Solution Manual for Personal Financial Planning 15th Edition by Randy Billingsley, Lawrence J. Gitman Complete Verified Chapter's.docx

Solution Manual for Personal Financial
Planning15th Edition by Randy Billingsley,
Lawrence J. Gitman, Michael D. Joehnk

SOLUTION MANUAL FOR
Personal Financial Planning 15th Edition by Randy
Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Understanding the
Financial Planning
ProcessChapter 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.

Ask the students to share one item with the class and record what they say so that the
entire classcan 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 onthe 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

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 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
$10,000will 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
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

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.
These may be used as a quiz or as a pre-test to get the students interested.

1. True False An improved standard of living is one of the payoffs of sound
personalfinancial planning.
2. True False A savings account is an example of a tangible asset because it
representssomething on deposit at a bank or other financial
institution.
3. True False Personal financial planning involves translating personal financial
goalsinto specific plans and arrangements that put these plans
into action.
4. True False Over the long run, gaining only an extra percent or two on an
investmentmakes little difference in the amount of earnings
generated
5. True False Inflation generally has little effect on personal financial planning.
6. True False Your income level depends on your age, education, and career
choice
Answers:
1. True 2. False 3. True 4. False 5. False 6. True
YOU CAN DO IT NOW
The ―You Can Do It Now‖ cases are primary for the student. They may be used in
class to start a discussion of the topic. They will help make the topic more real or
relevant to the students. In most cases, it will only take about five minutes of class
time.
Start a List of Your Financial Goals
Yogi Berra summed it up: ―If you don't know where you're going, you might not get
there.‖ And so, it is with your financial goals. Pick up some paper now and start a list of
your financial goals.Maybe it‘s as simple as saving $25 by the end of the month or as
lofty as saving $200,000 for retirement by the time you‘re 50. You‘ll never achieve your
goals if you don‘t know what they are, much less know whether they‘re realistic. Go
ahead and dream. List your goals (short-term,intermediate, and long-term) and start
laying out how you‘ll get there. You can do it now.
Start Building an Emergency Fund
What would happen if you lost your job, got hurt, or had an unexpected big expense?
Even if you‘re not making much money now, you could start building an emergency
fund by putting aside even $10 a month. As this chapter points out, your goal is to
eventually set aside enough tolast at least 6-month. Considering the risk of not doing
so, you can do it now.
Recognize that YOU are Your Most Important Asset
Your greatest asset is YOU. So, it‘s important to build the value of your best asset by
investing in your education and career. The amount you can consume, save, and invest

your earning ability. Consider that over an entire career, the average bachelor‘s degree
holder will earn $2.1 million, which is about twice what the typical high school grad
earns. (For additional motivating information, see the source of these statistics: The
Hamilton Project at the Brookings Institution,
http://hamiltonproject.org/earnings_by_major/). It‘s so important to realizeyou‘re your
greatest asset and act on it – you can do it now.
Financial Impact of Personal Choices
Read and think about the choices being made. Do you agree or not? Ask the students
to discussthe choices being made.
Andrew Cuts Back on Lunch Out and Lattes
Andrew buys lunch out most days and buys a latte every morning. He believes he could
cut backa bit and save $5 a day, which is $35 a week and $140 a month. So, what's
the impact of this seemingly modest cut-back?
If Andrew invests his $35 savings a week every month at 5 percent, he will have the
following inthe future:
20 years: $57,545
30 years: $116,516
40 years: $213,643
So, the seemingly small act of investing only $5 a day would have a dramatic long-term
effect onAndrew's future accumulated wealth.
Applying Personal Finance
While similar to the ―You can do it now‖ activities, the Applying Personal Finance
projects are longer and more involved activities the student can do to better understand
personal finance.
Generally, the project asked the student to disclose their personal information and
data. As a homework assignment, the student will benefit from doing the assignment,
but there are no rightor wrong answers. Also, there will be a tendency to make up
answers that sound good to the student.
If you choose to assign these projects, grading will be either check the student did
something ornot. Or, you could give an A, C, F for a good attempt, an attempt, or no
attempt.
Taken seriously, the student will benefit from the project. As a graded project, it will be
difficultto grade.
The Chapter 1 project takes the student to the Exhibit 1.4 and asks the student to
examine theirfinancial behavior. Weaknesses may be identified, and the student could
change their behavior to be one that is more conducive to building a solid financial
plan.

Watch Your Attitude!
Many people‘s attitude toward money has as much or more to do with their ability to
accumulatewealth as it does with the amount of money they earn. As observed in
Exhibit 1.4, your attitude toward money influences the entire financial planning process
and often determines whether financial goals become reality or end up being pipe
dreams. This project will help you examine your attitude toward money and wealth so
that you can formulate realistic goals and plans.
Use the following questions to stimulate your thought process.
a. Am I a saver, or do I spend almost all the money I receive?
b. Does it make me feel good just to spend money, regardless of what it‘s for?
c. Is it important for me to have new clothes or a new car just for the sake of having them?
d. Do I have clothes hanging in my closet with the price tags still on them?
e. Do I buy things because they are a bargain or because I need them?
f. Do I save for my vacations, or do I charge everything and take months paying off
my creditcard at high interest?
g. If I have a balance on my credit card, can I recall what the charges were for without
lookingat my statement?
h. Where do I want to be professionally and financially in 5 years? In 10 years?
i. Will my attitude toward money help get me there? If not, what do I need to do?
j. If I dropped out of school today or lost my job, what would I do?
Does your attitude toward money help or hinder you? How can you adjust your attitude
so thatyou are more likely to accomplish your financial goals?

Solutions to Financial Planning Exercises
1. Benefits of Personal Financial Planning. How can using personal financial
planning tools help you improve your financial situation? Describe
changes you can make in at least three areas.
Student answers will vary. In general, personal financial planning tools help
individuals to organize their finances, evaluate their current financial condition,
and track changes intheir financial condition throughout their life to see if they
are making progress toward their financial goals. Use of budgets and financial
statements will provide the information you need to maintain a financial plan.
2. Personal Financial Goals and the Life Cycle. Use Worksheet 1.1.
Describe your current status based on the personal financial planning
life cycle shown in Exhibit
1.7. Fill out Worksheet 1.1, ―Summary of Personal Financial Goals,‖ with
goals reflecting your current situation and your expected life situation in 5
and 10 years. Discuss the reasons for the changes in your goals and how
you’ll need to adapt yourfinancial plans as a result. Which types of financial
plans do you need for your current situation, and why?
Student answers will vary depending on their personal situation. The purpose of
this exercise is to encourage students to focus on how their personal goals and
plans will change over their financial planning life cycle and to help them be
specific in setting theirgoals by designating dollar amounts and dates. Worksheet
1.1 in the chapter lists examples of financial goals.
3. Personal Financial Goals. Recommend three financial goals and related
activitiesfor someone in each of the following circumstances:
a. A junior in college
b. A 30-year-old computer programmer who plans to earn an MBA degree
c. A couple in their 30s with two children, ages 3 and 6
d. A divorced 52-year-old man with a 16-year-old child and a 78-year-old
fatherwho is ill
Student answers will vary. Suggestions may include the following:
a. Junior in college—pay off all credit card debt by graduation; pay off all
student loanswithin 10 years of graduation; save $2,000 for a down payment
on another vehicle during the next 3 years.
b. 30-year old computer programmer who plans to earn an MBA—pay off auto
loan before beginning degree; find a cheaper place to live; set aside $5,000
for emergencyuse during school.

c. Couple in their 30s with two children, ages 3 and 6—begin college fund for
each child; fund Roth IRAs for both parents; max out [that is, put as much
as you can inplan] employer-sponsored retirement plan, such as 401k,
each year.
d. Divorced 52-year old man with a 16-year old child and a 78-year old father
who is ill—engage the help of friends or family in carpooling teenager to
school and activities; explore community or church programs which might
provide assistance forthe father, such as Meals on Wheels or a visitation
program; help father with estate planning needs, hiring an attorney if needed.
4. Life Cycle of Financial Plans. Hudson Ross and Camila Cox are planning to
get married in six months. Both are 30 years old and have been out of
college for severalyears. Hudson uses three credit cards and has a bank
account balance of $7,500 while Camila only uses one credit card and has
$9,500 in her bank account. What financial planning advice would you give
the couple?
Two issues are presented here: Number of credit cards and number of checking
accounts.Having too many credit cards can lower you FICO score and your credit
rating because you have the potential of maxing out on each of the cards and
getting into financial difficulty. Hudson should reduce his cards to one. Camila
should keep her card.
Two bank accounts can work okay if the various expenses are allocated
between the twospouses. If one spouse has the job of paying all the bills, that
spouse needs to have accessto all accounts, which defeats the purpose of
multiple accounts. Most couples have only one checking account. Here the
combined balances are more than they need in their checking account. They
should move about half of their $17,000 to an investment account.
5. Impact of Economic Environment on Financial Planning. Summarize
current andprojected trends in the economy with regard to GDP growth,
unemployment, andinflation. How should you use this information to
make personal financial and career planning decisions?
Answers on economic trends will depend on current economic conditions. If the
GDP is growing, the economy is expanding, and general economic conditions
are considered favorable. Unemployment is probably low, and jobs are
available. If the GDP is slowing,the economy may not be doing well, and jobs
may be scarce. Changes in the CPI indicatethe level of inflation. If inflation is
rising, purchasing power is declining, and you will need more money to achieve
your financial goals. In periods of high inflation, interest rates rise making it more
difficult to afford big-ticket items. Knowledge of current economic conditions can
help you plan the level of savings v spending. In period of inflation, physical
assets [such as real estate] are better than financial assets such as saving
accounts.

6. Financial Impact of Career Decisions. Brooklyn Hughes and Madison
Powell, both freshmen and friends at a major university, are interested in
going into a computersciences career. While they're not just interested in
the money they can make, theydo want to have a sense of the
compensation in that career. What do the data in Exhibit 1.13 tell Brooklyn
and Madison?
The income level of ―computer science and engineering‖ has a median early
career pay of about $72,000 and a median mid-career pay of about $120,000.
These salaries are sufficient to provide for a comfortable standard of living in
most places.
Of course, any of these careers can lead to management positions in large
technologycompanies that can result is a very comfortable standard of living.
In summary, computer science careers look favorable for a high [that is a very,
verycomfortable] standard of living.
7. Career Choices and Financial Planning. Assume that you graduated from
college with a major in marketing and took a job with a large consumer
products company.After three years, you are laid off when the company
downsizes. Describe the steps you’d take to ―repackage‖ yourself for
another field.
Possible steps to ―repackage‖ yourself might include:
 Analyzing skills and experience to identify transferable skills
 Looking for companies in related fields and industries
 Considering your own interests to see if other career paths make sense
 Networking extensively
 Researching fields that use your skills
 Developing functional resume focusing on skills rather than job titles
 Obtaining additional education or training, perhaps obtaining certifications

Critical Thinking Cases
1.1Aaron’s Need to Know: Personal Finance or Golf?
During the Christmas break of his final year at the University of Florida (U of F), Aaron
Barnes plans to put together his résumé in order to seek full-time employment as a
software engineer during the spring semester. To help Aaron prepare for the job
interview process, his older brotherhas arranged for him to meet with a friend, Carolyn
Jenkins, who has worked as a software engineer since her graduation from U of F two
years earlier. Carolyn gives him numerous pointers on résumé preparation, the
interview process, and possible job opportunities.
After answering Aaron‘s many questions, Carolyn asks Aaron to update her on what
he‘s up to atU of F. As they discuss courses, Carolyn shares that of all the electives she
took, the personal financial planning course was most useful. Aaron says that, although
he had considered personalfinancial planning for his last elective, he‘s currently leaning
toward a beginning golf course. Hefeels that the course will be fun because some of his
friends are taking it. He points out that he doesn‘t expect to get rich and already knows
how to balance his checkbook. Carolyn tells him that personal financial planning
involves much more than balancing a checkbook, and that the course is highly relevant
regardless of income level. She strongly believes that the personal financial planning
course will benefit Aaron more than beginning golf—a course that she also took while at
U of F.
Critical Thinking Questions
1. Describe to Aaron the goals and rewards of the personal financial planning process.
2. Explain to Aaron what is meant by the term financial planning and why it is
importantregardless of income.
3. Describe the financial planning environment to Aaron. Explain the role of the
consumer andthe impact of economic conditions on financial planning.
4. What arguments would you present to convince Aaron that the personal financial
planningcourse would benefit him more than beginning golf?
Aaron’s Need to Know: Personal Finance or Golf?
1. Personal financial planning is a process through which financial plans are
developed andimplemented to achieve personal financial goals. An individual
can develop these goals in a fashion consistent with his or her emotional needs
and preferences. As a process, personal financial planning is dynamic and
prospective as well as immediate and retrospective. Furthermore, it can be
adjusted to changes in goals, emotional orientation,available resources, and the
economic environment.
2. Personal financial planning covers the key elements of one‘s financial affairs and
provides a plan to achieve financial goals. Income level is one input in the
process but does not dictate its importance. An efficient, well-developed
personal financial plan can help to maximize an individual‘s wealth and quality of
life given his or her income and goals. If desired goals cannot be met with a
given level of income, financial planning will

help evaluate what is really important, and establish realistic and attainable goals.
Thus,financial planning is important regardless of one‘s income.
3. The personal financial planning environment is made up of three key groups, all
of whichAaron will contact directly or indirectly. Government establishes an
intangible structure in which an economy or society must function. It levies taxes
to fund its operations and institutes regulations which direct and control the
actions of the participants in the economic environment. Businesses produce
goods and services, employ labor, and use land and capital. They receive
money as payment for their goods and services and pay wages, rents, interest,
and profit. Businesses are a key part of the circular flow of incomesupporting our
economy. Businesses establish the price and availability of goods and services
in our economy through competitive interaction with each other and interfacing
with government and consumers. Finally, the consumer is the focal point of the
financialplanning environment. Consumer choices determine the types of
products and services businesses provide. Because consumers are net
providers of funds to government and businesses, their decisions to spend or
save have a major effect on the planning environment. However, government
and businesses place a number of constraints on the environment, and
consumers must therefore function within those limits.
The economy is a dynamic mechanism that reacts to numerous inputs.
Economic fluctuations can cause significant changes in one‘s wealth, thereby
affecting financial plans. Changes in price levels result from increases in
inflation, which can directly affectan individual‘s present and future consumption
patterns, level of wealth, standard of living, and quality of life. Changes in
economic conditions also affect nearly all aspects of one‘s financial life, from
career choices to retirement. Thus, the state of the economy and its fluctuations
are important factors defining the financial planning environment andaffecting
how one implements a financial plan.
4. Although beginning golf would probably provide a great deal of personal
satisfaction, personal finance would, in the long run, provide more benefits. The
personal finance course will help Aaron better understand the financial
environment, thereby allowing himto establish a realistic quality of life and
personal financial goals. He could then develop aplan to achieve his goals and a
methodology for monitoring the ongoing effectiveness of that plan. With an
understanding of the personal finance environment, the financial planning
process, and goal setting techniques, Aaron can optimize the use of his assets,
provide for a secure financial future, and acquire the resources to realize his
quality of life goals. Finally, the rewards achieved from using these financial
planning techniques could, in the future, allow Aaron to take not only beginning
golf but also intermediate golf and possibly join a golf club in the future.

1.2 Cameron’s Dilemma: Finding a New Job
Cameron Foster, a 55-year-old retail store manager earning $85,000 a year, has
worked forthe same company during his entire 30-year career. Cameron was
recently laid off and is still unemployed 10 months later, and his severance pay
and 6 months’ unemployment compensation have run out. Because he has
consistently observed careful financial planning practices, he now has sufficient
savings and investments to carry him through several more months of
unemployment.
Cameron is actively seeking work but finds that he is overqualified for available
lower- paying jobs and underqualified for higher-paying, more desirable
positions. There are noopenings for positions equivalent to the manager’s job
he lost. He lost his wife several years earlier and is close to his two grown
children, who live in the same city.
Cameron has these options:
• Wait out the recession until another retail store manager position opens up.
• Move to another area of the country where store manager positions are more plentiful.
• Accept a lower-paying job for two or three years and then go back to school
evenings tofinish his college degree and qualify for a better position.
• Consider other types of jobs that could benefit from his managerial skills.
Critical Thinking Questions
1. What important career factors should Cameron consider when evaluating his options?
2. What important personal factors should Cameron consider when deciding
among hiscareer options?
3. What recommendations would you give Cameron in light of both the
career andpersonal dimensions of his options noted in Questions 1 and
2?
4. What career strategies should today’s workers employ in order to avoid
Cameron’sdilemma?
This case asks students to consider the long-range implications of career and financial
planning.In today‘s business world, changes in the economy and in corporate
strategies often result in workforce downsizing. Many students may be faced with the
loss of a job during their workingyears. They may find themselves in Cameron‘s
position, overqualified for some jobs and underqualified for others. Knowing what
steps to take to avoid this situation is an important aspect of career and financial
planning.
There are many correct answers to these questions; some possibilities are given below.
1. Important career factors for Cameron to consider when looking for a new job
includesalary, opportunity for advancement, his transferable skills that could
apply to a field other than retailing, availability of benefits, available training
programs, types of

industries and companies (size, work environment, etc.) that interest him,
and tuitionreimbursement policies so he can finish his degree.
2. Personal factors that Cameron should take into account as he investigates job
opportunities include location/need to relocate (his children live in the area),
personal lifestyle needs (is he willing to travel, work overtime, commute
further?), type of worksituation most suitable for him (managing others, part of
a team, level of public contact,etc.), and any personal interests that could open
doors to a new career. (There is some overlap between career and personal
factors.)
3. Cameron should consider a lower-paying job on a short-term basis and at the
same time look for a managerial job in another field. He cannot afford to wait out
the recession; his funds will run out in a few months. This two-pronged approach
is therefore preferable to one or the other. A job at a lower salary, particularly
one with good benefits and a tuition reimbursement policy, would allow him to
finish his degree or obtain other job training toqualify for a better position.
Because he has no dependents, he should be able to cover hisliving expenses,
although he may have to cut back on some discretionary expenses. He should
look in several fields and not limit himself to retailing, particularly if he does not
wish to relocate to another area of the country away from his grown children. If
he is committed to staying in retailing, he probably will have to move. He needs
to determine his personal priorities to make these decisions. We do not have
enough information to know what they would be. He may want to participate in
some career workshops or get some career counseling to work out some of
these issues.
4. There are many strategies today‘s workers can employ to avoid being placed in
Cameron‘s position. Staying with one employer and one basic type of work for
25 years, as Cameron did, will be the exception rather than the rule. Job
changes, whether voluntary or involuntary, should be made with certain
objectives in mind, such as broadening your base of experience and learning
new skills—for example, computer skills and management responsibility.
Keeping up with industry trends and overall economic conditions is very
important. This can alert you to the skills needed for future success and provide
advance warning of possible downsizings. Don‘t allow yourself to be
―pigeonholed‖ into one very specific type of job for too long; look for
opportunities to transfer within your company or to another firm to get more
diverse experience. Think ofyour capabilities in terms of general skills that can
be applied to other jobs, companies, and industries. Develop and maintain a
network of professional contacts in firms and industries that appeal to you and
be willing to share your knowledge with others who need your help.

Test Yourself Questions
1-1 What is a standard of living? What factors affect the quality of life?
Standard of living, which varies from person to person, represents the
necessities, comforts, and luxuries enjoyed by a person. It is reflected in the
material items a personowns, as well as the costs and types of expenditures
normally made for goods and services.
Although many factors such as geographic location, public facilities, local costs of
living,pollution, traffic, and population density affect one‘s quality of life, the main
determinantof quality of life is believed to be wealth.
1-2 Are consumption patterns related to quality of life? Explain.
Generally, consumption patterns are related to quality of life, which depends on
a person‘s socioeconomic strata. This implies that wealthy persons, who are
likely to consume non-necessity items, quite often live higher quality lives than
persons whosewealth permits only consumption of necessities.
1-3 What is average propensity to consume? Is it possible for two people
with verydifferent incomes to have the same average propensity to
consume? Why?
The average propensity to consume is the percentage of each dollar of a
person‘s incomethat is spent (rather than saved), on average, for current needs
rather than savings. Yes, itis quite possible to find two persons with significantly
different incomes with the same average propensity to consume. Many people
will increase their level of consumption astheir incomes rise, i.e., buy a nicer
home or a newer car. Thus, even though they may have more money, they may
still consume the same percentage (or more) of their incomes as before.
1-4 Discuss the various forms in which wealth can be accumulated.
An individual‘s wealth is the accumulated value of all items he or she owns.
People accumulate wealth as either financial assets or tangible assets. Financial
assets are intangible assets such as savings accounts or securities, such as
stocks, bonds and mutualfunds. Financial assets are expected to provide the
investor with interest, dividends, or appreciated value. Tangible assets are
physical items, such as real estate, automobiles, artwork, and jewelry. Such items
can be held for either consumption or investment purposes or both.

1-5 What is the role of money in setting financial goals? What is the
relationship ofmoney to utility?
Money is the exchange medium used as the measure of value in our economy.
Money provides the standard unit of exchange (in the case of the U.S., the dollar)
by which specific personal financial plans—and progress with respect to these
plans—can be measured. Money is therefore the key consideration in
establishing financial plans. Utilityrefers to the amount of satisfaction derived
from purchasing certain types or quantities of goods and services. Since money
is used to purchase these goods and services, it is generally believed that
greater wealth (money) permits the purchase of more and better goods and
services that in turn result in greater utility (satisfaction).
1-6 Explain why financial plans must be psychologically as well as economically sound.
What is the best way to resolve money disputes in a relationship?
Money is not only an economic concept; it is also a psychological one that is
linked through emotion and personality. Each person has a unique personality
and emotional makeup that determines the importance and role of money in his
or her life, as well as one‘s particular money management style. Personal
values also affect one‘s attitudes to money. Money is a primary motivator of
personal behavior and has a strong impact on self-image. To some, money is of
primary importance, and accumulation of wealth is a dominant goal. For others,
money may be less important than lifestyle considerations. Therefore, every
financial plan must be developed with a view towards the wants, needs,and
financial resources of the individual and must also realistically consider his or
her personality, values, and money emotions.
Money is frequently a source of conflict in relationships, often because the
persons involved aren‘t comfortable discussing this emotion-laden topic. Each
person may have different financial goals and personal values, leading to
different opinions on how to spend/save/invest the family‘s money. To avoid
arguments and resolve conflicts, it is essential to first become aware of each
person‘s attitude toward money and his or her money management style, keep
the lines of communication open, and be willing to listenand to compromise. It is
possible to accommodate various money management styles within a
relationship or family by establishing personal financial plans that take individual
needs into account. Some families are able to avoid conflict by establishing
separate accounts, such as yours, mine and household, with a set amount
allocated to each account each pay period. This way, no one feels deprived, and
enough has been setaside to pay the bills and to meet common financial goals.
1-7 Explain why it is important to set realistically attainable financial goals.
Select oneof your personal financial goals and develop a brief financial
plan for achieving it.

Realistic goals are set with a specific focus and a reasonable time frame to
achieve results. It is important to set realistically attainable financial goals
because they form thebasis upon which our financial plans are established. If
goals are little more than ―pipe dreams,‖ then the integrity of the financial plans
would be suspect as well
Students‘ descriptions of the steps to achieve a specific goal will, of course, vary.
They should follow the general guidelines in the chapter: define financial goals,
develop financial plans and strategies to achieve goals, implement financial
plans and strategies, periodically develop and implement budgets to monitor and
control progress toward goals, use financial statements to evaluate results of
plans and budgets, and redefine goalsand revise plans as personal
circumstances change.
1-8 Distinguish between long-term, intermediate, and short-term financial
goals. Giveexamples of each.
Individual time horizons can vary, but in general individuals would expect to
achieve their short-term financial goals in a year or less, intermediate-term
goals in the next 2-5years, and long-term financial goals in more than 5 years.
Refer to Worksheet 1.1 for examples of financial goals.
In making personal financial goals, individuals must first carefully consider their
currentfinancial situation and then give themselves a pathway to reach their
future goals. Peoplein the early stages of their financial planning life cycle may
need more time to accomplish long-term goals than those who are already
established in their careers and may also need to give themselves more
flexibility with their goal dates.
1-9 What types of financial planning concerns does a complete set of
financial planscover?
Financial plans provide the roadmap for achieving your financial goals. The six-
step financial planning process (introduced in Exhibit 1.3) results in separate yet
interrelated components covering all the important financial elements in your
life. Some elements deal with the more immediate aspects of money
management, such as preparing a budgetto help manage spending. Others
focus on acquiring major assets, controlling borrowing,reducing financial risk,
providing for emergency funds and future wealth accumulation, taking
advantage of and managing employer-sponsored benefits, deferring and
minimizing taxes, providing for financial security when you stop working, and
ensuring an orderly and cost effective transfer of assets to your heirs.
1-10 Discuss the relationship of life-cycle considerations to personal financial
planning. What are some factors to consider when revising financial
plans to reflect changesin the life cycle?

Personal needs and goals change as you move through different stages of your
life. So, too, do financial goals and plans, because they are directly influenced
by personal needs.When your personal circumstances change, your goals must
reflect the new situation.
Factors such as job changes, a car accident, marriage, divorce, birth of
children or theneed to care for elderly relatives must be considered in
revising financial plans.
1-11 Cooper Bryant’s investments over the past several years have not lived up
to his fullreturn expectations. He is not particularly concerned, however,
because his return isonly about 2 percentage points below his
expectations. Do you have any advice for Cooper?
The loss of two percentage points on investment returns is anything but
inconsequential,particularly if the loss occurs annually over a period of several
years. For example, if Cooper had invested $1,000 at an 8 percent return and
subsequently had invested all earnings from the initial investment at 8 percent, in
40 years he would have accumulated
$21,725 from the initial $1,000 investment. If, on the other hand, he had earned
a 10 percent return on the same investment, he would have accumulated
$45,259 in 40 years—more than double his return at 8 percent! Clearly, two
percentage points over timecan make a significant difference! Calculate various
rates of return on a $1,000 investment to see that for every 2 percent increase in
return, your investment results will more than double over a 40-year period.
By carefully considering his investment and banking choices, it is likely that
Cooper would be able to get a 2 percent greater rate of return without taking on
additional risk. This can be done both by choosing investments and bank
accounts that hold down expenses, as well as by finding investments of the same
type that have performed better.
1-12 Describe employee benefit and tax planning. How do they fit into the
financialplanning framework?
Employee benefits, such as insurance (life, health, and disability) and pension
and other types of retirement plans, will affect your personal financial planning.
You must evaluatethese benefits so that you have the necessary insurance
protection and retirement funds. Ifyour employer‘s benefits fall short of your
needs, you must supplement them. Therefore, employee benefits must be
coordinated with and integrated into other insurance and retirement plans.
Tax planning involves looking at an individual‘s current and projected earnings
and developing strategies that will defer and/or minimize taxes. For income tax
purposes, income may be classified as active income, passive income, or portfolio
income. Whilemost income is currently subject to income taxes, some may be tax
free or tax deferred.Tax planning considers all these dimensions and more. Tax
planning is an important

element of financial planning because it guides the selection of investment
vehicles andthe form in which returns are to be received. This means that it is
closely tied to investment plans and often dictates certain investment strategies.
1-13 ―There’s no sense in worrying about retirement until you reach
middle age.‖Discuss this point of view.
This statement reflects a very limited and too often expressed point of view. Due
to theinconsistencies and vagaries of our economic system—and of life itself!—
the goals ofand plans for retirement should be established early in life. If
retirement goals are incorporated into an individual‘s financial planning
objectives, short- and long-term financial plans can be coordinated. Thus,
financial plans can guide present actions not only to maximize current wealth
and/or utility, but also to provide for the successful fulfillment of retirement
goals. Furthermore, if retirement is desired earlier than anticipated, the plans
may still permit the fulfillment of retirement goals.
1-14 Discuss briefly how the following situations affect personal financial planning:
a. Being part of a dual-income couple
Couples should discuss their money attitudes and financial goals and decide
how to manage joint financial affairs before they get married. Take an
inventory of your financial assets and liabilities, including savings and
checking accounts; credit card accounts and outstanding bills; auto, health,
and life insurance policies; and investment portfolios. You may want to
eliminate some credit cards. Too many cardscan hurt your credit rating, and
most people need only one or two. Each partner should have a card in his or
her name to establish a credit record. Compare employeebenefit plans to
figure out the lowest-cost source of health insurance coverage, and
coordinate other benefits. Change the beneficiary on your life insurance
policies as desired. Adjust withholding amounts as necessary based on your
new filing category.
b. Major life changes, such as marriage or divorce
Major life changes such as marriage and divorce:
Marriage. Finances must be merged and there may be a need for life insurance.
Divorce. Financial plans based on two incomes are no longer applicable.
Revisedplans must reflect any property settlements, alimony, and/or child
support.

c. Death of a spouse
The surviving spouse is typically faced with decisions on how to receive and
invest lifeinsurance proceeds and manage other assets. In families where the
deceased made mostof the financial decisions with little or no involvement of
the surviving spouse, the survivor may be overwhelmed by the need to take on
financial responsibilities. Advanceplanning can minimize many of these
problems.
1-15 What is a professional financial planner? Does it make any difference
whether the financial planner earns money from commissions made on
products sold as opposedto the fees he or she charges?
Unlike accounting and law, the field professional financial planning field is
largely unregulated, and almost anyone can call themselves a professional
financial planner. Most financial planners are honest and reputable, but there
have been cases of fraudulentpractice. So, it‘s critical to thoroughly check out a
potential financial advisor–preferablyinterview two or three.
Most financial planners fall into one of two categories based on how they are
paid: commissions or fees. Commission-based planners earn commissions on
the financial products they sell, whereas fee-only planners charge fees based on
the complexity of theplan they prepare. Many financial planners take a hybrid
approach and charge fees and collect commissions on products they sell, offering
lower fees if you make product transactions through them.
The way a planner is paid—commissions, fees, or both—should be one of your
major concerns. Obviously, you need to be aware of potential conflicts of interest
when using aplanner with ties to a brokerage firm, insurance company, or bank.
Many planners now provide clients with disclosure forms outlining fees and
commissions or various transaction costs.
1-16 Discuss the following statement: ―The interactions among government,
business, and consumers determine the environment in which personal
financial plans mustbe made.‖
Government, businesses, and consumers are the three major participants in the
economic system. Government provides the structure within which businesses
and consumers function. In addition, it provides a number of essential services
that generally improve thequality of the society in which we live. To create this
structure, various regulations are setforth, and to support its activities and
provision of essential services, taxes are levied.
These activities tend to constrain businesses and consumers.

Businesses provide goods and services for consumers and receive money
payments in return. They also employ certain inputs in producing and selling
goods and services. In exchange they pay wages, rents, interest, and profit.
Businesses are a key component in the circular flow of income that sustains our
economy. They create the competitive environment in which consumers select
from many different types of goods and services.By understanding the role and
actions of businesses on the cost and availability of goodsand services,
consumers can better function in the economic environment and, in turn,
implement more efficient personal wealth maximizing financial plans.
Consumers are the focal point of the personal finance environment. Their
choices ultimately determine the kinds of goods and services that businesses
will provide. Also, consumer spending and saving decisions directly affect the
present and future circular flows of income. Consumers must; however, operate
in the financial environment createdby the actions of government and business.
Consumers may affect change in this environment through their elected officials,
purchasing decisions and/or advocacy groups. Yet, basically, change occurs
slowly and tediously, often with less than favorableresults. Thus, consumers
should attempt to optimize their financial plans within the existing financial
environment.
1-17 What are the stages of an economic cycle? Explain their significance
for yourpersonal finances.
The stages of the economic cycles are expansion, peak, contraction, and trough.
Each of these stages relates to real gross domestic product (GDP), which is an
important indicatorof economic activity. The stronger the economy, the higher
the levels of real GDP and employment. During an expansion, employment is
high, the economy is active and growing, and prices tend to rise. During an
expansion, real GDP increases until it hits a peak, which usually signals the end
of the expansion and the beginning of a contraction. During a contraction, real
GDP falls into a trough, which is the end of a contraction and the beginning of an
expansion. An understanding of these four basic stages, coupled withknowledge
of the stage in which the economy is presently operating, should permit
individuals to adjust and implement financial actions in order to efficiently and
successfully achieve their personal financial goals.
1-18 What is inflation, and why should it be a concern in financial planning?
Inflation is a state of the economy in which the general price level is rising. It is
important in financial planning because it affects what we pay for goods and
services; it impacts how much we earn on our jobs; it directly affects interest
rates and, therefore, it affects such things as mortgage and car loan payments.
The most common measure of inflation is the consumer price index, which is
based on the changes in the cost of a typical ―market basket‖ of consumer
goods and services. This can be used to compare changes in the cost of living
over time for the typical family. Inflation is measured by the

percentage change in the consumer price index from one time period to another,
so that asthe CPI rises, the cost of living also increases.
1-19. ―All people who have equivalent formal education earn similar
incomes.‖ Do youagree or disagree with this statement? Explain your
position.
Disagree. Although higher levels of education may result in higher levels of
income, this does not mean that everyone with a given level of education will
achieve a specified levelof income. Factors such as age, marital status,
geographical location, and career choice also impact a person‘s level of income.
A number of other factors, such as the degree of personal motivation and the
methods by which one utilizes his or her formal education, can also affect one‘s
income level.
1-20 Discuss the need for career planning throughout the life cycle and its
relationship tofinancial planning. What are some of your own personal
career goals?
Career planning is a critical part of the life cycle of the personal financial
planning process. The choice of a career affects the amount you earn. By setting
both short- and long-term career goals, you can incorporate them into your
financial plans. For example, if you need additional education and/or other
training for a particular job, you may include a savings plan to obtain the needed
funds. You should reevaluate your career decision periodically to see if it still
meets your personal and financial goals. Other important considerations with
regard to a specific job (and company) include the earningspotential,
advancement opportunities, and benefits, plus how well the job fits your lifestyle
and values. In today‘s rapidly changing job environment, you should expect to
change careers several times. It is important to keep up with developments in
your industry, acquire a broad base of experience, and continue to learn new
skills, both general and technical.
Each student will, of course, have a different list of personal career goals based
upon hisor her career orientation and goals. However, responses should include
discussion of personal financial planning and associated career planning goals
and how a career choicewould best fulfill quality of life, standard of living, and
wealth maximization objectives.Goals might include getting a bachelor‘s,
master‘s or other degree, working in a specificindustry, owning one‘s own
business, finding a job in a different area of the country or overseas, achieving a
desired salary and/or responsibility level by a certain age, or finding a job that
meets lifestyle needs.

Key Terms
average propensity to
consume The percentage of each dollar of income, on average, that a
person spendsfor current needs rather than savings.
consumer price
index (CPI) A measure of inflation based on changes in the cost of
consumer goodsand services.
contraction The phase of the economic cycle when real GDP falls.
expansion The phase of the economic cycle when levels of employment and
production are high and the economy is growing, generally
accompaniedby rising prices for goods and services.
financial assets Intangible assets, such as savings accounts and securities, that are
acquiredfor some promised future return.
financial goals Results that an individual wants to attain, such as buying a home,
buildinga college fund, or achieving financial independence.
flexible-benefit
(cafeteria) plan A type of employee benefit plan wherein the employer allocates a
certain amount of money and then the employee ―spends‖ that
money for benefits selected from a menu covering everything from
childcare to health and lifeinsurance to retirement benefits.
goal dates Target dates in the future when certain financial objectives are
expected tobe completed.
gross domestic
product (GDP) The total of all goods and services produced in a country; used to
monitoreconomic growth.
inflation A state of the economy in which the general price level is increasing.
money The medium of exchange used as a measure of value in
financialtransactions.
peak The phase of the economic cycle when an expansion
ends, and acontraction begins.
personal financial planning A systematic process that considers important elements of
anindividual‘s financial affairs in order to fulfill financial goals.

professional
financial planner An individual or firm that helps clients establish financial
goals anddevelop and implement financial plans to achieve
those goals.
standard of living The necessities, comforts, and luxuries enjoyed or desired by an
individualor family.
tangible assets Physical assets, such as real estate and automobiles, that can
be held foreither consumption or investment purposes.
trough The phase of the economic cycle when a contraction ends
and anexpansion begins.
utility The amount of satisfaction received from purchasing certain
types orquantities of goods and services.
wealth The total value of all items owned by an individual such as
savingsaccounts, stocks, bonds, home, and automobiles.

Chapter Outline
Learning Goals
I. The Rewards of Sound Financial Planning
A. Improving Your Standard of Living
B. Spending Money Wisely
1. Current Needs
2. Future Needs
C. Accumulating Wealth
*Test Yourself*
II. The Personal Financial Planning Process
A. Steps in the Financial Planning Process
B. Defining Your Financial Goals
1. The Role of Money
2. The Psychology of Money
C. Money and Relationships
D. Types of Financial Goals
E. Putting Target Dates on Financial Goals
1. Long-term Goals
2. Short-term Goals and Intermediate Goals
*Test Yourself*
III. From Goals to Plans: A Lifetime of Planning
A. The Life Cycle of Financial Plans
B. Plans to Achieve Your Financial Goals
1. Asset Acquisition Planning
2. Liability and Insurance Planning
3. Savings and Investment Planning
4. Employee Benefit Planning
5. Tax Planning
6. Retirement and Estate Planning
C. Special Planning Concerns
1. Managing Two Incomes
2. Managing Employee Benefits
3. Managing Your Finances in Tough Economic Times
4. Adapting to Other Major Life Changes
D. Technology in Financial Planning
E. Using Professional Financial Planners
F. Types of Planners
G. Choosing a Financial Planner
*Test Yourself*

VI. The Planning Environment
A. The Players
1. Government
a. Taxation
b. Regulation
2. Business
3. Consumers
B. The Economy
1. Economic Cycles
2. Inflation, Prices, and Planning
*Test Yourself*
V. What Determines Your Personal Income?
A. Demographics and Your Income
B. Your Education
C. Where You Live
D. Your Career
E. Planning Your Career
*Test Yourself*
Summary
Key
Terms
Financial Planning
ExercisesApplying
Personal Finance
Watch Your Attitude!
Critical Thinking Cases
1.1 Aaron’s Need to Know: Personal Finance or Golf?
1.2 Cameron’s Dilemma: Finding a New Job
Using Financial
Statements and
BudgetsChapter 2
How Will This Affect Me?

A recent survey shows that more than half of adult Americans could not cover 6 months
of livingexpenses or the cost of medical emergencies. And younger millennials between
the ages of 18 and 24 are the least prepared*. These are scary findings … and this
chapter shows what you can do to avoid being part
of these alarming statistics.
Everyone knows it‘s hard to get where you need to go if you don‘t know where you
are. Financial goals describe your destination, and financial statements and budgets
are the tools thathelp you determine exactly where you are in the journey. This chapter
helps you define your financial goals and explains how to gauge your progress
carefully over time.
Hopefully most of your students have had a semester of financial accounting. If so,
while thischapter will be a review for them, they may need help understanding the
differences betweencash and accrual accounting. The chapter deals with cash
accounting; the previous accountingcourse dealt with accrual accounting. If they
have not had an accounting course, the students may have a hard time. If this
material is new to them, it will be helpful if you go over worksheets (2.1 and 2.2) and
then discuss the Financial Planning Exercises 3 (preparing a balance sheet) and 4
(preparing an income statement).
LEARNING GOALS
LG1 Understand the relationship between financial plans and statements.
The statement above ―it‘s hard to get where you need to go if you don‘t know where
you are‖ is very true. There are three basic financial statements: Balance Sheet,
Income Statement, and Budget. The balance sheet tells you where you are as of a
stated date. The income statement reports the income and expenses of the most
recent period, be it a year, quarter or month.
Th
ebudget is a forward-looking document that reports your plan for the next period [five
years, oneyear, quarter or month]. If your balance sheet is not consistent with your
financial goal, you know you need to make some changes.
Note the ―Financial Road Sign‖ that discusses the 50/30/20 rule.
• 50 percent of income goes to living expenses and necessities (needs), which
include rent,utilities, groceries, insurance, and transportation.
• 30 percent of income goes to flexible spending (wants), which includes everything
you wantbut don‘t need to buy. Examples are spending money on eating out, movies,
and travel.
• 20 percent of income goes to meeting financial goals, which are achieved
through saving, investments, building up and maintaining an emergency fund, and
payments to reduce debts.
To get a feel for where your students are in their ability to account for their financial
transactions, ask the students if they have a checking account. Then ask them if they
know thebalance of that account. Exhibit 2.1 presents the impact of the financial
statements on the financial plan. The statements give feedback to the plan.

LG2 Prepare a personal balance sheet.
The Balance Sheet computes the net worth [assets less liabilities] as of a given date.
By comparing the current balance sheet with the previous one from a year ago, you
can see if you are moving toward your goal, or not. While liquid assets and
investments may look the same, their purpose is very different. The liquid assets are
available to spend or pay off debt, while theinvestments are for the long term. Recall
that here we are discussing personal balance sheet.
Therefore, the concept of depreciation is not the same as with generally accepted
accounting principles (GAAP). With GAAP, depreciation is the allocation of a past cost
over its useful life.With a personal balance sheet, depreciation is a decline in value – the
assets are stated at their market value. Accordingly, it is common for personal property
to decline in value and real property to increase in value – though it is not guaranteed.
Liabilities are amounts owed to others. The classification as current [due within one
year] and long-term is important. The current liabilities have to be paid in the short run,
while long-term liabilities may be paid in the future or be paid with a monthly payment –
which is a current liability. Worksheet 2.1 gives a format for a personal balance
sheet—a fill-in-the-blanks approach that is useful for financial planning. In the chapter,
the worksheet includes example data for Dylan and Julia Butler. Note that the
worksheet computes the net worth as the assets less liabilities. While it may be
computed as the original net worth plus or minus cumulative netincome since the
individual or family started keeping records, the extra work is not useful.
Simply compute as assets less liabilities.
Exhibit 2.2 gives the student hope that in the future they will have a net worth.
LG3 Generate a personal income and expense statement.
While the balance sheet reports financial position as of a given day, the income
statement coversa stated period, typically a month or year. The Financial Planning
Exercises Number 4 should lead the students to consider what income is. The exercise
asks the question is income gross pay or net pay. If you take the position that it is net
pay, you are saying that you have no control overthe payroll deductions. But you can
control at least some of them and your actions should be consistent with your financial
plan. You decide how many exemptions to claim for withholding income taxes. You may
have some choice as to what health insurance you select, what life insurance to select,
or perhaps other benefits such as childcare or additional health benefits. The expenses
you can control are typically referred to as variable expenses and those you have no
control over are fixed expenses. You can control whether or not to incur a fixed
expense [to have cable TV or not], but once you decide to incur the item it is fixed for
future periods.
Worksheet 2.2 lists the typical income and expenses items. The example for Dylan and
Julia Butler gives the students an example of an income statement. Exhibit 2.3 reports
how we spendour after-tax income, at least the average amount we spend for various
items.

LG4 Develop a good record-keeping system and use ratios to evaluate personal
financialstatements.
Without records, you are flying blind. It‘s like the person who says they can spend
money as long as they have a check in their checkbook. Records give you a way to
prepare financial reports which allow you to evaluate where you are on your financial
plan. There is inexpensivesoftware that will help you keep records, but you still have to
record the transactions in order tohave data for your financial statements.
With financial statements you may use ratio analysis to better understand how you are
doing. Exhibit 2.5 gives a list of useful ratios. It will be useful to do some sensitivity
analysis, that is,ask the students is it good or bad to move from a solvency ratio of
35% to 50%; liquidity ratiofrom 13% to 8%; and so on. This will help student
understand the information in the ratio.
LG5 Construct a cash budget and use it to monitor and control spending.
The income statement reports the cash surplus or deficit for the period. But is the surplus of
$2,000 good or not. You need something to compare it to. Frequently you compare to
the previous period. While that is better than no comparison, comparing to your
planned surplus is better. Your planned surplus is the bottom line of your budget. The
budget is a statement in dollars of your planned income and expenses for the period,
typically month or year. By comparing the current expenses with budgeted expenses,
you create a budget variance. That variance tells you if you need to hold the course or
change your direction. The actual income orexpense compared to the budgeted
amount gives you the ability to monitor and control your expenses.
Worksheet 2.3 gives a common format for a cash budget, your planned expenditures for
the year.The cash budget for Dylan and Julia Butler is an example. Worksheet 2.4 gives
an example of comparing actual to budget and the resulting variance.
LG6 Apply time value of money concepts to put a monetary value on financial goals.
Financial plans are concerned with what future amounts you will need to be able to
provide for your desired lifestyle at that time. Since the time is in the future, typically you
need to apply theconcept called the time value of money, the idea that a dollar today is
worth more than a dollarreceived or spent in the future. Hopefully your students have
been exposed to this concept in previous courses. If not, use short time periods [3 or 5
years] to demonstrate the concept.
Perhaps use financing of a car as an example: You can pay $20,000 today or $400 per
month for5 years. With a 6% annual rate, the present value of an annuity of $400 per
month, for 60 months, at .06/12 monthly rate, is $20,690. If you are OK with a 6% rate,
pay cash.
The book discusses spreadsheets financial functions such as PV, FV, and PMT. Also,
the use ofa financial calculator and timelines are discussed. It depends upon the
culture of your program whether you use calculators or spreadsheets. The Rule of 72
is very useful for quick comparisons. Discuss it.

LG7 Understand the relationship between inflation and nominal interest rates
andcalculate the real interest rate.
The interest rate used in time value of money computations matters. The appropriate
rate is the inflation adjusted rate. In the example in the text, the nominal rate of 8%
becomes an inflation rate of 4.85% if you expect 3% inflation. The Fisher equation
which computes the inflation adjusted rate is discussed. The best way to handle
inflation in long-term financial planning decisions is first to consider prevailing
forecasts of future inflation. The next step is to incorporate the effect of those
inflationary expectations on future cash flows. Then the rates youuse to plan are
considered inflation adjusted rates.
Link to Solutions to Financial Planning Exercises
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.
• Whereas the balance sheet summarizes your financial condition at a given point in
time, theincome and expense statement report on your financial performance over
time.
Fact: A balance sheet is like a photograph of your financial condition (covering just one
day outof the year), while an income and expense statement is like a motion picture
(covering the full year or some other time period).
• Because financial statements are used to record actual results, they‘re really not that
importantin personal financial planning.
Fantasy: Personal financial statements let you know where you stand financially. As
such, theynot only help you set up realistic financial plans and strategies but also
provide a system for monitoring the amount of progress you‘re making toward the
financial goals you've set.
• A leased car should be listed as an asset on your personal balance sheet.
Fantasy: You are only ―using‖ the leased car and do not own it. Consequently, it should
not be included as an asset on the balance sheet.
• Only the principal portion of a loan should be recorded on the liability side of a balance sheet.
Fact: The principal portion of a loan represents the unpaid balance and is the amount of
moneyyou owe. In contrast, interest is a charge that will be levied over time for the use
of the money.
• Generating a cash surplus is desirable, because it adds to your net worth.

Fact: You can only increase your net worth by generating a cash surplus, someone
giving you additional assets, or through increases in market values. The only one of the
three you control isgenerating cash surplus.
• When evaluating your income and expenses statement, primary attention should be
given to thetop line: income received.
Fantasy: If you focus on only income and ignore expenses, you will quickly find
yourself witha cash deficit and your net worth will decrease. Expenses are equally
important and must be controlled.

These may be used as a quiz or as a pre-test to get the students interested.
1. True False Whereas the balance sheet summarizes your financial condition at a
given point in time, the income and expense statement report on your
financial performance overtime.
2. True False Because financial statements are used to record actual results, they‘re
really notthat important in personal financial planning.
3. True False A leased car should be listed as an asset on your personal balance sheet.
4. True False Only the principal portion of a loan should be recorded on the liability
side of abalance sheet.
5. True False Generating a cash surplus is desirable, because it adds to your net worth.
6. True False When evaluating your income and expenses statement, primary
attention shouldbe given to the top line: income received.
Answers: 1. True 2. False 3. False 4. True 5. True 6. False
YOU CAN DO IT NOW
The ―Do It Now‖ cases may be assigned to the students as short cases or problems.
They will help make the topic more real or relevant to the students. In most cases, it will
only take aboutten minutes to do, that is, until the student starts looking around at the
web site. But they will learn by doing so.
Track Your Expenses
It's easy for spending to become so automatic that we're not aware we're doing it. So
where doesyour money go? The only way to find out is to keep track of it. Writing down
what you spend ina paper journal or using an app like Expensify (www.expensify.com)
is simple and will make you more aware of where your money goes. Knowing where
you are will probably make you feel better too - so do it now.
Save Automatically
We all know we should save regularly. One way to create a savings "habit" is to literally
make itautomatic.

Open a savings account apart from your checking account. This will separate your
savings fromwhat you have available to spend. And then set up an automatic deposit
to your savings accounteach month. This sets your "habit." You can do it now.
Financial Impact of Personal Choices
Read and think about the choices being made. Do you agree or not? Ask the students
to discuss the choices being made.
No Budget, No Plan: Mason Bought a Boat!
Mason is 28 and has a good job as a sales rep. He's always found budgeting boring
and has beenintending to start a financial plan for years.
Recently, Mason went out with some friends on a rented boat to fish. He had a great
time and saw a boat sale on his way home. Before he knew it, the salesman convinced
Sean that the dealwas just too good to pass up. So Mason bought a $10,000 boat and
financed 80 percent of the cost for the next 5 years. Sean now finds himself relying
more on his credit card to get by eachmonth.
What if Mason had kept track of his money, used a budget, and had a set of financial
goals? Knowing where his money went and having a financial plan would have
increased the chancethat Mason would make more deliberate, informed financial
decisions.
Applying Personal Finance
What’s Your Condition?
Financial statements reflect your financial condition. They help you measure where you
are now.Then,
as time passes and you prepare your financial statements periodically, you can use them
to trackyour
progress toward financial goals. Good financial statements are also a must when you
apply for aloan.
This project will help you to evaluate your current financial condition.
Look back at the discussion in this chapter on balance sheets and income and expense
statements,
and prepare your own. If you‘re doing this for the first time, it may not be as easy as it
sounds!Use the following questions to help you along.

1. Have you included all your assets at fair market value (not historical cost) on your
balancesheet?
2. Have you included all your debt balances as liabilities on your balance sheet? (Don‘t
take yourmonthly payment amounts multiplied by the number of payments you have
left—this total includes
future interest.)
3. Have you included all items of income on your income and expense statement?
(Remember,your
paycheck is income and not an asset on your balance sheet.)
4. Have you included all debt payments as expenses on your income and expense
statement?(Your
phone bill is an expense for this month if you‘ve already paid it. If the bill is still sitting on
yourdesk
staring you in the face, it‘s a liability on your balance sheet.)
5. Are there occasional expenses that you‘ve forgotten about, or hidden
expenses such asentertainment
that you have overlooked? Look back through your checkbook, spending diary, or any
otherfinancial records to find these occasional or infrequent expenses.
6. Remember that items go on either the balance sheet or the income and expense
statement, but not on both. For example, the $350 car payment you made this month
is an expense on yourincome and expense statement. The remaining $15,000 balance
on your car loan is a liability onyour balance sheet, while the fair market value of your
car at $17,500 is an asset.
After completing your statements, calculate your solvency, liquidity, savings, and debt
serviceratios. Now, use your statements and ratios to assess your current financial
condition. Do youlike
where you are? If not, how can you get where you want to be? Use your financial
statements andratios
to help you formulate plans for the future.
Solutions to Financial Planning Exercises
1. Preparing Financial Statements: Axel Gibson is preparing his balance
sheet and income and expense statement for the year ending June 30,
2020. He is having difficulty classifying six items and asks for your help.
Which, if any, of the followingtransactions are assets, liabilities, income,
or expense items?
a. Axel rents a house for $1,350 a month.
The monthly rent is a monthly expense. The payment will reduce an asset, Cash.
b. On June 21, 2020, Axel bought diamond earrings for his wife and
charged them using his MasterCard. The earrings cost $900, but he
hasn’t yet received the bill.

The purchase will result in a new asset, personal property for $900. Since he
purchasedusing a credit card, his current liabilities also increase by $900. Credit
card debt is typically due within one month, so it is a current liability.
c. Axel borrowed $3,500 from his parents last fall, but so far, he has
made nopayments to them.
Since no loan payments were made during the period, a corresponding expense
would notappear. Whether or not the ―loan‖ is a real loan or a gift from the
parents is a question of fact to be determined. If real loan, the balance sheet will
list a liability of $3,500. If a gift, net worth will increase by the amount of cash
received, a direct contribution to his net worth.
d. Axel makes monthly payments of $225 on an installment loan; about half
of it is interest, and the balance is repayment of principal. He has 20
payments left, totaling
$4,500.
The income and expense statement will show an expense: payment of loan
$225 per month times 12 months, a total for the year of $2,700. When a balance
sheet is prepared, the loan balance will be reduced by half of the $225 per month
[$112.50] which representpayment of principal. Since it is useful to know the
amount of interest being paid, the loan payment may be split into $112.50
interest and $112.50 loan repayment.
e. Axel paid $3,800 in taxes during the year and is due a tax refund of $650,
which hehasn’t yet received.
The payment of taxes is an expense recorded as paid, typically monthly or
when paycheck is received. The refund is not recorded on the income and
expense statementuntil it is received. The receivable is not recorded on a
cash basis balance sheet. Whenthe refund is received it may be treated as a
reduction of tax expense rather than an income item. Doing so will reflect the
correct amount of tax paid for the year.
f. Axel invested $2,300 in some common stock.
The cash asset goes down and the investment asset goes up. The investment
will appearon the balance sheet.
2. Projecting Financial Statements: Put yourself 10 years into the future.
Construct afairly detailed and realistic balance sheet and income and
expense statement reflecting what you would like to achieve by that time.
While everyone's financial statements will differ based on their own
expectation of thefuture, each should have similar elements such as: assets
such as a home, automobiles and investments; liabilities such as a mortgage,
an auto loan, and consumer debt; and apositive net worth. The statement of
income and expense should reflect income from a

job or business, investment income, and expenses for items such as home
maintenance,food, debt payments, savings, taxes, and insurance.
3. Preparing Personal Balance Sheet: Use Worksheet 2.1. Sadie Richardson’s
banker has asked her to submit a personal balance sheet as of June 30, 2020, in
support of an application for a $6,000 home improvement loan. She comes to you
for help in preparing it.So far, she has made the following list of her assets and
liabilities as of June 30, 2020:
Cash on hand $ 70
Balance in checking account 180
Balance in money market deposit
account
with
Southwest Savings 650
Bills outstanding:
Telephone $ 20
Electricity 70
Charge account balance 190
Visa 180
MasterCard 220
Taxes 400
Insurance 220 1,300
Condo and property 68,000
Condo mortgage loan 52,000
Automobile: 2015 Honda Civic 12,000
Installment loan balances:
Auto loans 3,000
Furniture loan 500 3,500
Personal property:
Furniture 1,050
Clothing 900 1,950
Investments:
U.S. government savings bonds 500
Stock of Commodities Corp.
3,000
3,500
From the data given, prepare Sadie Richardson’s balance sheet, dated June 30,
2020 (follow the balance sheet form shown in Worksheet 2.1). Then evaluate
her balance sheetrelative to the following factors: (a) solvency, (b) liquidity, and
(c) equity in her dominantasset.
See following page for Worksheet 2.1 for Sadie Richardson.

3-a. Solvency Ratio: This term refers to having a positive net worth. The calculation for
hersolvency ratio is as follows:
Solvency Ratio = Total Net Worth = $29,55
0
= 34.22%
Total Assets $86,35
0
This indicates that Sadie could withstand about a 34% decline in the market value of her
assets before she would be insolvent. Although this is not too low a value, some thought
might be givento increasing her net worth.
3-b. Liquidity Ratio: A simple analysis of Sadie‘s balance sheet reveals that she's not
very liquid. In comparing current liquid assets ($900) with current bills
outstanding ($1,300),it is obvious that she cannot cover her bills and is, in fact,
$400 short (i.e., $1,300 currentdebt – $900 current assets). Her liquidity ratio is:
Liquidity ratio = Liquid Assets = $ 900 =
69.21%
Total Current Debts $1,300
This means she can cover only about 69% of her current debt with her liquid assets.
If we assume that her installment loan payments for the year are about $2,000
(half theauto loan balance and all of the furniture loan balance) and add them to
the bills outstanding, the liquidity ratio at this level of liquid assets is:
Liquidity ratio = Liquid assets = $ 900 = 27%
Total Current Debts $3,30
0
This indicates that if she lost income, she could cover only about 27% of her
existing one-year debt obligations with her liquid assets—and this does not
include her mortgagepayment! This is clearly not a favorable liquidity position.
3-c. Equity in Her Dominant Asset: Sadie‘s dominant asset is her condo and property,
which iscurrently valued at $68,000. Since the loan outstanding on this asset is $52,000,
the equity is
$16,000 (i.e., $68,000 – $52,000). This amount indicates about a 24% equity interest (i.e.,
$16,000/$68,000) in the market value of her real estate. This appears to be a favorable
equity position. However, if Sadie was forced to sale the condo to pay other debt, the
selling costs could be 15% of sales price and the distressed sale price could wipe out
the balance of her equity
Additional Issue: The data is to be used as is. However, used clothes and
household furnishings have very little value it they are to be sold. So, the value of
her personal property may be overstated. Similarly, the value of the 2015 Honda
Civic seems high.

Worksheet 2.1, Exercise 3, chapter 2
BALANCE
SHEET
Name(s)Sadie Richardson Date June 30, 2020
ASSE
TS
LIABILITI
ES
Liquid Assets Current Liabilities
Cash on hand $ 70.00 Utilities $ 90.00
In checking 180.00 Rent
Savings accounts Insurance premiums
Money market
funds and
deposits
650.00 Taxes
Medical/dental bills
Certificates of
deposit(<1 yr. to
maturity)
Repair bills
Total Liquid Assets $ 900.00 Bank credit card
balances
400.00
Investments
Dept. store credit
cardbalances 190.00
Stocks $ 3,000.00 Travel and
entertainmentcard
balances
Bonds 500.00 Gas and other credit
cardbalances
Certificates of deposit
(>1 yr. to maturity)
Bank line of credit
balances
Mutual funds Other current liabilities 400.00
220.00
Real estate Total Current Liabilities $ 1,300.00
Retirement funds, IRA Long-Term Liabilities
Other Primary
residence
mortgage
$ 52,000.0
0
Total Investments $ 3,500.00
Real Property Second home mortgage
Primary residence $ 68,000.00 Real estate
investmentmortgage
Second home
Other Auto loans 3,000.00
Total Real Property $ 68,000.00 Appliance/furniture loans 500.00
Personal Property Home improvement
loans
Auto(s): 2015 Honda
Civi
c
$
12,000.00 Single-payment loans
Auto(s): Education loans
Recreational vehicles
Margin loans
Household furnishing 1,050.00
Jewelry and artwork Other long-term loans
Other 900.00 Total Long-Term Liabilities $ 55,500.00
Other (II) Total Liabilities $
56,800.00 Net Worth [(I) - (II)]
Total Personal Property $ 13,950.00

(I)Total Assets $ 86,350.00
$ 29,550.00
Total Liabilities and Net Worth$
86,350.00

4. Preparing Income and Expense Statement: Use Worksheet 2.2. Ariana and
Nicholas Peterson are about to construct their income and expense statement
for the year ending December 31, 2020. They have put together the following
income and expense informationfor 2020:
Ariana’s salary $47,000
Reimbursement for travel expenses 1,950
Interest on:
Savings account 110
Bonds of Delta Corporation 70
Groceries 4,150
Rent
Utilitie
s
9,600
960
Gas and auto expenses 650
Nicholas’ tuition, books, and supplies 3,300
Books, magazines, and periodicals 280
Clothing and other miscellaneous
expenses
Cost of photographic
equipmentpurchased with
charge card
2,700
2,200
Amount paid to date on photographic
equipment
1,600
Ariana’s travel expenses 1,950
Purchase of a used car (cost) 9,750
Outstanding loan balance on car 7,300
Purchase of bonds in Delta
Corporation
4,900
Using the information provided, prepare an income and expense statement for
the Peterson’s for the year ending December 31, 2020 (follow the form shown in
Worksheet2.2).
See worksheet on following page.

Worksheet 2.2 Exercise 4, Chapter 2
hole
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.
INCOME AND EXPENSE STATEMENT
Name(s)
For the [month or year]
Ariana and Nicholas Peterson
Year Ended December 31, 2020
Income
Wages and salaries Name: Ariana Peterson $ 47,000.00
Name:
Name:
Self-employment income
Bonuses and commissions
Investment income Interest received 180.00
Dividends received
Rents received
Sale of securities
Other: Reimbursement of travel expenses 1,950.00
Pensions and annuities
Other income
(I) Total Income $ 49,130.00
Expenses
Housing Rent/mortgage payment
(include insurance and taxes, if applicable)
$
9,600.00
Repairs, maintenance, improvements
Utilities Gas, electric, water 960.00
Phone
Cable TV and other
Food Groceries 4,150.00
Dining out
Transportation Auto loan payments cost less loan, 9750-7300 2,450.00
License plates, fees, etc.
Gas, oil, repairs, tires, maintenance 650.00
Medical Health, major medical, disability insurance
(payroll deductions or not provided by employer)
Doctor, dentist, hospital, medicines
Clothing Clothes, shoes, and accessories 2,700.00
Insurance Homeowner’s (if not covered by mortgage payment)
Life (not provided by employer) &/or Long-term Care
Auto
Taxes Income and social security
Property (if not included in mortgage)
Appliances, furniture, and other
major purchases
Loan payments
Purchases and repairs
Personal care Laundry, cosmetics, hair care
Recreation and entertainment Vacations
Other recreation and entertainment 280.00
Other items Books, tuition, and supplies 3,300.00
Photographic equipment -- amount paid 1,600.00
Travel expenses 1,950.00
Purchase of Delta Corporation Bonds 4,900.00
(II) Total Expenses $ 32,540.00
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5. Preparing Cash Budget: Landon and Naomi Gray are preparing their cash
budget. Help the Grays reconcile the following differences, giving reasons to
support your answers.
a. Their only source of income is Landon’s salary, which amounts to $5,000
a monthbefore taxes. Landon wants to show the $5,000 as their monthly
income, whereas Naomi argues that his take-home pay of $3,917 is the
correct value to show.
Like many questions it depends. If the taxes and other payroll deductions are
consideredout of their control, then only the take home pay would be listed. But,
since they have some options in the computation of payroll deductions, the gross
pay should be listed.
Among the options is the number of exemptions for income tax withholding, the
optionto purchase health insurance for the non-working spouse through the
employer or elsewhere, and perhaps other fringe benefits such as childcare
and flexible benefits.
b. Naomi wants to make a provision for fun money, an idea that Landon
cannotunderstand.
He asks, ―Why do we need fun money when everything is provided for in
thebudget?‖
By having an allowance for "fun money," the Grays have specifically set aside a
certainportion of their income for a little self-indulgence. This will serve three basic
purposes:
(1) it will give a little financial independence to each member of the family; (2) to
a certain extent it allows for a little impulse buying which might further the
enjoyment of life under a budget control thus diminishing the possibility of it
occurring by taking fromanother account; and (3) it generally promotes a higher
quality of life. The inclusion of "fun money" is probably justified.
6. Identifying Missing Budget Items: Here is a portion of Joshua Sanders’s
budget recordfor a recent month. Fill in the blanks in columns 5 and 6.
Note, here the answers are included in bold. They may be deleted if you wish to use in
classroom.
Ite
m
(1)
Amount
Budgete
d(2)
Amoun
tSpent
(3)
Beginnin
g
Balance
(4)
Monthly
Surplus
(Deficit)
(5)
Cumulativ
eSurplus
(Deficit)
(6)
Rent $550 $575 $50 -$25 $25
Utilities 150 145 15 5 20
Food 510 475 -45 35 -10
Auto 75 95 -25 -20 -45

Recreatio
nand
Entertainmen
t
100 110 -50 -10 -60
7. Personal Cash Budget Use Worksheet 2.3. Prepare a record of your income
and expensesfor the last 30 days; then prepare a personal cash budget for the
next three months. (Use the format in Worksheet 2.3 but fill out only three
months and the Total column.) Use the cash budget to control and regulate your
expenses during the next month. Discuss the impact of the budget on your
spending behavior, as well as any differences between your expected and actual
spending patterns.
This question requires a personal response that will differ for each student.
Therefore, a specific example has not been provided. However, the Critical
Thinking Cases in this chapter provide several examples of possible answers to
this question; it is recommendedthat the cases be examined in conjunction with
this question.
The question provides an effective means to involve the student in the budgeting
process.Most students are somewhat amazed when they find out how they have
actually been spending their money. Before assigning this question, it is
interesting to ask the students to estimate how they actually spend their money.
A comparison of their estimates with the actual spending records typically
reflects the unconscious manner in which they maybe spending. Most students
will find that the use of a budget to control and regulate expenses allows them to
make more meaningful and satisfying purchases.
PLEASE NOTE: Exercises 8 through 10 deal with time value of money, and solutions
using Excel, the tables, and the financial calculator will be presented. The factors are
taken from the tables as follows: future value–Appendix A; future value annuity–
Appendix B; present value– Appendix C; present value annuity–Appendix D. If using the
financial calculator, set on End Mode and 1 Payment/Year. The +/- indicates the key to
change the sign of the entry, in these instances from positive to negative. This keystroke
is required on some financial calculators in order to make the programmed equation
work. Other calculators require that a "Compute" key bepressed to attain the answer.

8. Calculating present and future values: Use future or present value
techniques to solvethe following problems.
a. Starting with $15,000, how much will you have in 10 years if you can earn 6
percenton your money? If you can earn only 4 percent?
EXCEL TABLE CALCULATOR
Use FV function: rate is 6% Table of Future Values, App A 15000 +/- PV
FV(rate, term, annual payment,
Present value, 0 for end of
period)
PV * FV factor 6%, 10 yrs. 6 I
FV(.06,10,0,15000,0) = $15,000 * 1.791 10 N
$26,862.72 $26,865.00 FV $26,862.72
Use FV function: rate is 4% 15000 +/- PV
period)
PV x FV factor 4%, 10 yrs. 4 I
FV(.04,10,0,15000,0) = $15,000 * 1.480 10 N
$22,203.66 $22,200.00 FV $22,203.66
b. If you inherited $45,000 today and invested all of it in a security that
paid a 7percent rate of return, how much would you have in 25
years?
period)
PV * FV factor 7%, 25yrs. 7 I
FV(.07,25,0,45000,0) = $45,000 * 5.427 25 N
$244,234.47 $244,215.00 FV $244,234.47
c. If the average new home costs $275,000 today, how much will it cost in
10 years ifthe price increases by 5 percent each year?
present value, 0 for end of
period)
FV(.05,10,0,275000,0) = $275,000 * 1.629 10 N
$447,946.02 $447,975.00 FV $447,946.02

d. You think that in 15 years, it will cost $212,000 to provide your child with a
4-year college education. Will you have enough if you take $70,000 today
and invest it for the next 15 years at 5 percent? If you start from scratch,
how much will you have tosave each year to have $212,000 if you can earn
4 percent rate of return on your investments?
No, you will have $126.066, which is less than your $212,000 goal.
present value, 0 for end of
period)
FV(.04,15,0,70000,0) = $70,000 * 1.801 15 N
$126,066.05 $126,070.00 FV $126,066.05
You will need to deposit $10,587.51 at the end of each year for 15 years in order
toreach the $212,000 goal. I am assuming a 4% rate of return on investments.
Use PMT function to
determineannual payment
Table of Future Values
Annuity,App B
212000 +/- FV
PMT(rate, term, present
value, future value, 0 for end
of period)
PV / FVA factor 4%, 15yrs. 4 I
PMT(.04,15,0,212000,0) = $212,000 / 20.024 15 N
$10,587.51 $10,587.30 PMT $10,587.51
e. If you can earn 4 percent, how much will you have to save each year if
you want toretire in 35 years with $1 million?
You will need to invest $13,577.32 at the end of each year at a rate of 4% for the
next 35years in order to retire with $1 million.
Use PMT function to
determine annual saving
amount with rate of
4%, to accumulate $1 million
Table of Future Values
Annuity,App B
1000000 +/- FV
value, future value, 0 for end
of period)
PV / FVA factor 4%, 35yrs. 4 I
PMT(.04,35,0,1000000,0) = $1,000,000 / 73.652 35 N
$13,577.32 $13,577.36 PMT $13,577.32

f. You plan to have $750,000 in savings and investments when you retire
at age 60.Assuming that you earn an average of 8 percent on this
portfolio, what is the maximum annual withdrawal you can make over a
25-year period of retirement?
You will be able to withdraw $70,259.08 at the end of each year for 25 years if you retire with
$750,000 invested at 8%. If you live beyond 85, you have a problem.
Use PMT function to
determineannual withdrawal
Table of Present Values
Annuity,App D
750000 +/- PV
value,0 for end of period)
PV / PVA factor 8%, 25yrs. 8 I
PMT(.08,25,750000) = $750,000 / 10.675 25 N
$70,259.08 $70,257.61 PMT $70,529.08
9. Evaluating a Saving Goal: Over the past several years, Natalie Howard has
been able to save regularly. As a result, she has $54,188 in savings and
investments today. She wants toestablish her own business in 5 years and feels
she will need $100,000 to do so.
a. If she can earn 4 percent on her money, how much will her
$54,188 insavings/investments
be worth in five years? Will Natalie have the $100,000 she needs? If not, how
muchmore money will she need?
If Natalie can earn 4% on her money, $54,188 will be worth about $65,928 in 5 years:
period)
FV(.04,5,0,54188,0) = $54,188 * 1.217 5 N
$65,927.99 $65,946.80 FV $65,927.99
No, she will fall short by about $34,072.

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