Solution Manual for Personal Financial Planning15th
v v v v v v
v Edition by Randy Billingsley, Lawrence J. Gitman, Mi
v v v v v v v
chael D. Joehnk
v v
,SOLUTION MANUAL FOR v v
Personal Financial Planning 15th Edition by Randy Billingsley, La
v v v v v v v v
wrence J. Gitman, Michael D. Joehnk
v v v v v
Understanding the Financial v v v
Planning ProcessChapter 1 v v v
HowvWillvThisvAffectvMe?
Thevheartvofvfinancialvplanningvisvmakingvsurevyourvvaluesvlinevupvwithvhowvyouvspendvandvsave.vTh
atvmeansvknowingvwherevyouvarevfinanciallyvandvplanningvonvhowvtovgetvwherevyouvwantvtovbevinvt
hevfuturevnovmattervwhatvlifevthrowsvatvyou.vForvexample,vhowvshouldvyourvplanvhandlevthevproje
ctionvthatvSocialvSecurityvcostsvmayvexceedvrevenuesvbyv2035?vAndvwhatvifvthevgovernmentvdecide
svtovraisevtaxvratesvtovhelpvcovervthevfederalvdeficit?vAnvinformedvfinancialvplanvshouldvreflectv suc
hvuncertaintiesvandv more.
Thisvchaptervoverviewsvthevfinancialvplanningvprocessvandvexplainsvitsvcontext.vTopicsvincludevho
wvfinancialvplansvchangevtovaccommodatevyourvcurrentvstagevinvlifevandvthevrolevthatvfinancialvpla
nnersvcanvplayvinvhelpingvyouvachievevyourvobjectives.vAftervreadingvthisvchaptervyouvwillvhavevav
goodvperspectivevonvhowvtovorganizev yourvoverallvpersonalvfinancialvplan.
LEARNING GOALS v
LG1vIdentifyvthevbenefitsvofvusingvpersonalvfinancialvplanningvtechniquesvtovmanagevyourvfinanc
es.
KeyvconceptvinvthisvsectionvisvthevplanningvmodelvasvdisplayedvinvExhibitv1.1.vYourvstandardvofvlivi
ngvisvgreatlyvimpactedvbyvyourvspendingvhabitsvandvyourvcommitmentvtovsaving.vYourvspendingvi
svmeasuredvbyvyourvpropensityvtovconsume.vWealthvisvthevtotalvvaluevofvallvpropertyvyouvownvle
ssvthevamountvthatv youvowevtovothers.
ACTIVITY:v Askvthevstudentsvtovassumevthatvtheyvhavev justv inheritedv$100,000.v Whatv willvyouvdov
withvthev money?v Writevdownvthreevwaysv youvwillvspendvorvusevthev money.
,Askvthevstudentsvtovsharevonevitemvwithvthevclassvandvrecordvwhatvtheyvsayvsovthatvtheventirevclas
svcanvreflectvonvthevanswers.vHopefully,vatvleastvavfewvwillvmentionvinvestingvevenvifvonlyv$10,000v
ofvthevamount.vUsevtheirvanswersvtovdiscussvtakingv carevofvcurrentv needsvversusvfuturevneeds.
Focusvonvtheirvpropensityvtovconsumevandvitsvimpactvonvaccumulatingvwealth.vPointvoutvth
evFinancialvPlanningvTip,v ―BevSMARTv invPlanningv YourvFinancialvGoals.‖
UsevExhibitv1.2vtovshowvhowvthevaveragevpersonvearnsvandvspendsvtheirvmoneyvandvExhibitv1.6vtovh
elpvthevstudentv identifyvwherevtheyvarev now.
LG2vDescribevthevpersonalvfinancialvplanningvprocessvandvdefinevyourvgoals.
Dwightv Eisenhower,varmyv generalvandv president,v isvquotedvasvsayingv ―Plansvarevuseless;vPlanningvi
svpriceless‖.vThevprocessvofvplanningvallowsvyouvtovfocusvonvthevissuesvthatvarevmostvimportantva
ndvtov bevreadyvwhenvthingsvchange.
Exhibitv1.3vlistsvthevSixvStepvFinancialvPlanningvProcess.vThevfirstvandvmostvimportantvisvdefining
vyourvfinancialvgoals.vExhibitv1.6vlistsvgoalsvbyvagevtovdemonstratevhowvgoalsvchangevovervtime.v
UsevthevexamplesvinvExhibitv 1.5vtovaskvstudentsvifvthevassumptionsvarevrealistic.vYes,vthevanswervi
svinvthevexhibit,vbutvmanyvwillvnotvhavevreadvchaptervatvthisvpoint.vForvyourvuse,vthevassumption
svare:
Assumptionv1:vSavingvavfewvthousandvdollarsvavyearvshouldvprovidevenoughvtovfundvmyvchild‘svc
ollegevEducation.
Assumptionv2:vAnvemergencyvfundvlastingv3v monthsvshouldvbevadequate.
Assumptionv3:vIvwillvbevablevtovretirevatv65vandvshouldvhavevplentyvtovlivevonvinvretirement.v
Assumptionv4:vI‘mvrelyingvonvthevrulevofvthumbvthatvIvwillvneedvonlyv70vpercentvofvmyvpre-
vretirementv incomevtov managev nicelyvinvretirement.
Therevarevseveralvworksheetsvinvthevbook.vWorksheetv1.1vgivesvthevstudentvavformatvtovwritevdo
wnvtheirvPersonalvFinancialvGoals.vTherevisvpowervinvwritingvdownvgoalsv[andvmostvanyvothervplan
].vRecordingvthevgoalvandvthenvreviewingvthreevmonthsvlatervwillvhelpvyouvtovkeepvfocusvonvthevg
oal.
LG3vExplainvthevlifevcyclevofvfinancialvplans,vtheirvrolevinvachievingvyourvfinancialvgoals,vhowvt
ovdealvwithvspecialvplanningvconcerns,vandvthevusevofvprofessionalvfinancialvplanners.
Exhibitv1.7vcanvhelpvfocusvthevattentionvonvhowvgoalsvdiffervbetweenvthevvariousvstagesvofvlife.vS
ectionv1-3bvlistsvvariousvdecisionsvthatvyouvwillvhavevtovmakevovervyourvlife.vThevsectionv1-
3cvaddressesvSpecialvPlanningvConcerns.vWorksheetv1.2vfocusesvonvthevfinancialvbenefitvtovthevfa
milyvofvthevsecondvincome.vIfvthevsecondvincomevisvfromvavminimumvwagevjob,vitvmayvnotvbevavgo
odvfinancialvdecision.v Ofvcoursevhavingvav job,vevenvav minimumvwagev job,v mayvgivevthevpersonvpsy
chicv incomevthatv willvoverridevthev financialvimpact.
Whilevperhapsvoffvtopic,vIvrecallvavhighvschoolvsciencevteachervwhovwasvavsmoker.vHevwalkedvthr
oughvthevamountvofvmoneyvhevspentv onvpurchasingvtobaccov products.vThatvcomputationvhadva
, lotvtovdovwithvmyvdecisionvtovnotv smoke.vHowvthisvrelatesvtovthevcoursevisvthatvthisvisvanvillustratio
nvofvhowvthevfinancialvimpactvofvavdecisionvcanvdrivevthevdecision.
LG4vExaminevtheveconomicvenvironment’svinfluencevonvpersonalvfinancialvplanning.
Forvoldervfolks,vthevfinancialvcrisisvofv2008-
2009visvfreshvinvourvmemory.vTovthevstudentvofv2021,vthatvcrisisvisvmorevofvhistoryvthanvlife.vIfvyouv
canvsharevavwarvstoryvonvhowvyouvwerevpersonallyvimpacted,vitvwillvhelpvbringvthevimpactvofvthev
worldveconomyvonvfinancialvplansvtovlife.vThevbookvspeaksvhowvtovmanagevthisvtypevofvcrisis,vbutvy
ouvhadvtovgovthroughvitvtovreallyvunderstandvthevimpactv itv had.
Thevvaluevofvprofessionalvadvicevisvgreatlyvunderstated.vIfvbyvtalkingvtovavprofessionalvyouvcanvprev
entvmakingvavmistakev--vthatv canvbevofvavgreatvvalue.vSectionv1-
3evspeaksvtovthevusevofvprofessionalvfinancialvplanners.vExhibitv 1.9vlistsvoutvthevvariousvcertification
svthatvplannersvhave.
Economicvorvbusinessvcyclesvarevreal.vPerhapsvthevmostvusefulvthingvaboutvthevcyclesvisvthevknow
ledgevthatvifvthingsvarevbad,vyouvknowvtheyvwillvgetvbetter.vOfvcourse,vwhenvlifevisvgood,vyouvkno
wvthatvthevbadvcyclevwillvcomevaroundvagain.vThus,v financialvplanningvrequiresvsavingv invt hevgoodvt
imesv forvthevbadvtimes.vv Seevthev ―Testv Yourself‖vquestionv1-
17v forv avshortv discussionvofvbusinessvcycles.
Thevpowervofvcompoundingvisvrarelyvunderstood.vExhibitv1.8vshowsvhowvthevamountv$10,000v
willvgrowvovervtime.vThevlongervthevinvestmentvstaysvinvested,vthevgreatervthevamountv–
vthevpowervofvcompoundv interest.
LG5vEvaluatevthevimpactvofvage,veducation,vandvgeographicvlocationvonvpersonalvincome.
Exhibitv1.12vsaysvitvall.
LG6vUnderstandvthevimportancevofvcareervchoicesvandvtheirvrelationshipvtovpersonalvfinancialvpl
anning.
Exhibitv 1.13vshowsvthatvthevchoicevofvavcollegev majorvhasvavfinancialvimpact.vOfvcoursevmoneyvcann
otvbuyvhappiness,vbutvhavingvavbitvhelps.vIfvyouvreallyvwantvtovbevanvelementaryvschoolvteacher,vyo
uvmustvrecognizevthatvyouvwillvnotvhavevasvmuchvwealthvasvavlawyervorvfinancialvanalyst.
Thevsummaryvofvthevlearningvgoalsvatvthevendvofvthevchaptervshouldvaidvthevstudentvinvreviewin
gvthevchaptervwhenvexamvtimevcomes.vItvwillvbevusefulvtovpointvoutvtovthevstudentvhowvtovusevth
isvmaterial.
LinkvtovSolutionsvtovFinancialvPlanningvExercises
Pre-tests
v v v v v v
v Edition by Randy Billingsley, Lawrence J. Gitman, Mi
v v v v v v v
chael D. Joehnk
v v
,SOLUTION MANUAL FOR v v
Personal Financial Planning 15th Edition by Randy Billingsley, La
v v v v v v v v
wrence J. Gitman, Michael D. Joehnk
v v v v v
Understanding the Financial v v v
Planning ProcessChapter 1 v v v
HowvWillvThisvAffectvMe?
Thevheartvofvfinancialvplanningvisvmakingvsurevyourvvaluesvlinevupvwithvhowvyouvspendvandvsave.vTh
atvmeansvknowingvwherevyouvarevfinanciallyvandvplanningvonvhowvtovgetvwherevyouvwantvtovbevinvt
hevfuturevnovmattervwhatvlifevthrowsvatvyou.vForvexample,vhowvshouldvyourvplanvhandlevthevproje
ctionvthatvSocialvSecurityvcostsvmayvexceedvrevenuesvbyv2035?vAndvwhatvifvthevgovernmentvdecide
svtovraisevtaxvratesvtovhelpvcovervthevfederalvdeficit?vAnvinformedvfinancialvplanvshouldvreflectv suc
hvuncertaintiesvandv more.
Thisvchaptervoverviewsvthevfinancialvplanningvprocessvandvexplainsvitsvcontext.vTopicsvincludevho
wvfinancialvplansvchangevtovaccommodatevyourvcurrentvstagevinvlifevandvthevrolevthatvfinancialvpla
nnersvcanvplayvinvhelpingvyouvachievevyourvobjectives.vAftervreadingvthisvchaptervyouvwillvhavevav
goodvperspectivevonvhowvtovorganizev yourvoverallvpersonalvfinancialvplan.
LEARNING GOALS v
LG1vIdentifyvthevbenefitsvofvusingvpersonalvfinancialvplanningvtechniquesvtovmanagevyourvfinanc
es.
KeyvconceptvinvthisvsectionvisvthevplanningvmodelvasvdisplayedvinvExhibitv1.1.vYourvstandardvofvlivi
ngvisvgreatlyvimpactedvbyvyourvspendingvhabitsvandvyourvcommitmentvtovsaving.vYourvspendingvi
svmeasuredvbyvyourvpropensityvtovconsume.vWealthvisvthevtotalvvaluevofvallvpropertyvyouvownvle
ssvthevamountvthatv youvowevtovothers.
ACTIVITY:v Askvthevstudentsvtovassumevthatvtheyvhavev justv inheritedv$100,000.v Whatv willvyouvdov
withvthev money?v Writevdownvthreevwaysv youvwillvspendvorvusevthev money.
,Askvthevstudentsvtovsharevonevitemvwithvthevclassvandvrecordvwhatvtheyvsayvsovthatvtheventirevclas
svcanvreflectvonvthevanswers.vHopefully,vatvleastvavfewvwillvmentionvinvestingvevenvifvonlyv$10,000v
ofvthevamount.vUsevtheirvanswersvtovdiscussvtakingv carevofvcurrentv needsvversusvfuturevneeds.
Focusvonvtheirvpropensityvtovconsumevandvitsvimpactvonvaccumulatingvwealth.vPointvoutvth
evFinancialvPlanningvTip,v ―BevSMARTv invPlanningv YourvFinancialvGoals.‖
UsevExhibitv1.2vtovshowvhowvthevaveragevpersonvearnsvandvspendsvtheirvmoneyvandvExhibitv1.6vtovh
elpvthevstudentv identifyvwherevtheyvarev now.
LG2vDescribevthevpersonalvfinancialvplanningvprocessvandvdefinevyourvgoals.
Dwightv Eisenhower,varmyv generalvandv president,v isvquotedvasvsayingv ―Plansvarevuseless;vPlanningvi
svpriceless‖.vThevprocessvofvplanningvallowsvyouvtovfocusvonvthevissuesvthatvarevmostvimportantva
ndvtov bevreadyvwhenvthingsvchange.
Exhibitv1.3vlistsvthevSixvStepvFinancialvPlanningvProcess.vThevfirstvandvmostvimportantvisvdefining
vyourvfinancialvgoals.vExhibitv1.6vlistsvgoalsvbyvagevtovdemonstratevhowvgoalsvchangevovervtime.v
UsevthevexamplesvinvExhibitv 1.5vtovaskvstudentsvifvthevassumptionsvarevrealistic.vYes,vthevanswervi
svinvthevexhibit,vbutvmanyvwillvnotvhavevreadvchaptervatvthisvpoint.vForvyourvuse,vthevassumption
svare:
Assumptionv1:vSavingvavfewvthousandvdollarsvavyearvshouldvprovidevenoughvtovfundvmyvchild‘svc
ollegevEducation.
Assumptionv2:vAnvemergencyvfundvlastingv3v monthsvshouldvbevadequate.
Assumptionv3:vIvwillvbevablevtovretirevatv65vandvshouldvhavevplentyvtovlivevonvinvretirement.v
Assumptionv4:vI‘mvrelyingvonvthevrulevofvthumbvthatvIvwillvneedvonlyv70vpercentvofvmyvpre-
vretirementv incomevtov managev nicelyvinvretirement.
Therevarevseveralvworksheetsvinvthevbook.vWorksheetv1.1vgivesvthevstudentvavformatvtovwritevdo
wnvtheirvPersonalvFinancialvGoals.vTherevisvpowervinvwritingvdownvgoalsv[andvmostvanyvothervplan
].vRecordingvthevgoalvandvthenvreviewingvthreevmonthsvlatervwillvhelpvyouvtovkeepvfocusvonvthevg
oal.
LG3vExplainvthevlifevcyclevofvfinancialvplans,vtheirvrolevinvachievingvyourvfinancialvgoals,vhowvt
ovdealvwithvspecialvplanningvconcerns,vandvthevusevofvprofessionalvfinancialvplanners.
Exhibitv1.7vcanvhelpvfocusvthevattentionvonvhowvgoalsvdiffervbetweenvthevvariousvstagesvofvlife.vS
ectionv1-3bvlistsvvariousvdecisionsvthatvyouvwillvhavevtovmakevovervyourvlife.vThevsectionv1-
3cvaddressesvSpecialvPlanningvConcerns.vWorksheetv1.2vfocusesvonvthevfinancialvbenefitvtovthevfa
milyvofvthevsecondvincome.vIfvthevsecondvincomevisvfromvavminimumvwagevjob,vitvmayvnotvbevavgo
odvfinancialvdecision.v Ofvcoursevhavingvav job,vevenvav minimumvwagev job,v mayvgivevthevpersonvpsy
chicv incomevthatv willvoverridevthev financialvimpact.
Whilevperhapsvoffvtopic,vIvrecallvavhighvschoolvsciencevteachervwhovwasvavsmoker.vHevwalkedvthr
oughvthevamountvofvmoneyvhevspentv onvpurchasingvtobaccov products.vThatvcomputationvhadva
, lotvtovdovwithvmyvdecisionvtovnotv smoke.vHowvthisvrelatesvtovthevcoursevisvthatvthisvisvanvillustratio
nvofvhowvthevfinancialvimpactvofvavdecisionvcanvdrivevthevdecision.
LG4vExaminevtheveconomicvenvironment’svinfluencevonvpersonalvfinancialvplanning.
Forvoldervfolks,vthevfinancialvcrisisvofv2008-
2009visvfreshvinvourvmemory.vTovthevstudentvofv2021,vthatvcrisisvisvmorevofvhistoryvthanvlife.vIfvyouv
canvsharevavwarvstoryvonvhowvyouvwerevpersonallyvimpacted,vitvwillvhelpvbringvthevimpactvofvthev
worldveconomyvonvfinancialvplansvtovlife.vThevbookvspeaksvhowvtovmanagevthisvtypevofvcrisis,vbutvy
ouvhadvtovgovthroughvitvtovreallyvunderstandvthevimpactv itv had.
Thevvaluevofvprofessionalvadvicevisvgreatlyvunderstated.vIfvbyvtalkingvtovavprofessionalvyouvcanvprev
entvmakingvavmistakev--vthatv canvbevofvavgreatvvalue.vSectionv1-
3evspeaksvtovthevusevofvprofessionalvfinancialvplanners.vExhibitv 1.9vlistsvoutvthevvariousvcertification
svthatvplannersvhave.
Economicvorvbusinessvcyclesvarevreal.vPerhapsvthevmostvusefulvthingvaboutvthevcyclesvisvthevknow
ledgevthatvifvthingsvarevbad,vyouvknowvtheyvwillvgetvbetter.vOfvcourse,vwhenvlifevisvgood,vyouvkno
wvthatvthevbadvcyclevwillvcomevaroundvagain.vThus,v financialvplanningvrequiresvsavingv invt hevgoodvt
imesv forvthevbadvtimes.vv Seevthev ―Testv Yourself‖vquestionv1-
17v forv avshortv discussionvofvbusinessvcycles.
Thevpowervofvcompoundingvisvrarelyvunderstood.vExhibitv1.8vshowsvhowvthevamountv$10,000v
willvgrowvovervtime.vThevlongervthevinvestmentvstaysvinvested,vthevgreatervthevamountv–
vthevpowervofvcompoundv interest.
LG5vEvaluatevthevimpactvofvage,veducation,vandvgeographicvlocationvonvpersonalvincome.
Exhibitv1.12vsaysvitvall.
LG6vUnderstandvthevimportancevofvcareervchoicesvandvtheirvrelationshipvtovpersonalvfinancialvpl
anning.
Exhibitv 1.13vshowsvthatvthevchoicevofvavcollegev majorvhasvavfinancialvimpact.vOfvcoursevmoneyvcann
otvbuyvhappiness,vbutvhavingvavbitvhelps.vIfvyouvreallyvwantvtovbevanvelementaryvschoolvteacher,vyo
uvmustvrecognizevthatvyouvwillvnotvhavevasvmuchvwealthvasvavlawyervorvfinancialvanalyst.
Thevsummaryvofvthevlearningvgoalsvatvthevendvofvthevchaptervshouldvaidvthevstudentvinvreviewin
gvthevchaptervwhenvexamvtimevcomes.vItvwillvbevusefulvtovpointvoutvtovthevstudentvhowvtovusevth
isvmaterial.
LinkvtovSolutionsvtovFinancialvPlanningvExercises
Pre-tests
