2
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
Chap 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 bein 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 governmentdecides 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 financialplanners 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 yourfinances.
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 propertyyou own less the amount that you owe to others.
ACTIVITY: Ask the students to assume that they have just inherited $100,000. What will youdo with the money?
Write down three ways you will spend or use the money.
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
, 3
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
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 theFinancial
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 tohelp 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, theassumptions are:
Assumption 1: Saving a few thousand dollars a year should provide enough to fund my child‘scollege 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 otherplan]. 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 agood financial decision. Of course having a job, even a minimum wage job,
may give the personpsychic 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
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
, 4
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
lot to do with my decision to not smoke. How this relates to the course is that this is anillustration 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 bookspeaks 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 inthe 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 $10,000 will grow over
time. The longer the investment stays invested, the greater the amount – the power of compound interest.
LG5 Evaluate the impact of age, education, and geographic location on personal income.
Exhibit 1.12 says it all.
LG6 Understand the importance of career choices and their relationship to personalfinancial planning.
Exhibit 1.13 shows that the choice of a college major has a financial impact. Of course moneycannot buy happiness,
but having a bit helps. If you really want to be an elementary school teacher, you must recognize that you will not
have as much wealth as a lawyer or financial analyst.
The summary of the learning goals at the end of the chapter should aid the student in reviewingthe chapter when
exam time comes. It will be useful to point out to the student how to use this material.
Link to Solutions to Financial Planning Exercises
Pre-tests
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
, 5
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
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 thematerial 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 greaterenjoyment 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 ata 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 andarrangements 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 strategiesexplained in this book.
Over the long run, gaining only an extra percent or two on an investment makes little differencein the amount of
earnings generated.
Fantasy: Gaining an extra percent or two on an investment‘s return can make a tremendousdifference – 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 wemake. 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, particularlywhen 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.
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
Chap 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 bein 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 governmentdecides 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 financialplanners 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 yourfinances.
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 propertyyou own less the amount that you owe to others.
ACTIVITY: Ask the students to assume that they have just inherited $100,000. What will youdo with the money?
Write down three ways you will spend or use the money.
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
, 3
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
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 theFinancial
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 tohelp 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, theassumptions are:
Assumption 1: Saving a few thousand dollars a year should provide enough to fund my child‘scollege 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 otherplan]. 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 agood financial decision. Of course having a job, even a minimum wage job,
may give the personpsychic 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
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
, 4
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
lot to do with my decision to not smoke. How this relates to the course is that this is anillustration 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 bookspeaks 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 inthe 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 $10,000 will grow over
time. The longer the investment stays invested, the greater the amount – the power of compound interest.
LG5 Evaluate the impact of age, education, and geographic location on personal income.
Exhibit 1.12 says it all.
LG6 Understand the importance of career choices and their relationship to personalfinancial planning.
Exhibit 1.13 shows that the choice of a college major has a financial impact. Of course moneycannot buy happiness,
but having a bit helps. If you really want to be an elementary school teacher, you must recognize that you will not
have as much wealth as a lawyer or financial analyst.
The summary of the learning goals at the end of the chapter should aid the student in reviewingthe chapter when
exam time comes. It will be useful to point out to the student how to use this material.
Link to Solutions to Financial Planning Exercises
Pre-tests
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
, 5
@#*)($_())$*)$@((@_+@_)__($@+_+_@+_@$)@_#)@+_$()+_$@()$(+_(@$_)@(+_#@@+_#+_#@+@
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 thematerial 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 greaterenjoyment 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 ata 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 andarrangements 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 strategiesexplained in this book.
Over the long run, gaining only an extra percent or two on an investment makes little differencein the amount of
earnings generated.
Fantasy: Gaining an extra percent or two on an investment‘s return can make a tremendousdifference – 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 wemake. 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, particularlywhen 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.
pg. w
solution for Personal Financial Planning, 15th Edition by Randy Billingsley, Lawrence J. Gitman, and Michael D.
Joehnk*@)(*@_)(@_)@*$@u)(_*@$)$@*$@ikm)#)(k#{(@eok#rmd<#_+#(+
