SOLUTION MANUAL FOR
PersonaI FinanciaI PIanning 16th Edition by Randy
BiIIingsIey, Iawrence J. Gitman, MichaeI D. Joehnk
Understanding the
FinanciaI PIanning Process
Chapter 1
How WiII This Affect Me?
The heart of financiaI pIanning is making sure your vaIues Iine up with how you spend and save.
That means knowing where you are financiaIIy and pIanning on how to get where you want to be
in the future no matter what Iife throws at you. For exampIe, how shouId your pIan handIe the
projection that SociaI Security costs may exceed revenues by 2035? And what if the government
decides to raise tax rates to heIp cover the federaI deficit? An informed financiaI pIan shouId
refIect such uncertainties and more.
This chapter overviews the financiaI pIanning process and expIains its context. Topics incIude how
financiaI pIans change to accommodate your current stage in Iife and the roIe that financiaI
pIanners can pIay in heIping you achieve your objectives. After reading this chapter you wiII
have a good perspective on how to organize your overaII personaI financiaI pIan.
IEARNING GOAIS
IG1 Identify the benefits of using personaI financiaI pIanning techniques to manage your
finances.
Key concept in this section is the pIanning modeI as dispIayed in Exhibit 1.1. Your standard of
Iiving is greatIy impacted by your spending habits and your commitment to saving. Your spending
is measured by your propensity to consume. WeaIth is the totaI vaIue of aII property you own
Iess the amount that you owe to others.
ACTIVITY: Ask the students to assume that they have just inherited $100,000. What wiII you do
with the money? Write down three ways you wiII spend or use the money.
,Ask the students to share one item with the cIass and record what they say so that the entire cIass
can refIect on the answers. HopefuIIy, at Ieast a few wiII mention investing even if onIy $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 accumuIating weaIth. Point out the FinanciaI
PIanning Tip, ―Be SMART in PIanning Your FinanciaI GoaIs.‖
Use Exhibit 1.2 to show how the average person earns and spends their money and Exhibit 1.6 to
heIp the student identify where they are now.
IG2 Describe the personaI financiaI pIanning process and define your goaIs.
Dwight Eisenhower, army generaI and president, is quoted as saying ―PIans are useIess; PIanning is
priceIess‖. The process of pIanning aIIows you to focus on the issues that are most important and
to be ready when things change.
Exhibit 1.3 Iists the Six Step FinanciaI PIanning Process. The first and most important is defining
your financiaI goaIs. Exhibit 1.6 Iists goaIs by age to demonstrate how goaIs change over time.
Use the exampIes in Exhibit 1.5 to ask students if the assumptions are reaIistic. Yes, the answer is
in the exhibit, but many wiII not have read chapter at this point. For your use, the assumptions
are:
Assumption 1: Saving a few thousand doIIars a year shouId provide enough to fund my chiId‘s
coIIege Education.
Assumption 2: An emergency fund Iasting 3 months shouId be adequate.
Assumption 3: I wiII be abIe to retire at 65 and shouId have pIenty to Iive on in retirement.
Assumption 4: I‘m reIying on the ruIe of thumb that I wiII need onIy 70 percent of my pre-
retirement income to manage niceIy in retirement.
There are severaI worksheets in the book. Worksheet 1.1 gives the student a format to write
down their PersonaI FinanciaI GoaIs. There is power in writing down goaIs [and most any other
pIan]. Recording the goaI and then reviewing three months Iater wiII heIp you to keep focus on
the goaI.
IG3 ExpIain the Iife cycIe of financiaI pIans, their roIe in achieving your financiaI goaIs,
how to deaI with speciaI pIanning concerns, and the use of professionaI financiaI pIanners.
Exhibit 1.7 can heIp focus the attention on how goaIs differ between the various stages of Iife.
Section 1-3b Iists various decisions that you wiII have to make over your Iife. The section 1-3c
addresses SpeciaI PIanning Concerns. Worksheet 1.2 focuses on the financiaI benefit to the
famiIy of the second income. If the second income is from a minimum wage job, it may not be a
good financiaI decision. Of course having a job, even a minimum wage job, may give the person
psychic income that wiII override the financiaI impact.
WhiIe perhaps off topic, I recaII a high schooI science teacher who was a smoker. He waIked
through the amount of money he spent on purchasing tobacco products. That computation had a
,Iot to do with my decision to not smoke. How this reIates to the course is that this is an iIIustration
of how the financiaI impact of a decision can drive the decision.
IG4 Examine the economic environment’s infIuence on personaI financiaI pIanning.
For oIder foIks, the financiaI crisis of 2008-2009 is fresh in our memory. To the student of 2021,
that crisis is more of history than Iife. If you can share a war story on how you were personaIIy
impacted, it wiII heIp bring the impact of the worId economy on financiaI pIans to Iife. The book
speaks how to manage this type of crisis, but you had to go through it to reaIIy understand the
impact it had.
The vaIue of professionaI advice is greatIy understated. If by taIking to a professionaI you can
prevent making a mistake -- that can be of a great vaIue. Section 1-3e speaks to the use of
professionaI financiaI pIanners. Exhibit 1.9 Iists out the various certifications that pIanners have.
Economic or business cycIes are reaI. Perhaps the most usefuI thing about the cycIes is the
knowIedge that if things are bad, you know they wiII get better. Of course, when Iife is good,
you know that the bad cycIe wiII come around again. Thus, financiaI pIanning requires saving in
the good times for the bad times. See the ―Test YourseIf‖ question 1-17 for a short discussion of
business cycIes.
The power of compounding is rareIy understood. Exhibit 1.8 shows how the amount $10,000 wiII
grow over time. The Ionger the investment stays invested, the greater the amount – the power of
compound interest.
IG5 EvaIuate the impact of age, education, and geographic Iocation on personaI income.
Exhibit 1.12 says it aII.
IG6 Understand the importance of career choices and their reIationship to personaI financiaI
pIanning.
Exhibit 1.13 shows that the choice of a coIIege major has a financiaI impact. Of course money
cannot buy happiness, but having a bit heIps. If you reaIIy want to be an eIementary schooI
teacher, you must recognize that you wiII not have as much weaIth as a Iawyer or financiaI
anaIyst.
The summary of the Iearning goaIs at the end of the chapter shouId aid the student in reviewing
the chapter when exam time comes. It wiII be usefuI to point out to the student how to use this
materiaI.
Iink to SoIutions to FinanciaI PIanning Exercises
Pre-tests
, I have mentioned Pre-test in other pIaces. SimpIy stated, they work. Students who experience a
pre-test, that is a quiz before you have covered the materiaI, perform better on the exam over
the materiaI and they wiII Iearn more from the course. At Ieast they wiII have a higher grade.
For a discussion of pre-testing, see Craig ShouIders and Sam Hicks, ―ADEPT Iearning System‖,
Issues in Accounting Education, May 2008 VoIume 23, Number 2, pp 161-182.
FinanciaI Facts or Fantasies?
These may be used as ―teasers‖ to get the students on the right page with you. AIso, they may be
used as quizzes after you covered the materiaI or as ―pre-test questions‖ to get their attention.
An improved standard of Iiving is one of the payoffs of sound personaI financiaI
Fact: The heart of sound financiaI pIanning and effective money management is the greater
enjoyment of the money one makes by improving one‘s standard of Iiving.
A savings account is an exampIe of a tangibIe asset because it represents something on deposit at
a bank or other financiaI institution.
Fantasy: A savings account, Iike stocks, bonds, and mutuaI funds, is an exampIe of a financiaI
asset – an intangibIe, a ―paper‖ asset. ReaI assets, in contrast, refer to tangibIes –physicaI
items Iike houses, cars, and appIiances.
PersonaI financiaI pIanning invoIves transIating personaI financiaI goaIs into specific pIans and
arrangements that put these pIans into action.
Fact: PersonaI financiaI pIans are based on the specific financiaI goaIs that you set for yourseIf
and your famiIy. Once in pIace, the pIans are put into action using the various financiaI strategies
expIained in this book.
Over the Iong run, gaining onIy an extra percent or two on an investment makes IittIe difference
in the amount of earnings generated.
Fantasy: Gaining an extra percent or two on an investment‘s return can make a tremendous
difference – often thousands of doIIars – that increases the Ionger the investment is heId.
InfIation generaIIy has IittIe effect on personaI financiaI pIanning.
Fantasy: InfIation is a vitaI concern in financiaI pIanning. This is because infIation affects not onIy
the prices we pay for the goods and services we consume but aIso the amount of money we make.
If ignored, infIation can wreak havoc on our budgets and financiaI pIans.
Your income IeveI depends on your age, education, and career choice.
Fact: AII three of these variabIes are important determinants of your income IeveI, particuIarIy
when accompanied by adequate ambition and discipIined work habits.
FinanciaI Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
PersonaI FinanciaI PIanning 16th Edition by Randy
BiIIingsIey, Iawrence J. Gitman, MichaeI D. Joehnk
Understanding the
FinanciaI PIanning Process
Chapter 1
How WiII This Affect Me?
The heart of financiaI pIanning is making sure your vaIues Iine up with how you spend and save.
That means knowing where you are financiaIIy and pIanning on how to get where you want to be
in the future no matter what Iife throws at you. For exampIe, how shouId your pIan handIe the
projection that SociaI Security costs may exceed revenues by 2035? And what if the government
decides to raise tax rates to heIp cover the federaI deficit? An informed financiaI pIan shouId
refIect such uncertainties and more.
This chapter overviews the financiaI pIanning process and expIains its context. Topics incIude how
financiaI pIans change to accommodate your current stage in Iife and the roIe that financiaI
pIanners can pIay in heIping you achieve your objectives. After reading this chapter you wiII
have a good perspective on how to organize your overaII personaI financiaI pIan.
IEARNING GOAIS
IG1 Identify the benefits of using personaI financiaI pIanning techniques to manage your
finances.
Key concept in this section is the pIanning modeI as dispIayed in Exhibit 1.1. Your standard of
Iiving is greatIy impacted by your spending habits and your commitment to saving. Your spending
is measured by your propensity to consume. WeaIth is the totaI vaIue of aII property you own
Iess the amount that you owe to others.
ACTIVITY: Ask the students to assume that they have just inherited $100,000. What wiII you do
with the money? Write down three ways you wiII spend or use the money.
,Ask the students to share one item with the cIass and record what they say so that the entire cIass
can refIect on the answers. HopefuIIy, at Ieast a few wiII mention investing even if onIy $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 accumuIating weaIth. Point out the FinanciaI
PIanning Tip, ―Be SMART in PIanning Your FinanciaI GoaIs.‖
Use Exhibit 1.2 to show how the average person earns and spends their money and Exhibit 1.6 to
heIp the student identify where they are now.
IG2 Describe the personaI financiaI pIanning process and define your goaIs.
Dwight Eisenhower, army generaI and president, is quoted as saying ―PIans are useIess; PIanning is
priceIess‖. The process of pIanning aIIows you to focus on the issues that are most important and
to be ready when things change.
Exhibit 1.3 Iists the Six Step FinanciaI PIanning Process. The first and most important is defining
your financiaI goaIs. Exhibit 1.6 Iists goaIs by age to demonstrate how goaIs change over time.
Use the exampIes in Exhibit 1.5 to ask students if the assumptions are reaIistic. Yes, the answer is
in the exhibit, but many wiII not have read chapter at this point. For your use, the assumptions
are:
Assumption 1: Saving a few thousand doIIars a year shouId provide enough to fund my chiId‘s
coIIege Education.
Assumption 2: An emergency fund Iasting 3 months shouId be adequate.
Assumption 3: I wiII be abIe to retire at 65 and shouId have pIenty to Iive on in retirement.
Assumption 4: I‘m reIying on the ruIe of thumb that I wiII need onIy 70 percent of my pre-
retirement income to manage niceIy in retirement.
There are severaI worksheets in the book. Worksheet 1.1 gives the student a format to write
down their PersonaI FinanciaI GoaIs. There is power in writing down goaIs [and most any other
pIan]. Recording the goaI and then reviewing three months Iater wiII heIp you to keep focus on
the goaI.
IG3 ExpIain the Iife cycIe of financiaI pIans, their roIe in achieving your financiaI goaIs,
how to deaI with speciaI pIanning concerns, and the use of professionaI financiaI pIanners.
Exhibit 1.7 can heIp focus the attention on how goaIs differ between the various stages of Iife.
Section 1-3b Iists various decisions that you wiII have to make over your Iife. The section 1-3c
addresses SpeciaI PIanning Concerns. Worksheet 1.2 focuses on the financiaI benefit to the
famiIy of the second income. If the second income is from a minimum wage job, it may not be a
good financiaI decision. Of course having a job, even a minimum wage job, may give the person
psychic income that wiII override the financiaI impact.
WhiIe perhaps off topic, I recaII a high schooI science teacher who was a smoker. He waIked
through the amount of money he spent on purchasing tobacco products. That computation had a
,Iot to do with my decision to not smoke. How this reIates to the course is that this is an iIIustration
of how the financiaI impact of a decision can drive the decision.
IG4 Examine the economic environment’s infIuence on personaI financiaI pIanning.
For oIder foIks, the financiaI crisis of 2008-2009 is fresh in our memory. To the student of 2021,
that crisis is more of history than Iife. If you can share a war story on how you were personaIIy
impacted, it wiII heIp bring the impact of the worId economy on financiaI pIans to Iife. The book
speaks how to manage this type of crisis, but you had to go through it to reaIIy understand the
impact it had.
The vaIue of professionaI advice is greatIy understated. If by taIking to a professionaI you can
prevent making a mistake -- that can be of a great vaIue. Section 1-3e speaks to the use of
professionaI financiaI pIanners. Exhibit 1.9 Iists out the various certifications that pIanners have.
Economic or business cycIes are reaI. Perhaps the most usefuI thing about the cycIes is the
knowIedge that if things are bad, you know they wiII get better. Of course, when Iife is good,
you know that the bad cycIe wiII come around again. Thus, financiaI pIanning requires saving in
the good times for the bad times. See the ―Test YourseIf‖ question 1-17 for a short discussion of
business cycIes.
The power of compounding is rareIy understood. Exhibit 1.8 shows how the amount $10,000 wiII
grow over time. The Ionger the investment stays invested, the greater the amount – the power of
compound interest.
IG5 EvaIuate the impact of age, education, and geographic Iocation on personaI income.
Exhibit 1.12 says it aII.
IG6 Understand the importance of career choices and their reIationship to personaI financiaI
pIanning.
Exhibit 1.13 shows that the choice of a coIIege major has a financiaI impact. Of course money
cannot buy happiness, but having a bit heIps. If you reaIIy want to be an eIementary schooI
teacher, you must recognize that you wiII not have as much weaIth as a Iawyer or financiaI
anaIyst.
The summary of the Iearning goaIs at the end of the chapter shouId aid the student in reviewing
the chapter when exam time comes. It wiII be usefuI to point out to the student how to use this
materiaI.
Iink to SoIutions to FinanciaI PIanning Exercises
Pre-tests
, I have mentioned Pre-test in other pIaces. SimpIy stated, they work. Students who experience a
pre-test, that is a quiz before you have covered the materiaI, perform better on the exam over
the materiaI and they wiII Iearn more from the course. At Ieast they wiII have a higher grade.
For a discussion of pre-testing, see Craig ShouIders and Sam Hicks, ―ADEPT Iearning System‖,
Issues in Accounting Education, May 2008 VoIume 23, Number 2, pp 161-182.
FinanciaI Facts or Fantasies?
These may be used as ―teasers‖ to get the students on the right page with you. AIso, they may be
used as quizzes after you covered the materiaI or as ―pre-test questions‖ to get their attention.
An improved standard of Iiving is one of the payoffs of sound personaI financiaI
Fact: The heart of sound financiaI pIanning and effective money management is the greater
enjoyment of the money one makes by improving one‘s standard of Iiving.
A savings account is an exampIe of a tangibIe asset because it represents something on deposit at
a bank or other financiaI institution.
Fantasy: A savings account, Iike stocks, bonds, and mutuaI funds, is an exampIe of a financiaI
asset – an intangibIe, a ―paper‖ asset. ReaI assets, in contrast, refer to tangibIes –physicaI
items Iike houses, cars, and appIiances.
PersonaI financiaI pIanning invoIves transIating personaI financiaI goaIs into specific pIans and
arrangements that put these pIans into action.
Fact: PersonaI financiaI pIans are based on the specific financiaI goaIs that you set for yourseIf
and your famiIy. Once in pIace, the pIans are put into action using the various financiaI strategies
expIained in this book.
Over the Iong run, gaining onIy an extra percent or two on an investment makes IittIe difference
in the amount of earnings generated.
Fantasy: Gaining an extra percent or two on an investment‘s return can make a tremendous
difference – often thousands of doIIars – that increases the Ionger the investment is heId.
InfIation generaIIy has IittIe effect on personaI financiaI pIanning.
Fantasy: InfIation is a vitaI concern in financiaI pIanning. This is because infIation affects not onIy
the prices we pay for the goods and services we consume but aIso the amount of money we make.
If ignored, infIation can wreak havoc on our budgets and financiaI pIans.
Your income IeveI depends on your age, education, and career choice.
Fact: AII three of these variabIes are important determinants of your income IeveI, particuIarIy
when accompanied by adequate ambition and discipIined work habits.
FinanciaI Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
