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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