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Instructor’s Manual
To support your use of
14th Edition of
Personal Financial Planning
By
Randall S. Billingsley, PhD, FRM, CFA, Virginia Tech
Lawrence J. Gitman, PhD, CFP®, San Diego State University
Michael D. Joehnk, PhD, CFA – Arizona State University
Thank you for reading this instructor’s manual. If I were you, I would not read it because I have
not found instructor’s manuals to be useful. If you will keep reading, I hope that this manual will
be an exception. My goal is to give you useful highlights and information to make your course
better.
The personal financial planning course has the potential to be a life changing experience. If you
can get the students to read the book, understand the concepts therein, and then apply them to
their life, you will have done them a great service. And the students will be rewarded multiple
times.
The goal of this book is to remove the mystery from the personal financial planning process and
replace it with the tools your students need to take charge of their personal finances and life. To
organize this process, the text is divided into six parts as follows.
• Part 1: Foundations of Financial Planning
• Part 2: Managing Basic Assets
• Part 3: Managing Credit
• Part 4: Managing Insurance Needs
• Part 5: Managing Investments
• Part 6: Retirement and Estate Planning
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.
The organization of the Instructor’s Manual for each chapter is to
Key issues listed by learning goal with suggestions for classroom use [This is the most
useful section of the IM.]
The Financial Fact or Fantasy features are listed just after the learning goals. These are
also listed in the form of a True/False question that you can use as a Pre-test to introduce
the chapter, as a quiz, or as part of an exam.
Solutions for the “Test Yourself” questions – These may be used as quiz or exam
questions. Also, I found that by going through each of the questions, I reread the chapter.
The questions are in the order of the chapter and covers the key points of the chapter. By
answers the Test Yourself questions, you will read the chapter.
You Can Do It Now. These features gives the students links to interesting web sites. One
option for using these is to assign two or three students to go to the sites and report back
to the class what they found.
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.
Solutions to the Financial Planning Exercises – These may be used as quiz or exam
questions
Solutions to the Critical Thinking Exercises – These may be used as quiz or exam
questions
List of key terms from the chapter
Outline of the chapter
I should point out that the Power Points slides that come with the book [only updated by me] are
outstanding. They will be useful to you and I think you should use them. Since the color is well
done, they will be best used if you can project them rather than print black and white.
Understanding the
Financial Planning Process
Chapter 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 be
in the future no matter what life throws at you. For example, how should your plan handle the
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 financial
LEARNING GOALS
LG1 Identify the benefits of using personal financial planning techniques to manage your
finances.
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.
ACTIVITY: Ask the students to assume that they have just inherited $100,000. What will you
do 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 class
can reflex 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.
Use Exhibit 1.2 to show how the average person earns and spends their money and Exhibit 1-4 to
help 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 steps 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 statement assumptions are
realistic. Yes, the answer is in the exhibit, but many will not have read chapter at this point.
There are several worksheets in the book. Worksheet 1.1 gives the student a format to write
down their goals. There is power in writing down goals [and most any other plan]. Recording
the goal and then reviewing three months later will help you to keep focus on the goal.
The “DO IT NOW” feature for this section will make a good classroom discussion opportunity.
It is:
LG3 Explain the life cycle of financial plans, the role they play 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 a
good financial decision. Of course having a job, even a minimum wage job, may give the person
psychic 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 on our memory. To the student of 2016,
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 book
speaks 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 that the
knowledge that if things are bad, you know they will get better. Of course when life is good, you
know that the cycle will come around again. Thus, financial planning requires saving in the
good times for the bad times. See the “Test Yourself” question 1-17 for a short discussion of
business cycles.
Power of compounding is rarely understood. Exhibit 1.8 shows how the amount $10,000 will
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 personal financial
planning.
Exhibit 1.13 shows that the choice of a college major has a financial impact. Of course money
cannot 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.
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.
Your income level depends on your age, education, and career choice.
Fact: All three of these variables are important determinants of your income level, particularly
when accompanied by adequate ambition and disciplined work habits.
Over the long run, gaining only an extra percent or two on an investment makes little difference
in the amount of earnings generated.
Fantasy: Gaining an extra percent or two on an investment’s return can make a tremendous
difference – often thousands of dollars – that increases the longer the investment is held.
Personal financial planning involves translating personal financial goals into specific plans and
arrangements 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 strategies
explained in this book.
A savings account is an example of a tangible asset because it represents something on deposit at
a 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.
An improved standard of living is one of the payoffs of sound personal financial planning.
Fact: The heart of sound financial planning and effective money management is the greater
enjoyment of the money one makes by improving one’s standard of living.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
1. True False Your income level depends on your age, education, and career choice
2. True False Over the long run, gaining only an extra percent or two on an investment
makes little difference in the amount of earnings generated
3. True False Personal financial planning involves translating personal financial goals
into specific plans and arrangements that put these plans into
action.
4. True False A savings account is an example of a tangible asset because it represents
something on deposit at a bank or other financial institution.
5. True False An improved standard of living is one of the payoffs of sound personal
financial planning.
Answers:
YOU CAN DO IT NOW
The “You Can 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 about ten minutes to do, that is, until the student starts looking around at the web site. But
they will learn by doing so.
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.
May be 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.
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 to
last at least 6 month. Considering the risk of not doing so, you can do it now.
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 is directly related to
your earning ability. Consider that over an entire career, the average bachelor’s degree holder
will earn $1.19 million, which is about twice what the typical high school grad earns and
$335,000 more than the typical associate degree holder. (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 realize you’re your greatest
asset and act on it – 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.
Bob Cuts Back on Lunch Out and Lattes
Bob buys lunch out most days and buys a latte every morning. He believes he could cut back a
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 Bob invests his $35 savings a week every month at 5 percent, he will have the following in the
future:
So the seemingly small act of investing only $5 a day would have a dramatic long-term effect on
