Altfest_2e_IM_Chapter_01 (5).docx

**ANSWERS TO CHAPTER QUESTIONS** **Chapter 1 Introduction to Personal Financial Planning** 1. Some factors that may explain why it took until the 1970s for the field of financial planning to begin include: a. The ability of low-cost computers to handle middle-income problems....

**ANSWERS TO CHAPTER QUESTIONS** **Chapter 1 Introduction to Personal Financial Planning** 1. Some factors that may explain why it took until the 1970s for the field of financial planning to begin include: a. The ability of low-cost computers to handle middle-income problems. b. The rise in discretionary incomes to enable non-high net worth people to afford planning fees. c. The increasing complexity of taxes. d. The proliferation of new financial and investment instruments. 2. Personal financial planning involves other disciplines because: e. PFP must take into account what is happening in the country and society---for example, whether government policy is becoming more conservative---laissez-faire or liberal and its affect on the individual's financial future. f. Macro and microeconomics provide the economic setting for individual decisions. Portfolio policy may be changed when for instance there is a feeling that inflation will rise. g. Accounting presents a backdrop for the method of recordkeeping for financial planning and financial plans. Of course, accounting procedures are modified to accommodate finance's approach. h. Psychology and sociology help to understand human motivations which apply to behavioral financial planning. i. Communications and relational skills help in client interaction. 3. Financial planning is a process undertaken to achieve an objective. A financial plan is typically a written document which uses the planning process to set forth a specific way generally with specific numbers, to solve financial problems or goals. 4. The personal financial planning process and its related procedures includes: j. Establishing the scope of the activity. i. How broad are we making our examination? k. Gathering the data and identify goals. ii. What are our goals and what data will we need in the process? Obtain the data. l. Compiling and analyzing the data. iii. "Massage" the data to come up with valuable information to be used for drawing conclusions. m. Developing solutions and presenting the plan. iv. Make recommendations, perhaps with alternatives where appropriate, then present these recommendations n. Implementation v. Put the plan into action. Monitor and review periodically. Adjust the plan to accommodate new circumstances. 5. A comprehensive plan covers all basic parts of a financial plan plus others that may be particular to the household. Importantly it integrates those recommendations to come to a conclusion. As to allocation of resource a segmented plan treats one or a few particular areas and may not attempt to integrate. 6. Similarities and differences between a financial planning practitioner and a physician could include: o. Similarities vi. vii. viii. ix. x. xi. p. Differences xii. Planners don't have to answer to an insurance authority for reimbursement as the majority of doctors do. xiii. One specializes in medicine the other financial matters. xiv. Doctors aren't benchmarked against an overall index as financial planners who engage in investment management may be. 7. Integration is important because people have only limited resources and must make choices. The choices need to be compared to find the most desirable ones. This becomes fairly complex when choices have to be made for projected future decisions today. By employing comprehensive financial planning with its integration component the correct choices can be made. 8. The parts of a financial plan includes: q. Estate Planning: planning principally for one's heirs after the estate holder's demise. r. Tax Planning: deciding on timing, tax deductions, and other matters pertaining to a time-weighted reduction in taxes paid. s. Cash Flow Planning: plotting out inflows and outflow for optimal use of cash resources. t. Investments: deciding on which assets to purchase for use today (capital expenditures) and for future use (most often financial investments). u. Risk Management: controlling the risk of the household portfolio through products such as insurance and household member practices. 9. What might be missing in their discussion was the integration function. When integration is performed well, the proper allocation of resources in all areas of financial planning is possible. Without some indication that limited client resources were allocated correctly across areas based on client preferences the financial plan was not fully completed. 10. Financial planners help people to develop and understand their goals, make recommendations that assist people in realizing those goals and help individuals keep on track toward those goals including reviewing and updating the plans made when necessary. 11. Common problems are: v. Deciding on how much to save and adhering to a savings plan. w. Getting out of debt. x. Obtaining the right mix of attractive investments. y. Developing a retirement plan. z. Obtaining correct insurance coverage. a. Getting structured in financial matters. 12. The financial planner will help to assess their full financial picture including their income, total assets, liabilities, spending habits, and goals. The planner can then recommend how to adjust their spending and saving habits in order to best serve their goals. 13. There are multiple factors that can be taken into consideration. After the fall of the housing market in late 2007 it has become harder to get accepted for a mortgage. In addition, as technology has improved the market has become more efficient which makes it more difficult for the layman to find investment opportunities. 14. One possible explanation supporting why more information is better is that it allows investors to obtain a vast resource of knowledge right at their very fingertips. On the other hand some critics may say that this creates information overload and it can be difficult to sift out the good from the bad advice available on the internet. 15. Deciding on hiring a financial planner is a matter of personal choice. It would definitely be beneficial to hire a financial planner especially since Maria and her husband are considering purchasing a second home and plan on starting a family. In addition it may add some support in the household to have a financial mediator available to plan out their future expenditures in a formal setting. 16. Household finance is related to financial planning because it is the core of your spending. Much of your finances whether it is food, repairs, rent, clothing, entertainment, etc. is controlled from the household. Financial planning involves both investing assets and managing expenditures. Manage your household like a business and look to cut back on discretionary purchases where possible. Financial planners can assess your household spending and provide useful feedback. Perhaps plan a family vacation closer to home to cut back on large travel expenses. (For more information on household planning see Part Two of the text which encompasses Chapters 4-7.)