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 work
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
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
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 person
1-2 Are consumption patterns related to quality of life? Explain.
Generally, consumption patterns are related to quality of life, which depends on a
1-3 What is average propensity to consume? Is it possible for two people with very
different 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 income
that is spent (rather than saved), on average, for current needs rather than savings. Yes, it
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
1-5 What is the role of money in setting financial goals? What is the relationship of
money 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
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
1-7 Explain why it is important to set realistically attainable financial goals. Select one
of 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 the
1-8 Distinguish between long-term, intermediate, and short-term financial goals. Give
examples of each.
Individual time horizons can vary, but in general individuals would expect to achieve
1-9 What types of financial planning concerns does a complete set of financial plans
cover?
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
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 changes
in the life cycle?
Personal needs and goals change as you move through different stages of your life. So,
1-11 Cooper Bryant’s investments over the past several years have not lived up to his full
return expectations. He is not particularly concerned, however, because his return is
only 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
1-12 Describe employee benefit and tax planning. How do they fit into the financial
planning 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 evaluate
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 the
inconsistencies and vagaries of our economic system—and of life itself!—the goals of
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
b. Major life changes, such as marriage or divorce
Major life changes such as marriage and divorce:
c. Death of a spouse
The surviving spouse is typically faced with decisions on how to receive and invest life
insurance proceeds and manage other assets. In families where the deceased made most
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.
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 consumers
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 indicator
of economic activity. The stronger the economy, the higher the levels of real GDP and
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
1-19. “All people who have equivalent formal education earn similar incomes.” Do you
agree 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 level
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
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,
inane
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.
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 childcare to health and life
insurance to retirement benefits.
goal dates Target dates in the future when certain financial objectives are expected to
be completed.
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.
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
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
C. Special Planning Concerns
1. Managing Two Incomes
D. Technology in Financial Planning
E. Using Professional Financial Planners
F. Types of Planners
VI. The Planning Environment
A. The Players
1. Government
a. Taxation
b. Regulation
V. What Determines Your Personal Income?
A. Demographics and Your Income
Summary
Key Terms
Financial Planning Exercises
Applying Personal Finance
Watch Your Attitude!
Critical Thinking Cases