Solution Manual for Personal Financial Planning1
b b b b b b
5th Edition by Randy Billingsley, Lawrence J. Git
b b b b b b b
man, Michael D. Joehnk
b b b
,SOLUTION MANUAL FOR b b
Personal Financial Planning 15th Edition by Randy Billingsley
b b b b b b b
, Lawrence J. Gitman, Michael D. Joehnk
b b b b b b
Understanding the Financi b b
al Planning ProcessChapter
b b b
1
b
HowbWillbThisbAffectbMe?
Thebheartbofbfinancialbplanningbisbmakingbsurebyourbvaluesblinebupbwithbhowbyoubspendbandbsave.bTh
atbmeansbknowingbwherebyoubarebfinanciallybandbplanningbonbhowbtobgetbwherebyoubwantbtobbebinbthe
bfuturebnobmatterbwhatblifebthrowsbatbyou.bForbexample,bhowbshouldbyourbplanbhandlebthebprojectionb
thatbSocialbSecuritybcostsbmaybexceedbrevenuesbbyb2035?bAndbwhatbifbthebgovernmentbdecidesbtobrai
sebtaxbratesbtobhelpbcoverbthebfederalbdeficit?bAnbinformedbfinancialbplanbshouldbreflectb suchbuncerta
intiesbandb more.
Thisbchapterboverviewsbthebfinancialbplanningbprocessbandbexplainsbitsbcontext.bTopicsbincludebho
wbfinancialbplansbchangebtobaccommodatebyourbcurrentbstagebinblifebandbthebrolebthatbfinancialbplan
nersbcanbplaybinbhelpingbyoubachievebyourbobjectives.bAfterbreadingbthisbchapterbyoubwillbhavebabg
oodbperspectivebonbhowbtoborganizeb yourboverallbpersonalbfinancialbplan.
LEARNING GOALS b
LG1bIdentifybthebbenefitsbofbusingbpersonalbfinancialbplanningbtechniquesbtobmanagebyourbfin
ances.
KeybconceptbinbthisbsectionbisbthebplanningbmodelbasbdisplayedbinbExhibitb1.1.bYourbstandardbofbli
vingbisbgreatlybimpactedbbybyourbspendingbhabitsbandbyourbcommitmentbtobsaving.bYourbspendingb
isbmeasuredbbybyourbpropensitybtobconsume.bWealthbisbthebtotalbvaluebofballbpropertybyoubownble
ssbthebamountbthatb youbowebtobothers.
ACTIVITY:b Askbthebstudentsbtobassumebthatbtheybhavebjustb inheritedb$100,000.b Whatbwillbyoubdob
withbtheb money?bWritebdownbthreebwaysb youbwillbspendborbusebtheb money.
,Askbthebstudentsbtobsharebonebitembwithbthebclassbandbrecordbwhatbtheybsaybsobthatbthebentirebclassbca
nbreflectbonbthebanswers.bHopefully,batbleastbabfewbwillbmentionbinvestingbevenbifbonlyb$10,000bofbt
hebamount.bUsebtheirbanswersbtobdiscussbtakingb carebofbcurrentb needsbversusbfuturebneeds.
Focusbonbtheirbpropensitybtobconsumebandbitsbimpactbonbaccumulatingbwealth.bPointboutbthebF
inancialbPlanningbTip,b ―BebSMARTb inbPlanningb YourbFinancialbGoals.‖
UsebExhibitb1.2btobshowbhowbthebaveragebpersonbearnsbandbspendsbtheirbmoneybandbExhibitb1.6btobhe
lpbthebstudentb identifybwherebtheybareb now.
LG2bDescribebthebpersonalbfinancialbplanningbprocessbandbdefinebyourbgoals.
Dwightb Eisenhower,barmybgeneralbandbpresident,bisbquotedbasbsayingb ―Plansbarebuseless;bPlanningbis
bpriceless‖.bThebprocess bofbplanningballowsbyoubtobfocusbonbthebissuesbthatbarebmostbimportant bandb
tobbebreadybwhenbthingsbchange.
Exhibitb1.3blistsbthebSixbStepbFinancialbPlanningbProcess.bThebfirstbandbmostbimportantbisbdefinin
gbyourbfinancialbgoals.bExhibitb1.6blistsbgoalsbbybagebtobdemonstratebhowbgoalsbchangeboverbtime.
bUsebthebexamplesbinbExhibitb 1.5btobaskbstudentsbifbthebassumptionsbarebrealistic.bYes,bthebanswerbi
sbinbthebexhibit,bbutbmanybwillbnotbhavebreadbchapterbatbthisbpoint.bForbyourbuse,bthebassumptionsba
re:
Assumptionb1:bSavingbabfewbthousandbdollarsbabyearbshouldbprovidebenoughbtobfundbmybchild‘sbc
ollegebEducation.
Assumptionb2:bAnbemergencybfundblastingb3bmonthsbshouldbbebadequate.
Assumptionb3:bIbwillbbebablebtobretirebatb65bandbshouldbhavebplentybtoblivebonbinbretirement.bA
ssumptionb4:bI‘mbrelyingbonbthebrulebofbthumbbthatbIbwillbneedbonlyb70bpercentbofbmybpre-
bretirementb incomebtob managebnicelybinbretirement.
Therebarebseveralbworksheetsbinbthebbook.bWorksheetb1.1bgivesbthebstudentbabformatbtobwritebdown
btheirbPersonalbFinancialbGoals.bTherebisbpowerbinbwritingbdownbgoalsb[andbmostbanybotherbplan].bR
ecordingbthebgoalbandbthenbreviewingbthreebmonthsblaterbwillbhelpbyoubtobkeepbfocusbonbthebgoal.
LG3bExplainbtheblifebcyclebofbfinancialbplans,btheirbrolebinbachievingbyourbfinancialbgoals,bh
owbtobdealbwithbspecialbplanningbconcerns,bandbthebusebofbprofessionalbfinancialbplanners.
Exhibitb1.7bcanbhelpbfocusbthebattentionbonbhowbgoalsbdifferbbetweenbthebvariousbstagesbofblife.bSec
tionb1-3bblistsbvariousbdecisionsbthatbyoubwillbhavebtobmakeboverbyourblife.bThebsectionb1-
3cbaddressesbSpecialbPlanningbConcerns.bWorksheetb1.2bfocusesbonbthebfinancialbbenefitbtobthebfa
milybofbthebsecondbincome.bIfbthebsecondbincomebisbfrombabminimumbwagebjob,bitbmaybnotbbebabgoo
dbfinancialbdecision.b Ofbcoursebhavingbabjob,bevenbab minimumbwageb job,b maybgivebthebpersonbpsych
icb incomebthatb willboverridebtheb financialbimpact.
Whilebperhapsboffbtopic,bIbrecallbabhighbschoolbsciencebteacherbwhobwasbabsmoker.bHebwalkedbthro
ughbthebamountbofbmoneybhebspentbonbpurchasingbtobaccob products.bThatbcomputationbhadba
, lotbtobdobwithbmybdecisionbtobnotbsmoke.bHowbthisbrelatesbtobthebcoursebisbthatbthisbisbanbillustrationb
ofbhowbthebfinancialbimpactbofbabdecisionbcanbdrivebthebdecision.
LG4bExaminebthebeconomicbenvironment’sbinfluencebonbpersonalbfinancialbplanning.
Forbolderbfolks,bthebfinancialbcrisisbofb2008-
2009bisbfreshbinbourbmemory.bTobthebstudentbofb2021,bthatbcrisisbisbmorebofbhistorybthanblife.bIfbyoubc
anbsharebabwarbstorybonbhowbyoubwerebpersonallybimpacted,bitbwillbhelpbbringbthebimpactbofbthebwor
ldbeconomybonbfinancialbplansbtoblife.bThebbookbspeaksbhowbtobmanagebthisbtypebofbcrisis,bbutbyoubh
adbtobgobthroughbitbtobreallybunderstandbthebimpactb itb had.
Thebvaluebofbprofessionalbadvicebisbgreatlybunderstated.bIfbbybtalkingbtobabprofessionalbyoubcanbprev
entbmakingbabmistakeb--bthatbcanbbebofbabgreatbvalue.bSectionb1-
3ebspeaksbtobthebusebofbprofessionalbfinancialbplanners.bExhibitb1.9blistsboutbthebvariousbcertifications
bthatb plannersbhave.
Economicborbbusinessbcyclesbarebreal.bPerhapsbthebmostbusefulbthingbaboutbthebcyclesbisbthebknowl
edgebthatbifbthingsbarebbad,byoubknowbtheybwillbgetbbetter.bOfbcourse,bwhenblifebisbgood,byoubknowbt
hatbthebbadbcyclebwillbcomebaroundbagain.bThus,b financialbplanningbrequiresbsavingbinbt hebgoodbtime
sb forbthebbadbtimes.bb Seebtheb―Testb Yourself‖bquestionb1-
17b forbabshortb discussionbofbbusinessbcycles.
Thebpowerbofbcompoundingbisbrarelybunderstood.bExhibitb1.8bshowsbhowbthebamountb$10,000b
willbgrowboverbtime.bTheblongerbthebinvestmentbstaysbinvested,bthebgreaterbthebamountb–
bthebpowerbofbcompoundb interest.
LG5bEvaluatebthebimpactbofbage,beducation,bandbgeographicblocationbonbpersonalbincome.
Exhibitb1.12bsaysbitball.
LG6bUnderstandbthebimportancebofbcareerbchoicesbandbtheirbrelationshipbtobpersonalbfinancia
lbplanning.
Exhibitb 1.13bshowsbthatbthebchoicebofbabcollegeb majorbhasbabfinancialbimpact.bOfbcoursebmoneybcanno
tbbuybhappiness,bbutbhavingbabbitbhelps.bIfbyoubreallybwantbtobbebanbelementarybschoolbteacher,byoub
mustbrecognizebthatbyoubwillbnotbhavebasbmuchbwealthbasbablawyerborbfinancialbanalyst.
Thebsummarybofbtheblearningbgoalsbatbthebendbofbthebchapterbshouldbaidbthebstudentbinbreviewingbth
ebchapterbwhenbexambtimebcomes.bItbwillbbebusefulbtobpointboutbtobthebstudentbhowbtobusebthisbmat
erial.
LinkbtobSolutionsbtobFinancialbPlanningbExercises
Pre-tests
b b b b b b
5th Edition by Randy Billingsley, Lawrence J. Git
b b b b b b b
man, Michael D. Joehnk
b b b
,SOLUTION MANUAL FOR b b
Personal Financial Planning 15th Edition by Randy Billingsley
b b b b b b b
, Lawrence J. Gitman, Michael D. Joehnk
b b b b b b
Understanding the Financi b b
al Planning ProcessChapter
b b b
1
b
HowbWillbThisbAffectbMe?
Thebheartbofbfinancialbplanningbisbmakingbsurebyourbvaluesblinebupbwithbhowbyoubspendbandbsave.bTh
atbmeansbknowingbwherebyoubarebfinanciallybandbplanningbonbhowbtobgetbwherebyoubwantbtobbebinbthe
bfuturebnobmatterbwhatblifebthrowsbatbyou.bForbexample,bhowbshouldbyourbplanbhandlebthebprojectionb
thatbSocialbSecuritybcostsbmaybexceedbrevenuesbbyb2035?bAndbwhatbifbthebgovernmentbdecidesbtobrai
sebtaxbratesbtobhelpbcoverbthebfederalbdeficit?bAnbinformedbfinancialbplanbshouldbreflectb suchbuncerta
intiesbandb more.
Thisbchapterboverviewsbthebfinancialbplanningbprocessbandbexplainsbitsbcontext.bTopicsbincludebho
wbfinancialbplansbchangebtobaccommodatebyourbcurrentbstagebinblifebandbthebrolebthatbfinancialbplan
nersbcanbplaybinbhelpingbyoubachievebyourbobjectives.bAfterbreadingbthisbchapterbyoubwillbhavebabg
oodbperspectivebonbhowbtoborganizeb yourboverallbpersonalbfinancialbplan.
LEARNING GOALS b
LG1bIdentifybthebbenefitsbofbusingbpersonalbfinancialbplanningbtechniquesbtobmanagebyourbfin
ances.
KeybconceptbinbthisbsectionbisbthebplanningbmodelbasbdisplayedbinbExhibitb1.1.bYourbstandardbofbli
vingbisbgreatlybimpactedbbybyourbspendingbhabitsbandbyourbcommitmentbtobsaving.bYourbspendingb
isbmeasuredbbybyourbpropensitybtobconsume.bWealthbisbthebtotalbvaluebofballbpropertybyoubownble
ssbthebamountbthatb youbowebtobothers.
ACTIVITY:b Askbthebstudentsbtobassumebthatbtheybhavebjustb inheritedb$100,000.b Whatbwillbyoubdob
withbtheb money?bWritebdownbthreebwaysb youbwillbspendborbusebtheb money.
,Askbthebstudentsbtobsharebonebitembwithbthebclassbandbrecordbwhatbtheybsaybsobthatbthebentirebclassbca
nbreflectbonbthebanswers.bHopefully,batbleastbabfewbwillbmentionbinvestingbevenbifbonlyb$10,000bofbt
hebamount.bUsebtheirbanswersbtobdiscussbtakingb carebofbcurrentb needsbversusbfuturebneeds.
Focusbonbtheirbpropensitybtobconsumebandbitsbimpactbonbaccumulatingbwealth.bPointboutbthebF
inancialbPlanningbTip,b ―BebSMARTb inbPlanningb YourbFinancialbGoals.‖
UsebExhibitb1.2btobshowbhowbthebaveragebpersonbearnsbandbspendsbtheirbmoneybandbExhibitb1.6btobhe
lpbthebstudentb identifybwherebtheybareb now.
LG2bDescribebthebpersonalbfinancialbplanningbprocessbandbdefinebyourbgoals.
Dwightb Eisenhower,barmybgeneralbandbpresident,bisbquotedbasbsayingb ―Plansbarebuseless;bPlanningbis
bpriceless‖.bThebprocess bofbplanningballowsbyoubtobfocusbonbthebissuesbthatbarebmostbimportant bandb
tobbebreadybwhenbthingsbchange.
Exhibitb1.3blistsbthebSixbStepbFinancialbPlanningbProcess.bThebfirstbandbmostbimportantbisbdefinin
gbyourbfinancialbgoals.bExhibitb1.6blistsbgoalsbbybagebtobdemonstratebhowbgoalsbchangeboverbtime.
bUsebthebexamplesbinbExhibitb 1.5btobaskbstudentsbifbthebassumptionsbarebrealistic.bYes,bthebanswerbi
sbinbthebexhibit,bbutbmanybwillbnotbhavebreadbchapterbatbthisbpoint.bForbyourbuse,bthebassumptionsba
re:
Assumptionb1:bSavingbabfewbthousandbdollarsbabyearbshouldbprovidebenoughbtobfundbmybchild‘sbc
ollegebEducation.
Assumptionb2:bAnbemergencybfundblastingb3bmonthsbshouldbbebadequate.
Assumptionb3:bIbwillbbebablebtobretirebatb65bandbshouldbhavebplentybtoblivebonbinbretirement.bA
ssumptionb4:bI‘mbrelyingbonbthebrulebofbthumbbthatbIbwillbneedbonlyb70bpercentbofbmybpre-
bretirementb incomebtob managebnicelybinbretirement.
Therebarebseveralbworksheetsbinbthebbook.bWorksheetb1.1bgivesbthebstudentbabformatbtobwritebdown
btheirbPersonalbFinancialbGoals.bTherebisbpowerbinbwritingbdownbgoalsb[andbmostbanybotherbplan].bR
ecordingbthebgoalbandbthenbreviewingbthreebmonthsblaterbwillbhelpbyoubtobkeepbfocusbonbthebgoal.
LG3bExplainbtheblifebcyclebofbfinancialbplans,btheirbrolebinbachievingbyourbfinancialbgoals,bh
owbtobdealbwithbspecialbplanningbconcerns,bandbthebusebofbprofessionalbfinancialbplanners.
Exhibitb1.7bcanbhelpbfocusbthebattentionbonbhowbgoalsbdifferbbetweenbthebvariousbstagesbofblife.bSec
tionb1-3bblistsbvariousbdecisionsbthatbyoubwillbhavebtobmakeboverbyourblife.bThebsectionb1-
3cbaddressesbSpecialbPlanningbConcerns.bWorksheetb1.2bfocusesbonbthebfinancialbbenefitbtobthebfa
milybofbthebsecondbincome.bIfbthebsecondbincomebisbfrombabminimumbwagebjob,bitbmaybnotbbebabgoo
dbfinancialbdecision.b Ofbcoursebhavingbabjob,bevenbab minimumbwageb job,b maybgivebthebpersonbpsych
icb incomebthatb willboverridebtheb financialbimpact.
Whilebperhapsboffbtopic,bIbrecallbabhighbschoolbsciencebteacherbwhobwasbabsmoker.bHebwalkedbthro
ughbthebamountbofbmoneybhebspentbonbpurchasingbtobaccob products.bThatbcomputationbhadba
, lotbtobdobwithbmybdecisionbtobnotbsmoke.bHowbthisbrelatesbtobthebcoursebisbthatbthisbisbanbillustrationb
ofbhowbthebfinancialbimpactbofbabdecisionbcanbdrivebthebdecision.
LG4bExaminebthebeconomicbenvironment’sbinfluencebonbpersonalbfinancialbplanning.
Forbolderbfolks,bthebfinancialbcrisisbofb2008-
2009bisbfreshbinbourbmemory.bTobthebstudentbofb2021,bthatbcrisisbisbmorebofbhistorybthanblife.bIfbyoubc
anbsharebabwarbstorybonbhowbyoubwerebpersonallybimpacted,bitbwillbhelpbbringbthebimpactbofbthebwor
ldbeconomybonbfinancialbplansbtoblife.bThebbookbspeaksbhowbtobmanagebthisbtypebofbcrisis,bbutbyoubh
adbtobgobthroughbitbtobreallybunderstandbthebimpactb itb had.
Thebvaluebofbprofessionalbadvicebisbgreatlybunderstated.bIfbbybtalkingbtobabprofessionalbyoubcanbprev
entbmakingbabmistakeb--bthatbcanbbebofbabgreatbvalue.bSectionb1-
3ebspeaksbtobthebusebofbprofessionalbfinancialbplanners.bExhibitb1.9blistsboutbthebvariousbcertifications
bthatb plannersbhave.
Economicborbbusinessbcyclesbarebreal.bPerhapsbthebmostbusefulbthingbaboutbthebcyclesbisbthebknowl
edgebthatbifbthingsbarebbad,byoubknowbtheybwillbgetbbetter.bOfbcourse,bwhenblifebisbgood,byoubknowbt
hatbthebbadbcyclebwillbcomebaroundbagain.bThus,b financialbplanningbrequiresbsavingbinbt hebgoodbtime
sb forbthebbadbtimes.bb Seebtheb―Testb Yourself‖bquestionb1-
17b forbabshortb discussionbofbbusinessbcycles.
Thebpowerbofbcompoundingbisbrarelybunderstood.bExhibitb1.8bshowsbhowbthebamountb$10,000b
willbgrowboverbtime.bTheblongerbthebinvestmentbstaysbinvested,bthebgreaterbthebamountb–
bthebpowerbofbcompoundb interest.
LG5bEvaluatebthebimpactbofbage,beducation,bandbgeographicblocationbonbpersonalbincome.
Exhibitb1.12bsaysbitball.
LG6bUnderstandbthebimportancebofbcareerbchoicesbandbtheirbrelationshipbtobpersonalbfinancia
lbplanning.
Exhibitb 1.13bshowsbthatbthebchoicebofbabcollegeb majorbhasbabfinancialbimpact.bOfbcoursebmoneybcanno
tbbuybhappiness,bbutbhavingbabbitbhelps.bIfbyoubreallybwantbtobbebanbelementarybschoolbteacher,byoub
mustbrecognizebthatbyoubwillbnotbhavebasbmuchbwealthbasbablawyerborbfinancialbanalyst.
Thebsummarybofbtheblearningbgoalsbatbthebendbofbthebchapterbshouldbaidbthebstudentbinbreviewingbth
ebchapterbwhenbexambtimebcomes.bItbwillbbebusefulbtobpointboutbtobthebstudentbhowbtobusebthisbmat
erial.
LinkbtobSolutionsbtobFinancialbPlanningbExercises
Pre-tests
