Solution.and.Answer.Guide:.Garman/Fox,.Personal.Finance.14e,.Chapter.1:.Thinking.Like.a.Financial.Planner
SolutionandAnswerGuide . . .
GARMAN/FOX,. PERSONAL. FINANCE. 14E,. CHAPTER. 1:. THINKING. LIKE. A. FINANCIAL. PLANNER
TABLE OF CONTENTS. .
Answers.to.Chapter.Concept.Checks .......................................................................................................... 2
What.Do.You.Recommend.Now?................................................................................................................. 4
Let’s.Talk.About.It ....................................................................................................................................... 5
Do.the.Math .................................................................................................................................................. 6
Financial.Planning.Cases ............................................................................................................................. 8
Extended.Learning .................................................................................................................................... 10
©.2024.Cengage..All.Rights.Reserved..May.not.be.scanned,.copied,.or.duplicated,.or.posted.to.a.publicly.accessible 1
website,.in.whole.or.in.part.
, Solution.and.Answer.Guide:.Garman/Fox,.Personal.Finance.14e,.Chapter.1:.Thinking.Like.a.Financial.Planner
ANSWERS TO CHAPTER CONCEPT CHECKS
. . . .
LO1.1.Recognize.the.keys.to.achieving.financial.success.
1. Explain.the.five.steps.in.the.financial.planning.process.
Answer:.There.are.five.fundamental.steps.to.the.personal.financial.planning.process:.(1).evaluate.your.financia
l.health.to.your.education.and.career.choice;.(2).define.your.financial.goals;.(3).develop.a.plan.of.action.to.achiev
e.your.goals;.(4).implement.spending.and.saving.plans.to.monitor.and.control.progress.toward.your.goals;.and.(
5).review.your.financial.progress.and.make.changes.as.appropriate.
2. Distinguish.among.financial.success,.financial.security,.and.financial.happiness.
Answer:.Financial.success.is.the.achievement.of.financial.aspirations.that.are.desired,.planned,.or.attempted..
Success.is.defined.by.the.individual.or.family.that.seeks.it..Financial.success.may.be.defined.as.being.able.to.live.
according.to.one’s.standard.of.living..Financial.security.is.that.comfortable.feeling.that.your.financial.resource
s.will.be.adequate.to.fulfill.any.needs.you.have.as.well.as.your.wants..Financial.happiness.is.the.experience.you
.have.when.you.are.satisfied.with.money.matters..People.who.are.happy.about.their.finances.will.see.a.spillover.i
nto.positive.feelings.about.life.in.general.
3. Summarize.what.you.will.accomplish.studying.personal.finance.
Answer:.Several.things.can.be.accomplished.by.studying.personal.finance..Recognize.how.to.manage.unexpec
ted.and.expected.financial.events..Pay.as.little.as.possible.in.income.taxes..Understand.how.to.effectively.compa
rison.shop.for.vehicles.and.homes..Protect.what.we.own..Invest.wisely..Accumulate.and.protect.the.wealth.that.w
e.may.choose.to.spend.during.our.non-working.years.(e.g.,.retirement).or.donate.
4. What.are.the.building.blocks.to.achieving.financial.success?
Answer:.The.building.blocks.for.achieving.financial.success.include.a.foundation.of.regular.income.that.provi
des.the.means.to.support.your.lifestyle.and.save.for.desired.goals.in.the.future..The.foundation.supports.a.base.of.
various.banking.accounts,.insurance.protection,.and.employee.benefits..Then.we.can.establish.goals,.a.recordke
eping.system,.a.budget,.and.an.emergency.savings.fund..We.will.also.manage.various.expenses.such.as.housing,
.transportation,.insurance,.and.the.payment.of.taxes..We.will.also.need.to.handle.credit,.savings,.and.educational.
costs..Finally,.we.invest.in.various.investment.alternatives.such.as.mutual.funds,.stocks,.and.bonds,.often.for.ret
irement..As.a.result.of.all.these.building.blocks,.we.are.more.apt.to.have.a.financially.successful.life.
LO1.2.Understand.how.the.economy.affects.your.personal.financial.success.
1. Summarize.the.phases.of.the.business.cycle.
Answer:.The.business.cycle.entails.a.wavelike.pattern.of.rising.and.falling.economic.activity.as.measured.by.ec
onomic.indicators.like.unemployment.rates.or.the.gross.domestic.product..The.phases.of.the.business.cycle.incl
ude.expansion.(preferred.stage—
production.is.high,.unemployment.low,.interest.rates.low.or.falling,.stock.market.and.consumer.demand.high),.
peak,.contraction,.downturn,.trough,.and.recovery.
2. Describe.two.statistics.that.help.predict.the.future.direction.of.the.economy.
Answer:.Forecasting.the.state.of.the.economy.involves.predicting,.estimating,.or.calculating.what.will.happen.i
n.advance..We.need.to.be.able.to.forecast.the.state.of.the.economy,.inflation,.and.interest.rates.so.that.we.have.ad
vance.warning.of.the.directions.and.strength.of.changes.in.economic.trends.since.they.will.affect.our.personal.fin
ances..Two.statistics.we.could.watch.are.the.consumer.confidence.index.(how.consumers.feel.about.the.econom
y.and.their.personal.finances).and.the.index.of.leading.economic.indicators.(composite.index,.averages.ten.com
ponents.of.economic.growth).
©.2024.Cengage..All.Rights.Reserved..May.not.be.scanned,.copied,.or.duplicated,.or.posted.to.a.publicly.accessible 2
website,.in.whole.or.in.part.
, Solution.and.Answer.Guide:.Garman/Fox,.Personal.Finance.14e,.Chapter.1:.Thinking.Like.a.Financial.Planner
3. Give.an.example.of.how.inflation.affects.income.and.consumption.
Answer:.Inflation.reduces.the.purchasing.power.of.the.dollar..This.means.that.our.income.will.not.go.as.far.and
,.thus,.in.real.terms.will.be.lowered.by.inflation..Because.items.cost.more,.we.will.have.to.consume.less.and.may.
cut.back.on.some.expenditures.to.be.able.to.afford.those.with.a.higher.priority.
LO1.3.Think.like.an.economist.when.making.financial.decisions.
1. Define.opportunity.cost.and.give.an.example.of.how.opportunity.costs.might.affect.your.financial.deci
sion.making.
Answer:.The.opportunity.cost.of.a.decision.is.measured.as.the.value.of.the.next-
best.alternative.that.must.be.forgone..If.we,.for.example,.put.our.retirement.savings.in.a.regular.savings.account.i
nstead.of.in.a.tax-
.sheltered.retirement.account,.we.may.be.forgoing.the.tax.benefits.associated.with.investing.in.retirement.accou
nts.such.as.IRAs.or.401(k).plans..In.another.example,.if.we.decide.to.borrow.the.maximum.student.loan.amount.
for.which.we.qualify.to.live.a.bit.more.comfortably.while.in.college,.we.will.not.be.able.to.live.as.nicely,.save.as.
much.for.the.down.payment.on.a.home.or.save.for.retirement.once.we.graduate.because.of.the.higher.loan.paym
ents.
2. Explain.and.give.an.example.of.how.marginal.utility.and.marginal.cost.make.some.financial.deci
sions.easier.
Answer:.Marginal.analysis.focuses.on.the.next.increment.of.usefulness.or.cost.when.making.financial.decision
s..Marginal.utility.is.the.extra.satisfaction.derived.from.having.one.more.incremental.unit.of.a.product.or.servic
e..Marginal.cost.is.the.additional.cost.of.that.unit..When.marginal.utility.exceeds. marginal.cost,.and.we.compar
e.the.two,.we.can.make.better.financial.decisions..As.an.example,.if.you.must.fly.to.some.destination,.is.the.margi
nal.cost.of.checking.a.bag.using.a.carry-on.worth.the.marginal.utility?
3. Describe.and.give.an.example.of.how.your.marginal.income.tax.rate.can.affect.financial.decision.mak
ing.
Answer:.As.our.income.rises,.we.will.find.ourselves.in.higher.and.higher.tax.brackets..One.type.of.decision.that.
is.affected.by.income.taxes.is.how.we.should.invest.for.retirement..We.might.want.to.invest.through.a.401(k).pla
n.instead.of.keeping.our.retirement.money.in.a.savings.account,.which.is.taxable.
Since.most.types.of.income.are.taxable,.it.is.important.that.we.understand.the.impact.of.income.taxes.on.financial
.decisions..Of.particular.importance.is.the.marginal.tax.rate.(the.tax.rate.at.which.our.last.dollar.earned.is.taxed)..I
f.we.are.in.the.25.percent.marginal.tax.bracket,.we.will.get.to.keep.75.percent.(100.percent.minus.25.percent).of.o
ur.last.taxable.dollar.earned..If.the.income.is.tax-
free.income,.on.the.other.hand,.we.would.get.to.keep.100.percent.of.it..Therefore,.it.is.important.to.know.our.mar
ginal.tax.rate.as.well.as.what.types.of.income.are.subject.to.federal.income.taxes..It.is.also.important.to.remember
.the.impact.of.state.income.taxes.and.Social.Security.taxes.
LO1.4.Perform.time.value.of.money.calculations.in.personal.financial.decision.making.
1. What.are.the.two.common.questions.about.money?
Answer:.The.two.common.questions.about.money.are.its.future.value.and.present.value..Future.value.is.what.in
vestment.or.series.of.investments.will.be.at.a.point.in.the.future..Present.value.is.how.much.we.would.need.to.in
vest.today.and/or.in.a.series.of.future.investments.to.provide.some.amount.in.the.future.
2. Explain.the.difference.between.simple.interest.and.compound.interest,.and.describe.why.that.diff
erence.is.critical.
Answer:.Simple.interest.is.money.paid.on.a.principal.amount.for.a.given.number.of.years..The.interest.is.paid.o
nly.on.the.principal.(the.original.amount.invested)..For.example,.we.might.put.$1,000.in.a.bank.savings.account.
at.5.percent.interest.for.one.year..We.would.have.accumulated.$50.in.that.year.
©.2024.Cengage..All.Rights.Reserved..May.not.be.scanned,.copied,.or.duplicated,.or.posted.to.a.publicly.accessible 3
website,.in.whole.or.in.part.
, Solution.and.Answer.Guide:.Garman/Fox,.Personal.Finance.14e,.Chapter.1:.Thinking.Like.a.Financial.Planner
Compound.interest.is.interest.paid.on.interest.and.principal..For.example,.if.we.leave.your.$1,000.on.deposit.a
nd.do.not.withdraw.the.$50.interest.at.the.end.of.the.year,.we.will.earn.interest.on.both.the.deposit.and.the.interest.
earned.during.the.first.year..This.difference.in.the.types.of.interest.paid.is.important.as.compound.interest.is.the.b
asic.principle.of.accumulating.wealth..If.we.invest.regularly.over.time,.our.money.will.grow.due.to.the.power.of.
compound.interest.
3. Use.Table.1-
1.to.calculate.the.future.value.of.(a).$2,000.at.5.percent.for.four.years,.(b).$4,500.at.9.percent.for.eight.y
ears,.and.(c).$10,000.at.6.percent.for.ten.years.
Answer:
a. $2,000.at.5.percent.for.four.years.would.equal.$2,431.($2,000.×.1.2155).
b. $4,500.at.9.percent.for.eight.years.would.equal.$8,966.70.($4,500.×.1.9926).
c. $10,000.at.6.percent.for.10.years.would.equal.$17,908.($10,000.×.1.7908).
[return.to.top]
WHAT DO YOU RECOMMEND NOW?
. . . .
Now.that.you.have.read.the.chapter.on.the.importance.of.personal.finance,.what.do.you.recommend.to.Jing.Wáng.in.the.cas
e.at.the.beginning.of.the.chapter.
1. Participating.in.her.employer’s.401(k).retirement.plan?
Answer:.Jing.should.participate.in.her.employer’s.plan.because.her.contributions.reduce.her.taxable.income.an
d.will.grow.tax-
sheltered.until.withdrawn.at.retirement..By.doing.so,.she.will.qualify.for.her.employer.contributions,.thereby.re
ceiving.additional.tax-
sheltered.income.that.will.go.directly.into.her.retirement.account..If.Jing.contributed.8.percent.of.her.salary,.her.
employer.would.match.it.with.4.percent.for.a.total.of.12.percent..Her.total.contribution.would.be.$9,600.based.o
n.her.salary.of.$80,000.
2. Understanding.the.effects.of.her.marginal.tax.rate.on.her.financial.decisions?
Answer:.Jing.should.use.her.marginal.tax.rate.to.assess.how.changes.in.her.income.and.the.financial.decisions.s
he.will.make.would.be.affected.by.taxes..For.every.extra.dollar.that.she.contributes.to.her.retirement.plan,.for.ex
ample,.she.will.save.$0.25.in.taxes.if.she.is.in.the.25.percent.tax.bracket..Also,.if.she.earns.an.extra.dollar,.it.will.b
e.taxed.at.her.marginal.rate.
3. Considering.the.current.state.of.the.economy.in.her.personal.financial.planning?
Answer:.Jing.should.stay.informed.about.economic.trends.as.indicated.in.changes.in.the.gross.domestic.produc
t,.index.of.leading.economic.indicators,.and.consumer.price.index..She.should.also.keep.track.of.the.federal.fund
s.rate.as.an.indicator.of.interest.rates.in.the.economy..She.should.be.able.to.make.her.own.estimate.for.economic.
growth,.inflation,.and.interest.rates.over.the.next.couple.of.years.
4. Using.time.value.of.money.considerations.to.project.what.her.Roth-IRA.might.be.worth.at.age.63?
Answer:.Jing.could.use.Appendix.A.1.to.calculate.how.much.her.IRA.fund.(currently.$2,000).would.grow.in.40.
years..She.would.need.to.assume.a.rate.of.return.on.the.funds..An.8.to.10.percent.rate.would.be.appropriate.given.
the.investment.opportunities.available.to.her.in.her.IRA..At.8.percent,.her.account.would.be.worth.about.$43,449
.(21.7245.×.$2,000).
5. Using.time.value.of.money.considerations.to.project.what.her.401(k).plan.might.be.worth.at.age.63.if.she.w
ere.to.participate.fully?
©.2024.Cengage..All.Rights.Reserved..May.not.be.scanned,.copied,.or.duplicated,.or.posted.to.a.publicly.accessible 4
website,.in.whole.or.in.part.
SolutionandAnswerGuide . . .
GARMAN/FOX,. PERSONAL. FINANCE. 14E,. CHAPTER. 1:. THINKING. LIKE. A. FINANCIAL. PLANNER
TABLE OF CONTENTS. .
Answers.to.Chapter.Concept.Checks .......................................................................................................... 2
What.Do.You.Recommend.Now?................................................................................................................. 4
Let’s.Talk.About.It ....................................................................................................................................... 5
Do.the.Math .................................................................................................................................................. 6
Financial.Planning.Cases ............................................................................................................................. 8
Extended.Learning .................................................................................................................................... 10
©.2024.Cengage..All.Rights.Reserved..May.not.be.scanned,.copied,.or.duplicated,.or.posted.to.a.publicly.accessible 1
website,.in.whole.or.in.part.
, Solution.and.Answer.Guide:.Garman/Fox,.Personal.Finance.14e,.Chapter.1:.Thinking.Like.a.Financial.Planner
ANSWERS TO CHAPTER CONCEPT CHECKS
. . . .
LO1.1.Recognize.the.keys.to.achieving.financial.success.
1. Explain.the.five.steps.in.the.financial.planning.process.
Answer:.There.are.five.fundamental.steps.to.the.personal.financial.planning.process:.(1).evaluate.your.financia
l.health.to.your.education.and.career.choice;.(2).define.your.financial.goals;.(3).develop.a.plan.of.action.to.achiev
e.your.goals;.(4).implement.spending.and.saving.plans.to.monitor.and.control.progress.toward.your.goals;.and.(
5).review.your.financial.progress.and.make.changes.as.appropriate.
2. Distinguish.among.financial.success,.financial.security,.and.financial.happiness.
Answer:.Financial.success.is.the.achievement.of.financial.aspirations.that.are.desired,.planned,.or.attempted..
Success.is.defined.by.the.individual.or.family.that.seeks.it..Financial.success.may.be.defined.as.being.able.to.live.
according.to.one’s.standard.of.living..Financial.security.is.that.comfortable.feeling.that.your.financial.resource
s.will.be.adequate.to.fulfill.any.needs.you.have.as.well.as.your.wants..Financial.happiness.is.the.experience.you
.have.when.you.are.satisfied.with.money.matters..People.who.are.happy.about.their.finances.will.see.a.spillover.i
nto.positive.feelings.about.life.in.general.
3. Summarize.what.you.will.accomplish.studying.personal.finance.
Answer:.Several.things.can.be.accomplished.by.studying.personal.finance..Recognize.how.to.manage.unexpec
ted.and.expected.financial.events..Pay.as.little.as.possible.in.income.taxes..Understand.how.to.effectively.compa
rison.shop.for.vehicles.and.homes..Protect.what.we.own..Invest.wisely..Accumulate.and.protect.the.wealth.that.w
e.may.choose.to.spend.during.our.non-working.years.(e.g.,.retirement).or.donate.
4. What.are.the.building.blocks.to.achieving.financial.success?
Answer:.The.building.blocks.for.achieving.financial.success.include.a.foundation.of.regular.income.that.provi
des.the.means.to.support.your.lifestyle.and.save.for.desired.goals.in.the.future..The.foundation.supports.a.base.of.
various.banking.accounts,.insurance.protection,.and.employee.benefits..Then.we.can.establish.goals,.a.recordke
eping.system,.a.budget,.and.an.emergency.savings.fund..We.will.also.manage.various.expenses.such.as.housing,
.transportation,.insurance,.and.the.payment.of.taxes..We.will.also.need.to.handle.credit,.savings,.and.educational.
costs..Finally,.we.invest.in.various.investment.alternatives.such.as.mutual.funds,.stocks,.and.bonds,.often.for.ret
irement..As.a.result.of.all.these.building.blocks,.we.are.more.apt.to.have.a.financially.successful.life.
LO1.2.Understand.how.the.economy.affects.your.personal.financial.success.
1. Summarize.the.phases.of.the.business.cycle.
Answer:.The.business.cycle.entails.a.wavelike.pattern.of.rising.and.falling.economic.activity.as.measured.by.ec
onomic.indicators.like.unemployment.rates.or.the.gross.domestic.product..The.phases.of.the.business.cycle.incl
ude.expansion.(preferred.stage—
production.is.high,.unemployment.low,.interest.rates.low.or.falling,.stock.market.and.consumer.demand.high),.
peak,.contraction,.downturn,.trough,.and.recovery.
2. Describe.two.statistics.that.help.predict.the.future.direction.of.the.economy.
Answer:.Forecasting.the.state.of.the.economy.involves.predicting,.estimating,.or.calculating.what.will.happen.i
n.advance..We.need.to.be.able.to.forecast.the.state.of.the.economy,.inflation,.and.interest.rates.so.that.we.have.ad
vance.warning.of.the.directions.and.strength.of.changes.in.economic.trends.since.they.will.affect.our.personal.fin
ances..Two.statistics.we.could.watch.are.the.consumer.confidence.index.(how.consumers.feel.about.the.econom
y.and.their.personal.finances).and.the.index.of.leading.economic.indicators.(composite.index,.averages.ten.com
ponents.of.economic.growth).
©.2024.Cengage..All.Rights.Reserved..May.not.be.scanned,.copied,.or.duplicated,.or.posted.to.a.publicly.accessible 2
website,.in.whole.or.in.part.
, Solution.and.Answer.Guide:.Garman/Fox,.Personal.Finance.14e,.Chapter.1:.Thinking.Like.a.Financial.Planner
3. Give.an.example.of.how.inflation.affects.income.and.consumption.
Answer:.Inflation.reduces.the.purchasing.power.of.the.dollar..This.means.that.our.income.will.not.go.as.far.and
,.thus,.in.real.terms.will.be.lowered.by.inflation..Because.items.cost.more,.we.will.have.to.consume.less.and.may.
cut.back.on.some.expenditures.to.be.able.to.afford.those.with.a.higher.priority.
LO1.3.Think.like.an.economist.when.making.financial.decisions.
1. Define.opportunity.cost.and.give.an.example.of.how.opportunity.costs.might.affect.your.financial.deci
sion.making.
Answer:.The.opportunity.cost.of.a.decision.is.measured.as.the.value.of.the.next-
best.alternative.that.must.be.forgone..If.we,.for.example,.put.our.retirement.savings.in.a.regular.savings.account.i
nstead.of.in.a.tax-
.sheltered.retirement.account,.we.may.be.forgoing.the.tax.benefits.associated.with.investing.in.retirement.accou
nts.such.as.IRAs.or.401(k).plans..In.another.example,.if.we.decide.to.borrow.the.maximum.student.loan.amount.
for.which.we.qualify.to.live.a.bit.more.comfortably.while.in.college,.we.will.not.be.able.to.live.as.nicely,.save.as.
much.for.the.down.payment.on.a.home.or.save.for.retirement.once.we.graduate.because.of.the.higher.loan.paym
ents.
2. Explain.and.give.an.example.of.how.marginal.utility.and.marginal.cost.make.some.financial.deci
sions.easier.
Answer:.Marginal.analysis.focuses.on.the.next.increment.of.usefulness.or.cost.when.making.financial.decision
s..Marginal.utility.is.the.extra.satisfaction.derived.from.having.one.more.incremental.unit.of.a.product.or.servic
e..Marginal.cost.is.the.additional.cost.of.that.unit..When.marginal.utility.exceeds. marginal.cost,.and.we.compar
e.the.two,.we.can.make.better.financial.decisions..As.an.example,.if.you.must.fly.to.some.destination,.is.the.margi
nal.cost.of.checking.a.bag.using.a.carry-on.worth.the.marginal.utility?
3. Describe.and.give.an.example.of.how.your.marginal.income.tax.rate.can.affect.financial.decision.mak
ing.
Answer:.As.our.income.rises,.we.will.find.ourselves.in.higher.and.higher.tax.brackets..One.type.of.decision.that.
is.affected.by.income.taxes.is.how.we.should.invest.for.retirement..We.might.want.to.invest.through.a.401(k).pla
n.instead.of.keeping.our.retirement.money.in.a.savings.account,.which.is.taxable.
Since.most.types.of.income.are.taxable,.it.is.important.that.we.understand.the.impact.of.income.taxes.on.financial
.decisions..Of.particular.importance.is.the.marginal.tax.rate.(the.tax.rate.at.which.our.last.dollar.earned.is.taxed)..I
f.we.are.in.the.25.percent.marginal.tax.bracket,.we.will.get.to.keep.75.percent.(100.percent.minus.25.percent).of.o
ur.last.taxable.dollar.earned..If.the.income.is.tax-
free.income,.on.the.other.hand,.we.would.get.to.keep.100.percent.of.it..Therefore,.it.is.important.to.know.our.mar
ginal.tax.rate.as.well.as.what.types.of.income.are.subject.to.federal.income.taxes..It.is.also.important.to.remember
.the.impact.of.state.income.taxes.and.Social.Security.taxes.
LO1.4.Perform.time.value.of.money.calculations.in.personal.financial.decision.making.
1. What.are.the.two.common.questions.about.money?
Answer:.The.two.common.questions.about.money.are.its.future.value.and.present.value..Future.value.is.what.in
vestment.or.series.of.investments.will.be.at.a.point.in.the.future..Present.value.is.how.much.we.would.need.to.in
vest.today.and/or.in.a.series.of.future.investments.to.provide.some.amount.in.the.future.
2. Explain.the.difference.between.simple.interest.and.compound.interest,.and.describe.why.that.diff
erence.is.critical.
Answer:.Simple.interest.is.money.paid.on.a.principal.amount.for.a.given.number.of.years..The.interest.is.paid.o
nly.on.the.principal.(the.original.amount.invested)..For.example,.we.might.put.$1,000.in.a.bank.savings.account.
at.5.percent.interest.for.one.year..We.would.have.accumulated.$50.in.that.year.
©.2024.Cengage..All.Rights.Reserved..May.not.be.scanned,.copied,.or.duplicated,.or.posted.to.a.publicly.accessible 3
website,.in.whole.or.in.part.
, Solution.and.Answer.Guide:.Garman/Fox,.Personal.Finance.14e,.Chapter.1:.Thinking.Like.a.Financial.Planner
Compound.interest.is.interest.paid.on.interest.and.principal..For.example,.if.we.leave.your.$1,000.on.deposit.a
nd.do.not.withdraw.the.$50.interest.at.the.end.of.the.year,.we.will.earn.interest.on.both.the.deposit.and.the.interest.
earned.during.the.first.year..This.difference.in.the.types.of.interest.paid.is.important.as.compound.interest.is.the.b
asic.principle.of.accumulating.wealth..If.we.invest.regularly.over.time,.our.money.will.grow.due.to.the.power.of.
compound.interest.
3. Use.Table.1-
1.to.calculate.the.future.value.of.(a).$2,000.at.5.percent.for.four.years,.(b).$4,500.at.9.percent.for.eight.y
ears,.and.(c).$10,000.at.6.percent.for.ten.years.
Answer:
a. $2,000.at.5.percent.for.four.years.would.equal.$2,431.($2,000.×.1.2155).
b. $4,500.at.9.percent.for.eight.years.would.equal.$8,966.70.($4,500.×.1.9926).
c. $10,000.at.6.percent.for.10.years.would.equal.$17,908.($10,000.×.1.7908).
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WHAT DO YOU RECOMMEND NOW?
. . . .
Now.that.you.have.read.the.chapter.on.the.importance.of.personal.finance,.what.do.you.recommend.to.Jing.Wáng.in.the.cas
e.at.the.beginning.of.the.chapter.
1. Participating.in.her.employer’s.401(k).retirement.plan?
Answer:.Jing.should.participate.in.her.employer’s.plan.because.her.contributions.reduce.her.taxable.income.an
d.will.grow.tax-
sheltered.until.withdrawn.at.retirement..By.doing.so,.she.will.qualify.for.her.employer.contributions,.thereby.re
ceiving.additional.tax-
sheltered.income.that.will.go.directly.into.her.retirement.account..If.Jing.contributed.8.percent.of.her.salary,.her.
employer.would.match.it.with.4.percent.for.a.total.of.12.percent..Her.total.contribution.would.be.$9,600.based.o
n.her.salary.of.$80,000.
2. Understanding.the.effects.of.her.marginal.tax.rate.on.her.financial.decisions?
Answer:.Jing.should.use.her.marginal.tax.rate.to.assess.how.changes.in.her.income.and.the.financial.decisions.s
he.will.make.would.be.affected.by.taxes..For.every.extra.dollar.that.she.contributes.to.her.retirement.plan,.for.ex
ample,.she.will.save.$0.25.in.taxes.if.she.is.in.the.25.percent.tax.bracket..Also,.if.she.earns.an.extra.dollar,.it.will.b
e.taxed.at.her.marginal.rate.
3. Considering.the.current.state.of.the.economy.in.her.personal.financial.planning?
Answer:.Jing.should.stay.informed.about.economic.trends.as.indicated.in.changes.in.the.gross.domestic.produc
t,.index.of.leading.economic.indicators,.and.consumer.price.index..She.should.also.keep.track.of.the.federal.fund
s.rate.as.an.indicator.of.interest.rates.in.the.economy..She.should.be.able.to.make.her.own.estimate.for.economic.
growth,.inflation,.and.interest.rates.over.the.next.couple.of.years.
4. Using.time.value.of.money.considerations.to.project.what.her.Roth-IRA.might.be.worth.at.age.63?
Answer:.Jing.could.use.Appendix.A.1.to.calculate.how.much.her.IRA.fund.(currently.$2,000).would.grow.in.40.
years..She.would.need.to.assume.a.rate.of.return.on.the.funds..An.8.to.10.percent.rate.would.be.appropriate.given.
the.investment.opportunities.available.to.her.in.her.IRA..At.8.percent,.her.account.would.be.worth.about.$43,449
.(21.7245.×.$2,000).
5. Using.time.value.of.money.considerations.to.project.what.her.401(k).plan.might.be.worth.at.age.63.if.she.w
ere.to.participate.fully?
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website,.in.whole.or.in.part.
