Type:
Solution Manual
Resource:
Personal Finance Skills
Edition:
1st Edition
Author(s):
Vickie L. Bajtelsmit
CHAPTER 1 THE FINANCIAL PLANNING PROCESS THE LEARNING OBJECTIVES 1. To be able to recognize and internalize the importance of studying personal financial planning. 2. Ability to describe the five steps in the personal financial planning process. 3. Be able to identify the factors that influence personal financial planning decisions. 4. Understand how the elements of a comprehensive financial plan fit together. 5. Use analytical tools that consider opportunity costs and marginal effects in making personal finance decisions. 6. Understand when and how to select qualified financial planning professionals. CHAPTER OUTLINE AND SUMMARY I. Why study personal financial planning? A. What are the benefits of personal financial planning? 1. It will help you make better decisions. 2. Personal finance is a specialized area of study that focuses on individual and household financial decisions, such as budgeting, saving, tax planning, financing major purchases, buying insurance, and investing to achieve long-term goals.. 3. Personal financial planning is the process of developing and implementing an integrated, comprehensive plan designed to meet financial goals, to improve financial well being, and to prepare for financial emergencies. 4. The primary goal of personal financial planning is to develop and achieve financial goals. B. Why do people avoid financial planning? 1. Surveys suggest that most people recognize the need to manage their finances, but admit that they do not do an adequate job of it. 2. Variety of reasons including fear of failure, lack of interest, expect someone else to take care of it, aren’t interested, don’t have the math and finance skills, too busy, and don’t know whom to trust. C. What problems are associated with lack of financial planning? 1. Psychological problems can include stress, worry, embarrassment, anxiety or depression. 2. Unable to handle financial emergencies or unexpected job loss. 3. Victims of “get rich quick” scams. II. The five steps in the personal financial planning process. A. Step 1: Analyze your current financial position. 1. Need to determine your income and expenses. 2. You must collect and organize all of your financial information. 3. Then you must create personal financial statements and establish a baseline against which you measure improvement.
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B. Step 2: Develop short-term and long-term financial goals. 1. Must identify and prioritize specific goals and objectives. 2. Must assess why you have the goals you do. 3. Short-term and long-term goals change over time. C. Step 3: Identify and evaluate alternative strategies for achieving your goals. 1. May need to reduce spending, increase earnings, or do both. 2. Necessary to compare costs and benefits of alternative strategies. D. Step 4: Implement a plan for achieving your goals. 1. Acquire fundamental knowledge and master analytical tools. 2. Make a personal financial plan. E. Step 5: Regularly reevaluate and revise your plan. III. Factors that influence personal financial planning. A. Changing needs over the life cycle. B. Value and attitudes. 1. People have different values and attitudes regarding money. 2. Values are fundamental beliefs about what is important if life. 3. Attitudes are opinions and psychological differences between people that affect their decisions. 4. Risk is your attitude toward uncertainty and is very important in financial planning. C. Life situations. 1. Family make-up and demographic characteristics – such as age, marital status, income, and wealth - significantly affect financial planning. 2. College-educated individuals tend to have higher incomes with more benefits. D. General economic conditions. 1. Economic factors that affect financial planning include inflation, interest rates, employment conditions, political unrest, and global issues. 2. Inflation is the change in the prices of goods and services over time. 3. Inflation is measured by the change in the consumer price index (CPI), reported monthly by the Bureau of Labor Statistics. a. The CPI is a measure of the price of a representative basket of more than 400 household goods and services in the United States market. b. It includes food, housing, consumer goods, gasoline, and clothing. c. Inflation is the percentage change in the CPI from one period to another. d. Calculated as: New value – Old value / Old value. 4. An interest rate is the cost of money or return on invested money. a. Usually expressed as a percentage of the amount lent or borrowed. b. When you borrow money, the interest rate is a cost to you. c. When you invest money, it is a measure of your earnings or return on that investment. d. Interest rates are driven by supply and demand. 1) When there a lot of demand for something (lots of buyers) relative to supply (not as many sellers), the price tends to rise. 2) When there is a lot of supply (lots of sellers) relative to demand (not as may buyers), competition will cause the price to fall.
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e. Federal Reserve Bank (FRB) is the central bank of the United States. f. The FRB (The Fed) controls the money supply and sometimes takes actions to increase or decrease the supply of money. g. The federal funds rate is the rate that banks charge each other for short-term loans. h. The Fed controls monetary policy for the U.S. by taking actions that cause the “Fed Funds Rate” to increase or decrease. 1) When the Fed wants to stimulate the economy, it takes action to decrease interest rates. 2) When the Fed wants to slow the economy, it takes action to increase interest rates. 5. The economic cycle and employment conditions. a. The U.S. economy has historically experienced a pattern of ups and downs that is called the business cycle or economic cycle. 1) A recession is a phase in the economic cycle characterized by reduced business investment and increased unemployment. 2) Economic expansion is a phase in the economic cycle characterized by increasing business investment and employment opportunities. 6. Political unrest and global factors can affect your personal finances. IV. Elements of a comprehensive financial plan. A. Foundation. Acquire necessary tools and skills: Chapters 1-4. B. Securing basic needs – short-term planning: Chapters 5-10. C. Wealth building – long-term planning: Chapters 11-15. D. Wealth protection – insurance and estate planning: Chapters 16-17. V. Making effective decisions. A. Make reasonable assumptions. 1. Should be based on sound reasoning. 2. Should take risk into account. B. Apply marginal reasoning. 1. Marginal reasoning is a method of analysis that considers the increased benefit which would result from a particular decision. 2. Term “marginal” refers to the change in outcome, or the additional benefit, that will result from the decision you make. C. Opportunity cost is a measure of what you have to give up in order to take a particular action. D. Sensitivity analysis is an estimation of the change in outcome that results from a change in assumptions. VI. Selecting qualified financial planning professionals. A. As your life and finances become more complicated, you may need to get some professional help with financial matters. B. What are the factors to consider in choosing a planner? 1. Education. 2. Certification(s). 3. Experience. 4. Reputation. C. How are planners paid?
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1. Fee only – planner charges based on services provided. 2. Commission only – planner receives no payment for financial plan, but receives a commission when you buy a financial product. 3. Fee plus commission – planner charges a fee for financial plan and receives commissions on any financial product sold to you. Fee may be lower than for a fee-only arrangement. 4. Fee offset by commission – planner charges a fee for services but will offset some of the fee for commission earned on products. ADDITIONAL WEBSITE ASSIGNMENTS 1. www.money.cnn.com: Create a chart for a stock that provides data for the last month, quarter, year, three years, and five years. Determine the ticker symbol for a stock. Look up today’s closing prices for the Dow Jones Industrial Average (DJIA) and determine the 30 stocks that make up this index. 2. www.yahoo.com: Compare ratios for a firm you select and other firms in that industry. 3. www.cfp-board.org: Determine what schools in your state offer the course work that is required in order to take the test for the CFP certificate. 4. www.napfa.org: Click on the box entitled, “How to Choose a Financial Advisor” and compare the criteria in your textbook to this advice. 5. www.afcpe.org: Read about this association of financial planning educators and practitioners. 6. www.nefe.org: Read about collaborative efforts to improve financial literacy in the United States. ADDITIONAL MINI-CASES 1. Case 1 – Over My Head in Debt! Joe is a senior in college, majoring in engineering, and is considering proposing marriage to his girlfriend of three years. He is concerned about his credit card debt of $20,000 and his student loans of $20,000. His girlfriend Jane, has no loans because her parents are paying for her college tuition and books and she is working part-time to pay her other expenses while she is in college. a. Why is it important for Joe to talk to Jane about his debt before he proposes marriage? b. What do you think Joe should do about his debt? c. Should Joe propose to Jane? Why? 2. Case 2 – Will I Have to Support My Parents in Their Old Age? Jill is an only child and her parents have paid all her college expenses and still help her now that she has a full time job as an accountant. Her parents are getting ready to retire and are concerned about inflation because they are both going to be 62 years old and may face 30 or more years of being retired. They have Social Security and each of them has a fixed defined
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benefit pension plan from teaching for 30 years. a. Should Jill be concerned about having to help them in the future because of the impact of inflation on their retirement income? b. How can she analyze the risk of her parents needing help in the future? c. What factors should she consider in determining if her parents may have a problem supporting themselves in the future? 3. Case 3 – Does College Pay? Jim is starting his junior year in college and is wondering if it makes sense to continue his studies. During his first two years he played on the school’s nationally ranked football team and paid very little attention to his studies during the fall semesters and had low grades. He loves playing football and would like to make that his career for the next 5-10 years. a. How can Jim use marginal analysis to help him make this decision? b. How much weight should Jim put on his poor academic performance? c. Should he talk to his coach and academic advisor about his decision? TEACHING SUGGESTIONS 1. Have students do the Learning Styles exercise in the text preface during the first class and use it to involve the students in a discussion about different approaches to learning. 2. Use the “Myth or Fact” quiz at the beginning of the chapter as a first quiz to allow students to gauge their knowledge of personal finance. Use it as a springboard for starting the discussion of the chapter. 3. Have students list five benefits they think they can derive from learning more about personal financial planning. Ask them to keep the list until the last week of classes and compare it to a list they make at the end of the semester. 4. Have students list three reasons why they think individuals avoid financial planning. Determine which reason the class thinks is most important and why. 5. Have students list three short term goals they would like to achieve in the next year and three long-term goals they would like to achieve in the next five years. Put the class in two, three, or four person groups and have them compare and discuss the goals they have written down. Prepare a list of common goals and have them present it to the class. 6. Have students discuss the concept of “life cycle” and how it will affect their financial plans. 7. Break the class into groups to discuss the concepts of values, attitudes, and risk and provide at least three examples of each to offer to the class. Discuss reasons why individuals have differences in values, attitudes, and risk and how it will affect their lives. 8. Have students go the www.bankrate.com to explore interest rates on a variety of different types of loans and discuss their findings in class. Ask them to bring to class a copy of the rates they find. 9. Have students complete the activities at the end of the chapter entitled, “Assessing Your Values and Attitudes Toward Money” and “Talking About Money With Your Family” and discuss their findings in class during the second class period.
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CHAPTER 1 THE FINANCIAL PLANNING PROCESS SOLUTIONS TO END OF CHAPTER CASE APPLICATIONS Page 24 in Textbook Case 1-1. And Then There Were Three – A Baby Changes Everything. Re-evaluate the honeymoon plans. - Perhaps a cheaper honeymoon. In addition to the expenses of a new baby, they are going to have new expenses connected with work. - Employee health care coverage on the new jobs needs to be checked, particularly for preexisting conditions. - Company policy concerning family leave should also be examined. - A family decision needs to be made concerning Ellen’s return to work after the baby is born. - Living arrangements may need reexamination. The baby and associated equipment takes space. - Should project two to three year expenses for the baby. Case 1- 2.
Living on the Edge – What Happens If the Car Breaks Down? - Is the car essential? Public transportation would save much more than $400 a year. - If the car is essential, use the present money for repairs. Saving $40 per month will give her $130 for Christmas presents. - She needs an emergency fund of at least three to five months take-home pay. - She needs to reexamine her budget for cutting expenses to allow more savings.
Case 1 – 3.
Costs and Benefits of Graduate School. Consider how certain is a promotion to a management position. Would company provide financial support for studies? How much of a pay increase comes with a management position? Part-time Program. - Longer to complete. - Will continue to receive salary Full-time program - Less time to complete - Earlier promotion - Possible change in corporate needs for management. - Loss of salary Opportunity Costs - Costs of Tuition, Fees and Books. - Initial promotion delay for two year program. - Future salary differences due to one year delay for the two year program
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