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
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. Your
spending is measured by your propensity to consume. Wealth is the total value of all property
you own less the amount that you owe to others.
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
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.
Assumption 1: Saving a few thousand dollars a year should provide enough to fund my child’s
college Education.
Assumption 2: An emergency fund lasting 3 months should be adequate.
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 other
plan]. Recording the goal and then reviewing three months later will help you to keep focus on
the 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
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 book
speaks how to manage this type of crisis, but you had to go through it to really understand the
impact it had.
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
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 the
material 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 greater
enjoyment of the money one makes by improving one’s standard of living.
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.
Financial Facts or Fantasies?
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 personal
financial planning.
2. 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.
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 Over the long run, gaining only an extra percent or two on an investment
makes 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
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.
Start Building an Emergency Fund
What would happen if you lost your job, got hurt, or had an unexpected big expense? Even if
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
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.
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 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 Andrew invests his $35 savings a week every month at 5 percent, he will have the following in
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 right
or wrong answers. Also, there will be a tendency to make up answers that sound good to the
student.
Watch Your Attitude!
Many people’s attitude toward money has as much or more to do with their ability to accumulate
wealth as it does with the amount of money they earn. As observed in Exhibit 1.4, your attitude
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?
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
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
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 52-year-old man with a 16-year-old child and a 78-year-old father
who is ill
Student answers will vary. Suggestions may include the following:
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 several
years. 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
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
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 computer
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 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
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
Critical Thinking Cases
1.1 Aaron’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 brother
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 important
regardless of income.
Aaron’s Need to Know: Personal Finance or Golf?
1. Personal financial planning is a process through which financial plans are developed and
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
3. The personal financial planning environment is made up of three key groups, all of which
Aaron 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
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
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 him
to establish a realistic quality of life and personal financial goals. He could then develop a
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 for
the 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.
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 his
career options?
3. What recommendations would you give Cameron 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 Cameron’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
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 include
salary, opportunity for advancement, his transferable skills that could apply to a field
other than retailing, availability of benefits, available training programs, types of