SOLUTION MANUAL FOR
Personal Financial Planning 15th Edition by Randy
Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Understanding the
Financial 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
in the future no matter what life throws at you. For example, how should your plan handle the
projection that Social Security costs may exceed revenues by 2035? And what if the government
decides to raise tax rates to help cover the federal deficit? An informed financial plan should
reflect such uncertainties and more.
This chapter overviews the financial planning process and explains its context. Topics include
how financial plans change to accommodate your current stage in life and the role that financial
planners can play in helping you achieve your objectives. After reading this chapter you will
have a good 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
finances.
Key concept in this section is the planning model as displayed in Exhibit 1.1. Your standard of
living 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.
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
,Ask the students to share one item with the class and record what they say so that the entire class
can 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
Financial 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
defining 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 are:
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
down 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 goal.
LG3 Explain the life cycle of financial plans, their role in achieving your financial goals,
how 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.
Section 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
family of the second income. If the second income is from a minimum wage job, it may not be a
good financial decision. Of course having a job, even a minimum wage job, may give the person
psychic income that will override the financial impact.
While perhaps off topic, I recall a high school science teacher who was a smoker. He walked
through the amount of money he spent on purchasing tobacco products. That computation had a
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
,lot to do with my decision to not smoke. How this relates to the course is that this is an
illustration 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 world economy on financial plans to life. The book
speaks how to manage this type of crisis, but you 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
prevent 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 certifications that planners have.
Economic or business cycles are real. Perhaps the most useful thing about the cycles is the
knowledge 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 times 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
financial planning.
Exhibit 1.13 shows that the choice of a college major has a financial impact. Of course money
cannot buy happiness, but having a bit helps. If you really want to be an elementary school
teacher, you 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
the chapter when exam time comes. It will be useful to point out to the student how to use this
material.
Link to Solutions to Financial Planning Exercises
Pre-tests
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
, I have mentioned Pre-test in other places. Simply stated, they work. Students who experience a
pre-test, that is a quiz before you have covered the material, perform better on the exam over the
material and they will learn more from the course. At least they will have a higher grade. For a
discussion of pre-testing, see Craig Shoulders and Sam Hicks, ―ADEPT Learning System‖,
Issues in Accounting Education, May 2008 Volume 23, Number 2, pp 161-182.
Financial Facts or Fantasies?
These may be used as ―teasers‖ to get the students on the right page with you. Also, they may be
used as quizzes after you covered the material or as ―pre-test questions‖ to get their attention.
An improved standard of living is one of the payoffs of sound personal financial
Fact: The heart of sound financial planning and effective money management is the greater
enjoyment of the money one makes by improving one‘s standard of living.
A savings account is an example of a tangible asset because it represents something on deposit at
a bank or other financial institution.
Fantasy: A savings account, like stocks, bonds, and mutual funds, is an example of a financial
asset – an intangible, a ―paper‖ asset. Real assets, in contrast, refer to tangibles –physical items
like houses, cars, and appliances.
Personal financial planning involves translating personal financial goals into specific plans and
arrangements that put these plans into action.
Fact: Personal financial plans are based on the specific financial goals that you set for yourself
and your family. Once in place, the plans are put into action using the various financial strategies
explained in this book.
Over the long run, gaining only an extra percent or two on an investment makes little 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 dollars – that increases the longer the investment is held.
Inflation generally has little effect on personal financial planning.
Fantasy: Inflation is a vital concern in financial planning. This is because inflation affects not
only the prices we pay for the goods and services we consume but also the amount of money we
make. If ignored, inflation can wreak havoc on our budgets and financial plans.
Your income level depends on your age, education, and career choice.
Fact: All three of these variables are important determinants of your income level, particularly
when accompanied by adequate ambition and disciplined work habits.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
Personal Financial Planning 15th Edition by Randy
Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Understanding the
Financial 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
in the future no matter what life throws at you. For example, how should your plan handle the
projection that Social Security costs may exceed revenues by 2035? And what if the government
decides to raise tax rates to help cover the federal deficit? An informed financial plan should
reflect such uncertainties and more.
This chapter overviews the financial planning process and explains its context. Topics include
how financial plans change to accommodate your current stage in life and the role that financial
planners can play in helping you achieve your objectives. After reading this chapter you will
have a good 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
finances.
Key concept in this section is the planning model as displayed in Exhibit 1.1. Your standard of
living 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.
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
,Ask the students to share one item with the class and record what they say so that the entire class
can 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
Financial 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
defining 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 are:
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
down 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 goal.
LG3 Explain the life cycle of financial plans, their role in achieving your financial goals,
how 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.
Section 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
family of the second income. If the second income is from a minimum wage job, it may not be a
good financial decision. Of course having a job, even a minimum wage job, may give the person
psychic income that will override the financial impact.
While perhaps off topic, I recall a high school science teacher who was a smoker. He walked
through the amount of money he spent on purchasing tobacco products. That computation had a
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
,lot to do with my decision to not smoke. How this relates to the course is that this is an
illustration 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 world economy on financial plans to life. The book
speaks how to manage this type of crisis, but you 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
prevent 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 certifications that planners have.
Economic or business cycles are real. Perhaps the most useful thing about the cycles is the
knowledge 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 times 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
financial planning.
Exhibit 1.13 shows that the choice of a college major has a financial impact. Of course money
cannot buy happiness, but having a bit helps. If you really want to be an elementary school
teacher, you 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
the chapter when exam time comes. It will be useful to point out to the student how to use this
material.
Link to Solutions to Financial Planning Exercises
Pre-tests
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
, I have mentioned Pre-test in other places. Simply stated, they work. Students who experience a
pre-test, that is a quiz before you have covered the material, perform better on the exam over the
material and they will learn more from the course. At least they will have a higher grade. For a
discussion of pre-testing, see Craig Shoulders and Sam Hicks, ―ADEPT Learning System‖,
Issues in Accounting Education, May 2008 Volume 23, Number 2, pp 161-182.
Financial Facts or Fantasies?
These may be used as ―teasers‖ to get the students on the right page with you. Also, they may be
used as quizzes after you covered the material or as ―pre-test questions‖ to get their attention.
An improved standard of living is one of the payoffs of sound personal financial
Fact: The heart of sound financial planning and effective money management is the greater
enjoyment of the money one makes by improving one‘s standard of living.
A savings account is an example of a tangible asset because it represents something on deposit at
a bank or other financial institution.
Fantasy: A savings account, like stocks, bonds, and mutual funds, is an example of a financial
asset – an intangible, a ―paper‖ asset. Real assets, in contrast, refer to tangibles –physical items
like houses, cars, and appliances.
Personal financial planning involves translating personal financial goals into specific plans and
arrangements that put these plans into action.
Fact: Personal financial plans are based on the specific financial goals that you set for yourself
and your family. Once in place, the plans are put into action using the various financial strategies
explained in this book.
Over the long run, gaining only an extra percent or two on an investment makes little 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 dollars – that increases the longer the investment is held.
Inflation generally has little effect on personal financial planning.
Fantasy: Inflation is a vital concern in financial planning. This is because inflation affects not
only the prices we pay for the goods and services we consume but also the amount of money we
make. If ignored, inflation can wreak havoc on our budgets and financial plans.
Your income level depends on your age, education, and career choice.
Fact: All three of these variables are important determinants of your income level, particularly
when accompanied by adequate ambition and disciplined work habits.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
© 2025 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
