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Personal Financial Planning Theory and Practice Instructor Manual, 5th Edition

DIScUSSION QUeStIONS aND SOLUtIONS

1. What is personal financial planning?
Personal financial planning is the process, both artistic and scientific, of formulating, implementing, and monitoring multifunctional decisions that enable an individual or family to achieve financial goals.

2. What does it mean to say that financial success is a relative concept?

Financial success means different things to different people because each person compares their financial success with their own benchmarks or standards. If you had $1,000 dollars and everyone else around you only had $1, you would likely feel financially successful. However, if everyone else around you had $10,000, it is likely you would not feel financially successful.

3. How does the financial planning process promote efficient allocation of a clients resources?
Financial planning provides a client with a framework of objective alternatives that identifies the opportunity cost associated with each alternative so that the client can make a more informed, more rational choice among alternatives.

4. Why do people hire professional financial planners?

People hire professional financial planners because they believe that doing so is more effective and efficient than attempting to create and implement a financial plan on their own.

5. What does the Financial Planners Pyramid of Knowledge identify?

The Financial Planners Pyramid of Knowledge identifies the skills required of financial planners, the basic tools that the financial planner must possess, the core topics that the planner must be knowledgeable of, and the profession of financial planning.

6. What benefits can a client derive from the process of personal financial planning?
It assists in goal identification and prioritization. It provides an objective, rational view of choices and resource allocation. It promotes the future and proactive thinking rather than the past and reactive thinking. It creates a framework for feedback, evaluation, and control. It requires a thorough, systematic analysis of the internal and external environment. It identifies risks and, thus, minimizes their effect through the risk management process. It promotes a positive view of change by viewing it as an opportunity for goal accomplishment. It provides discipline and formality to financial affairs.

7. What concepts must a professional financial planner balance in order to create a successful financial plan?
Financial success is a relative concept. There is both subjectivity and objectivity in financial planning. Financial planning is about the allocation of resources. Rational choices are dependent on personal utility curves.

Chapter 1 | Introduction to Personal Financial Planning

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Every alternative has consequences and risks. Financial planning promotes efficiency by devoting fewer resources to correcting poor decisions.

8. Through what activities is the personal financial planner expected to guide the client?
The personal financial planner is expected to guide the client through the steps of the financial planning process, which includes identifying a financial mission, establishing financial goals, developing financial objectives, formulating alternative strategies, selecting the optimal strategy, and implementing and controlling a completed financial plan.