews`the`financial`planning`process`and`explains`its`context.`Topics`include`ho
w`financial`plans`change`to`accommodate`your`current`stage`in`life`and`the`role`that`financial`plan
ners`can`play`in`helping`you`achieve`your`objectives.`After`reading`this`chapter`you`will`have`a`g
ood`perspective`on`how`to`organize`your`overall`personal`financial`plan.
LEARNING`GOALS
LG1`Identify`the`benefits`of`using`personal`financial`planning`techniques`to`manage`your`fi
nances.
Key`concept`in`this`section`is`the`planning`model`as`displayed`in`Exhibit`1.1.`Your`standard`of`liv
ing`is`greatly`impacted`by`your`spending`habits`and`your`commitment`to`saving.`Your`spending`is
`measured`by`your`propensity`to`consume.`Wealth`is`the`total`value`of`all`property`you`own`less
`the`amount`that`you`owe`to`others.
ACTIVITY:` Ask`the`students`to`assume`that`they`have`just`inherited`$100,000.`What`will`you`do
`with`the`money?`Write`down`three`ways`you`will`spend`or`use`the`money.
,Ask`the`students`to`share`one`item`with`the`class`and`record`what`they`say`so`that`the`entire`class`c
an`reflect`on`the`answers.`Hopefully,`at`least`a`few`will`mention`investing`even`if`only`$10,000`of`
the`amount.` Use`their`answers`to`discuss`taking`care`of`current`needs`versus`future`needs.
Focus`on`their`propensity`to`consume`and`its`impact`on`accumulating`wealth.`Point`out`the`Financ
ial`Planning`Tip,`―Be`SMART`in`Planning`Your`Financial`Goals.‖
Use`Exhibit`1.2`to`show`how`the`average`person`earns`and`spends`their`money`and`Exhibit`1.6`to`
help`the`student`identify`where`they`are`now.
LG2`Describe`the`personal`financial`planning`process`and`define`your`goals.
Dwight`Eisenhower,`army`general`and`president,`is`quoted`as`saying`―Plans`are`useless;`Planning`is
`priceless‖.`The`process`of`planning`allows`you`to`focus`on`the`issues`that`are`most`important`and`
to`be`ready`when`things`change.
Exhibit`1.3`lists`the`Six`Step`Financial`Planning`Process.`The`first`and`most`important`is`definin
g`your`financial`goals.`Exhibit`1.6`lists`goals`by`age`to`demonstrate`how`goals`change`over`time.`
Use`the`examples`in`Exhibit`1.5`to`ask`students`if`the`assumptions`are`realistic.`Yes,`the`answer`is
`in`the`exhibit,`but`many`will`not`have`read`chapter`at`this`point.`For`your`use,`the`assumptions`ar
e:
Assumption`1:`Saving`a`few`thousand`dollars`a`year`should`provide`enough`to`fund`my`child‘s`
college`Education.
Assumption`2:`An`emergency`fund`lasting`3`months`should`be`adequate.
Assumption`3:`I`will`be`able`to`retire`at`65`and`should`have`plenty`to`live`on`in`retirement.`
Assumption`4:`I‘m`relying`on`the`rule`of`thumb`that`I`will`need`only`70`percent`of`my`pre-
`retirement`income`to`manage`nicely`in`retirement.
There`are`several`worksheets`in`the`book.`Worksheet`1.1`gives`the`student`a`format`to`write`dow
n`their`Personal`Financial`Goals.`There`is`power`in`writing`down`goals`[and`most`any`other`plan].
`Recording`the`goal`and`then`reviewing`three`months`later`will`help`you`to`keep`focus`on`the`goa
l.
LG3`Explain`the`life`cycle`of`financial`plans,`their`role`in`achieving`your`financial`goals,`h
ow`to`deal`with`special`planning`concerns,`and`the`use`of`professional`financial`planners.
Exhibit`1.7`can`help`focus`the`attention`on`how`goals`differ`between`the`various`stages`of`life.`Se
ction`1-3b`lists`various`decisions`that`you`will`have`to`make`over`your`life.`The`section`1-
3c`addresses`Special`Planning`Concerns.`Worksheet`1.2`focuses`on`the`financial`benefit`to`the`fa
mily`of`the`second`income.`If`the`second`income`is`from`a`minimum`wage`job,`it`may`not`be`a`goo
d`financial`decision.`Of`course`having`a`job,`even`a`minimum`wage`job,`may`give`the`person`psyc
hic`income`that`will`override`the`financial`impact.
While`perhaps`off`topic,`I`recall`a`high`school`science`teacher`who`was`a`smoker.`He`walked`thr
ough`the`amount`of`money`he`spent`on`purchasing`tobacco`products.` That`computation`had`a
, lot`to`do`with`my`decision`to`not`smoke.`How`this`relates`to`the`course`is`that`this`is`an`illustratio
n`of`how`the`financial`impact`of`a`decision`can`drive`the`decision.
LG4`Examine`the`economic`environment’s`influence`on`personal`financial`planning.
For`older`folks,`the`financial`crisis`of`2008-
2009`is`fresh`in`our`memory.`To`the`student`of`2021,`that`crisis`is`more`of`history`than`life.`If`you`
can`share`a`war`story`on`how`you`were`personally`impacted,`it`will`help`bring`the`impact`of`the`w
orld`economy`on`financial`plans`to`life.`The`book`speaks`how`to`manage`this`type`of`crisis,`but`yo
u`had`to`go`through`it`to`really`understand`the`impact`it`had.
The`value`of`professional`advice`is`greatly`understated.`If`by`talking`to`a`professional`you`can`pre
vent`making`a`mistake`--`that`can`be`of`a`great`value.`Section`1-
3e`speaks`to`the`use`of`professional`financial`planners.` Exhibit`1.9`lists`out`the`various`certificatio
ns`that`planners`have.
Economic`or`business`cycles`are`real.`Perhaps`the`most`useful`thing`about`the`cycles`is`the`knowl
edge`that`if`things`are`bad,`you`know`they`will`get`better.` Of`course,`when`life`is`good,`you`know
`that`the`bad`cycle`will`come`around`again.` Thus,`financial`planning`requires`saving`in`the`good`ti
mes`for`the`bad`times.` See`the`―Test`Yourself‖`question`1-
17`for`a`short`discussion`of`business`cycles.
The`power`of`compounding`is`rarely`understood.`Exhibit`1.8`shows`how`the`amount`$10,000`will
`grow`over`time.`The`longer`the`investment`stays`invested,`the`greater`the`amount`–
`the`power`of`compound`interest.
LG5`Evaluate`the`impact`of`age,`education,`and`geographic`location`on`personal`income.
Exhibit`1.12`says`it`all.
LG6`Understand`the`importance`of`career`choices`and`their`relationship`to`personal`financi
al`planning.
Exhibit`1.13`shows`that`the`choice`of`a`college`major`has`a`financial`impact.`Of`course`money`can
not`buy`happiness,`but`having`a`bit`helps.`If`you`really`want`to`be`an`elementary`school`teacher,`y
ou`must`recognize`that`you`will`not`have`as`much`wealth`as`a`lawyer`or`financial`analyst.
The`summary`of`the`learning`goals`at`the`end`of`the`chapter`should`aid`the`student`in`reviewing`t
he`chapter`when`exam`time`comes.`It`will`be`useful`to`point`out`to`the`student`how`to`use`this`m
aterial.
Link`to`Solutions`to`Financial`Planning`Exercises
Pre-tests
