A good friend of yours, Frank, just graduated college and is starting his first career job working as a
game developer with a salary of $72,000. While Frank has an outstanding knowledge of information
technology and developing cool “apps” for the iPhone, he has absolutely no idea how to organize his
finances, and he wishes that he had taken a personal finance course while he was in college. As his new
life begins, he is confused with financial terminology like financial planning, budgeting, tax audits,
financial services, etc. He would like to have his own “place” to live and maybe purchase a new car and
house in the near future.
Frank just received a letter from the financial aid department stating that he will need to start making
payments on his student loans in six months-ouch! He has been purchasing new clothes for his job,
eating out all the time, while the money just seems to flow out from his bank account for all of his new
expenses. The good news is that Frank is about to receive his first “real” paycheck which is quite
exciting. Before cashing that check and heading to the uptown area of Dallas, Frank comes to his senses
and has just sent you a text on what to do with his cash. He understands that you are taking a personal
finance course and are becoming quite skilled at managing money. Let’s help Frank build a positive
financial plan.
1. Financial Planning Process
Frank needs to have an understanding of the financial planning process. Define and explain
each of the six steps of the financial planning process.
2. Influence on Economic Conditions
Personal financial decisions are most closely influenced by economic conditions of
consumer prices/inflation, consumer spending, and interest rates. Define and explain for
Frank these three economic conditions.
3. Work Experience
Frank, like many college students, had a lack of work experience when he applied for his
career occupation. List and explain various ways that a college student could gain valuable
employment experiences while still in college.
4. Professional Network
Frank was quite fortunate to land a job right out of college. While Frank has a respectable
amount of followers on Twitter, he realizes that he really needs to better develop his
professional network. List and explain to Frank networking strategies, as well as, strategies
to conduct an informational interview that he can incorporate to build his long-term career
plan.
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5. Personal Financial Records System
Frank really needs to put together a personal financial records system. Explain to Frank
why this is a good idea and how he should proceed in establishing this system.
6. Budgeting Process
Frank is terrified of the word budget as he thinks his money will be restricted. Try to calm
him down by listing and explaining the seven steps in the budgeting process.
7. Taxes
As a single person with no dependents and a good paying job, Frank is probably going to pay
high income taxes. He really needs to examine strategies to lower his taxable income.
Explain to Frank what a tax credit and a tax deduction are, and list examples that Frank
could legally use to reduce his tax burden.
8. Tax Audits
Oh no! Frank just received an audit notification from the IRS and he is completely freaked
out. Help Frank complete a list of his audit rights, and strategies of how he should conduct
himself in the audit.
9. Financial Services
Great work, Frank survived the IRS audit thanks to your advice and even received a $2,000
check due to an error by the IRS. Frank thinks he should put that money in the bank and
would like to know what other services banks offer besides a simple checking account. List
and explain to Frank the major types of financial services that a bank or financial institution
usually offer their customers.
10. Savings Plans
It just keeps getting better for Frank as his Aunt Sally has just given him a graduation gift of
$1,000! However, she says that Frank must save at least 90% of this amount. List and
explain several options of savings plans that he could put this money towards.
The financial planning process is a systematic approach to managing one’s finances and achieving financial goals. It consists of six key steps:
Setting Financial Goals: Frank should start by defining his short-term and long-term financial goals. These can include saving for a down payment on a house, buying a car, paying off student loans, and building an emergency fund.
Gathering Financial Information: Frank should assess his current financial situation. This involves calculating his income, expenses, assets, and liabilities. It’s crucial to have a clear understanding of his financial standing.
Analyzing Financial Information: After gathering the necessary information, Frank needs to analyze it. This includes identifying areas where he can cut costs, increase savings, and prioritize debt repayment.
Developing a Financial Plan: Frank should create a comprehensive financial plan that outlines how he will achieve his goals. This may involve creating a budget, setting up an investment strategy, and developing a debt repayment plan.
Implementing the Plan: Once the financial plan is in place, Frank should take action to execute it. This involves making adjustments to his spending habits, saving regularly, and following the plan diligently.
Monitoring and Reviewing: Frank should regularly review his financial plan to ensure he’s on track to meet his goals. Adjustments may be necessary if there are changes in his income, expenses, or financial goals.
Frank should be aware of the economic conditions that can impact his financial decisions:
Consumer Prices/Inflation: Inflation erodes the purchasing power of money over time. Frank needs to invest his money wisely to ensure it keeps pace with or outpaces inflation to maintain his purchasing power.
Consumer Spending: Consumer spending patterns can affect Frank’s job stability and the demand for his skills as a game developer. He should be mindful of market trends and consumer preferences.
Interest Rates: Interest rates can impact Frank’s borrowing costs (e.g., for a mortgage or car loan) and the returns on his savings and investments. He should consider these rates when making financing and investment decisions.
To gain valuable employment experience while still in college, Frank can consider various options:
Internships: Participating in internships related to his field of study can provide hands-on experience and networking opportunities.
Part-Time Jobs: Frank can work part-time jobs in relevant industries or positions that develop transferable skills.
Freelancing: If applicable to his skill set, Frank can take on freelance projects or gig work to gain experience and build a portfolio.
Volunteer Work: Volunteering for organizations that align with his career interests can also help him gain experience and showcase his skills.
Building a professional network is crucial for Frank’s long-term career growth. Strategies include:
Attend Industry Events: Frank can attend conferences, seminars, and networking events in his field to meet professionals and potential mentors.
Online Networking: Utilizing platforms like LinkedIn to connect with colleagues and industry experts can help expand his network.
Informational Interviews: Frank can reach out to professionals in his field and request informational interviews to learn about their career paths and gather insights.
Join Professional Associations: Becoming a member of industry-specific associations can provide access to resources, events, and networking opportunities.
Having a personal financial records system is essential for Frank because it helps him track income, expenses, and financial progress. He can create this system by:
Organizing Documents: Frank should keep important financial documents like pay stubs, tax returns, bank statements, and bills in an organized and secure manner.
Tracking Expenses: Use budgeting software or apps to record daily expenses, categorize them, and identify spending patterns.
Setting Up a Filing System: Use physical or digital folders to store financial records, ensuring easy access when needed.
Regular Updates: Review and update the records system monthly to stay on top of financial activities.
Budgeting is not about restricting money; it’s about managing it effectively. The seven steps in the budgeting process are:
Set Financial Goals: Determine what Frank wants to achieve with his money.
Calculate Income: Sum up all sources of income, including his $72,000 salary.
List Expenses: Record all monthly expenses, categorizing them as fixed (rent, loan payments) or variable (entertainment, dining out).
Create a Budget: Balance income and expenses to meet financial goals, ensuring that expenses don’t exceed income.
Monitor and Adjust: Regularly track spending to ensure it aligns with the budget and make adjustments if necessary.
Emergency Fund: Allocate a portion of the budget to build an emergency fund for unexpected expenses.
Savings and Investments: Allocate funds for savings, investments, and debt repayment.
Frank should explore strategies to lower his taxable income:
Tax Deductions: Deductions like student loan interest, retirement contributions, and mortgage interest can reduce taxable income.
Tax Credits: Tax credits directly reduce tax liability. Examples include the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit for education expenses.
In case of an IRS audit, Frank should know his rights:
Right to Representation: Frank can have a tax professional represent him during the audit.
Right to Privacy: He has the right to confidentiality during the audit process.
Appeal Rights: If he disagrees with the audit findings, he can appeal the decision.
To conduct himself during the audit, Frank should remain calm, provide requested documents, and answer questions honestly.
Banks offer various financial services, including:
Checking and Savings Accounts: Basic accounts for daily transactions and saving money.
Loans and Credit Cards: Borrowing options for personal and business needs.
Investment Services: Investment accounts and financial advisory services.
Mortgages and Home Loans: Financing for purchasing homes.
Wealth Management: Tailored services for high-net-worth individuals.
Retirement Accounts: IRAs, 401(k) plans, and other retirement savings options.
Online and Mobile Banking: Digital tools for easy money management.
Frank can consider several savings plans for his $1,000 gift:
Emergency Fund: Set aside a portion for an emergency fund to cover unexpected expenses.
High-Yield Savings Account: A safe and liquid option with higher interest rates.
Individual Retirement Account (IRA): Start saving for retirement, which offers tax advantages.
Investment Account: Consider investing in stocks, bonds, or mutual funds for potential growth.
Education Savings Account (ESA): If Frank plans to further his education, he can save in an ESA for future educational expenses.
By following these guidelines, Frank can develop a solid financial plan, make informed financial decisions, and work toward achieving his financial goals while building a secure financial future.
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