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 in
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 your
financial 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
3. Personal Financial Goals. Recommend three financial goals and related activities
for 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 42-year-old man with a 16-year-old child and a 72-year-old father who
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 loans
b. 30-year old computer programmer who plans to earn an MBA—pay off auto loan
c. Couple in their thirties with two children, ages three and six—begin college fund for
d. Divorced 42-year old man with a 16-year old child and a 72-year old father who is ill
—engage the help of friends or family in carpooling teenager to school and activities;
4. Life Cycle of Financial Plans. Ben Saunders and Ashley Tinsdale are planning to get
married in six months. Both are 30 years old have been out of college for several
years. Ben uses three credit cards and has a bank account balance of $7,500 while
Ashely 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
Two bank accounts can work OK if the various expenses are allocated between the two
spouses. If one spouse has the job of paying all the bills, that spouse needs to have access
5. Impact of Economic Environment on Financial Planning. Summarize current and
projected trends in the economy with regard to GDP growth, unemployment, and
inflation. 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,
6. Financial Impact of Career Decisions. Alice Reynolds and Tricia Bostwick, both
freshman and friends at a major university, are interested in going into a health
sciences career. While they’re not just interested in the money they can make, they
do want to have a sense of the compensation in different health sciences careers.
What do the data in Exhibit 1.13 tell Alice and Tricia?
The income level of “doctors and pharmacists” is six figures which should provide a
comfortable standard of living. The registered nurse salary, $68,910, if doubled [Ben and
Tricia both are RNs], provides a similar six figures standard.
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
inane
Critical Thinking Cases
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 develop these goals
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
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 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
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 affect
an individual’s present and future consumption patterns, level of wealth, standard of
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 Jim better understand the financial environment, thereby allowing him to
establish a realistic quality of life and personal financial goals. He could then develop a
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?
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 working
years. They may find themselves in Brad’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 Brad to consider when looking for a new job include salary,
opportunity for advancement, his transferable skills that could apply to a field other than
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
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; 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 to
4. There are many strategies today’s workers can employ to avoid being placed in Brad’s
position. Staying with one employer and one basic type of work for 28 years, as Brad 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
Key terms
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
index (CPI) A measure of inflation based on changes in the cost of consumer goods
and 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 accompanied
by rising prices for goods and services.
financial assets Intangible assets, such as savings accounts and securities, that are acquired
for some promised future return.
financial goals Results that an individual wants to attain, such as buying a home, building
a 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 child care to health and
life insurance to retirement benefits.
gross domestic
product (GDP) The total of all goods and services produced in a country; used to monitor
economic growth.
goal dates Target dates in the future when certain financial objectives are expected to
be completed.
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.
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.
standard of living The necessities, comforts, and luxuries enjoyed or desired by an individual
or family.
tangible assets Physical assets, such as real estate and automobiles, that can be held for
either consumption or investment purposes.
trough The phase of the economic cycle when a contraction ends and an
expansion begins.
utility The amount of satisfaction received from purchasing certain types or
quantities of goods and services.
wealth The total value of all items owned by an individual such as savings
accounts, 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 Exercises
Applying Personal Finance
Watch Your Attitude!
Critical Thinking Cases
1.1 Jim’s Need to Know: Personal Finance or Golf?
1.2 Brad’s Dilemma: Finding a New Job
Money Online!