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Understanding the Financial Planning Process — Chapter 1
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole 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.
14
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 cards can 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 employee benefit 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
c. Death of a spouse
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
opposed to 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.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole 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.
15
1-16 Discuss the following statement: “The interactions among government, business,
and consumers determine the environment in which personal financial plans must
be made.”
Government, businesses, and consumers are the three major participants in the
economic system. Government provides the structure within which businesses and
1-17 What are the stages of an economic cycle? Explain their significance for your
personal 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
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole 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.
16
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
1-19. “All people who have equivalent formal education earn similar incomes.” Do you
agree or disagree with this statement? Explain your position.
1-20 Discuss the need for career planning throughout the life cycle and its relationship
to financial 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
Understanding the Financial Planning Process — Chapter 1
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole 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.
17
Solutions to Critical Thinking Cases
The following are questions and solutions to “Critical Thinking Cases” that you may use for
additional homework or class discussion. These are legacy questions from prior editions.
1.1 Jim’s Need to Know: Personal Finance or Golf?
During the Christmas break of his final year at the University of Maryland (UMD),
Jim Curtis plans to put together his résumé in order to seek full-time employment as a
software engineer during the spring semester. To help Jim prepare for the job
interview process, his older brother has arranged for him to meet with a friend, Lisa
Bancroft, who has worked as a software engineer since her graduation from UMD
two years earlier. Lisa gives him numerous pointers on résumé preparation, the
interview process, and possible job opportunities. After answering Jim’s many
questions, Lisa asks Jim to update her on UMD. As they discuss courses, Lisa
indicates that of all the electives she took, the personal financial planning course was
most useful. Jim says that, although he had considered personal financial planning for
his last elective, he’s currently leaning toward a beginning golf course. He feels 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. Lisa 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 Jim more
than beginning golf—a course that she also took while at UMD.
Critical Thinking Questions
1. Describe to Jim the goals and rewards of the personal financial planning process.
2. Explain to Jim what is meant by the term financial planning and why it is important
regardless of income.
3. Describe the financial planning environment to Jim. Explain the role of the consumer and
the impact of economic conditions on financial planning.
4. What arguments would you present to convince Jim that the personal financial planning
course would benefit him more than beginning golf?
Jim’s Need to Know: Personal Finance or Golf?
1. Personal financial planning is a process through which financial plans are
developed and implemented to achieve personal financial goals. An individual can
2. Personal financial planning covers the key elements of one’s financial affairs and
3. The personal financial planning environment is made up of three key groups, all of
which Jim will contact directly or indirectly. Government establishes an intangible
4. Although beginning golf would probably provide a great deal of personal satisfaction,
Understanding the Financial Planning Process — Chapter 1
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole 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.
19
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 Jim to take not only
beginning golf but also intermediate golf and possibly join a golf club.
1.2 Brad’s Dilemma: Finding a New Job
Brad Smitham, a 53-year-old retail store manager earning $75,000 a year, has
worked for the same company during his entire 28-year career. Brad was
recently laid off and is still unemployed 10 months later, and his 10 months’
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. Brad 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 no openings for positions equivalent
to the manager’s job he lost. He lost his wife several years earlier and is very
close to his two grown children, who live in the same city.
Brad 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 to finish 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 Brad consider when evaluating his
options?
2. What important personal factors should Brad consider when deciding among
his career options?
3. What recommendations would you give Brad in light of both the career and
personal dimensions of his options noted in Questions 1 and 2?
4. What career strategies should today’s workers employ in order to avoid
Brad’s dilemma?
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in
whole 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.
21
2. Personal factors that Brad 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
work situation 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. Brad 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;
4. There are many strategies today’s workers can employ to avoid being placed in
Key Terms
To begin developing a personal financial plan, one must understand basic financial planning
terminology, principles, and environmental factors. The following phrases/terms represent the
key concepts stressed in the chapter. They are defined in the chapter.
average propensity to
consume The percentage of each dollar of income, on average, that a person
spends for current needs rather than savings.
consumer price
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 financial
transactions.
peak The phase of the economic cycle when an expansion ends and a
contraction begins.
Understanding the Financial Planning Process — Chapter 1
personal financial planning A systematic process that considers important elements of an
individual’s financial affairs in order to fulfill financial goals.
professional
financial planner An individual or firm that helps clients establish financial goals and
develop and implement financial plans to achieve those goals.
Understanding the Financial Planning Process — Chapter 1
Chapter Outline
I. The Rewards of Sound Financial Planning
A. Organizational Planning Model:
II. The Personal Financial Planning Process
A. Steps in the Financial Planning Process [Exhibit 1.3]
III. From Goals to Plans: A Lifetime of Planning
A. The Life Cycle of Financial Plans [Exhibit 1.4]
B. Plans to Achieve Your Financial Goals
IV. The Planning Environment
A. The Players
1. Economic Cycles
2. Inflation, Prices, and Planning
V. What Determines Your Personal Income?
A. Where You Live
