SolutiongandgAnswergGuide:gGarman/Fox,gPersonalgFinanceg14e,gChapterg1:gThinkinggLikegagFinancialgPl
anner
Solution and Answer Guide g g g
GARMAN/FOX,G PERSONALG FINANCEG 14E,G CHAPTERG 1:G THINKINGG LIKEG AG FINANCIALG PLANNER
TABLE OF CONTENTSG G
AnswersgtogChaptergConceptgChecks ....................................................................................................... 2
WhatgDogYougRecommendgNow? ............................................................................................................. 4
Let’sgTalkgAboutgIt ..................................................................................................................................... 5
DogthegMath................................................................................................................................................. 6
FinancialgPlanninggCases ........................................................................................................................... 8
ExtendedgLearning.................................................................................................................................... 10
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 1
essible
website,gingwholegorgingpart.
, SolutiongandgAnswergGuide:gGarman/Fox,gPersonalgFinanceg14e,gChapterg1:gThinkinggLikegagFinancialgPl
anner
ANSWERS TO CHAPTER CONCEPT CHECKS
G G G G
LO1.1gRecognizegthegkeysgtogachievinggfinancialgsuccess.
1. Explaingthegfivegstepsgingthegfinancialgplanninggprocess.
Answer:gTheregaregfivegfundamentalgstepsgtogthegpersonalgfinancialgplanninggprocess:g(1)gevaluategyourg
financialghealthgtogyourgeducationgandgcareergchoice;g(2)gdefinegyourgfinancialggoals;g(3)gdevelopgagplang
ofgactiongtogachievegyourggoals;g(4)gimplementgspendinggandgsavinggplansgtogmonitorgandgcontrolgprogr
essgtowardgyourggoals;gandg(5)greviewgyourgfinancialgprogressgandgmakegchangesgasgappropriate.
2. Distinguishgamonggfinancialgsuccess,gfinancialgsecurity,gandgfinancialghappiness.
Answer:gFinancialgsuccessgisgthegachievementgofgfinancialgaspirationsgthatgaregdesired,gplanned,gorgatte
mpted.gSuccessgisgdefinedgbygthegindividualgorgfamilygthatgseeksgit.gFinancialgsuccessgmaygbegdefinedgas
gbeinggablegtoglivegaccordinggtogone’sgstandardgofgliving.gFinancialgsecuritygisgthatgcomfortablegfeelingg
thatgyourgfinancialgresourcesgwillgbegadequategtogfulfillganygneedsgyoughavegasgwellgasgyourgwants.gFina
ncialghappinessgisgthegexperiencegyoughavegwhengyougaregsatisfiedgwithgmoneygmatters.gPeoplegwhogar
eghappygaboutgtheirgfinancesgwillgseegagspillovergintogpositivegfeelingsgaboutglifeginggeneral.
3. Summarizegwhatgyougwillgaccomplishgstudyinggpersonalgfinance.
Answer:gSeveralgthingsgcangbegaccomplishedgbygstudyinggpersonalgfinance.gRecognizeghowgtogmanageg
unexpectedgandgexpectedgfinancialgevents.gPaygasglittlegasgpossiblegingincomegtaxes.gUnderstandghowgtog
effectivelygcomparisongshopgforgvehiclesgandghomes.gProtectgwhatgwegown.gInvestgwisely.gAccumulatega
ndgprotectgthegwealthgthatgwegmaygchoosegtogspendgduringgourgnon-
workinggyearsg(e.g.,gretirement)gorgdonate.
4. Whatgaregthegbuildinggblocksgtogachievinggfinancialgsuccess?
Answer:gThegbuildinggblocksgforgachievinggfinancialgsuccessgincludegagfoundationgofgregulargincomegth
atgprovidesgthegmeansgtogsupportgyourglifestylegandgsavegforgdesiredggoalsgingthegfuture.gThegfoundation
gsupportsgagbasegofgvariousgbankinggaccounts,ginsurancegprotection,gandgemployeegbenefits.gThengwegca
ngestablishggoals,gagrecordkeepinggsystem,gagbudget,gandgangemergencygsavingsgfund.gWegwillgalsogman
agegvariousgexpensesgsuchgasghousing,gtransportation,ginsurance,gandgthegpaymentgofgtaxes.gWegwillgalso
gneedgtoghandlegcredit,gsavings,gandgeducationalgcosts.gFinally,gweginvestgingvariousginvestmentgalternati
vesgsuchgasgmutualgfunds,gstocks,gandgbonds,goftengforgretirement.gAsgagresultgofgallgthesegbuildinggbloc
ks,gwegaregmoregaptgtoghavegagfinanciallygsuccessfulglife.
LO1.2gUnderstandghowgthegeconomygaffectsgyourgpersonalgfinancialgsuccess.
1. Summarizegthegphasesgofgthegbusinessgcycle.
Answer:gThegbusinessgcyclegentailsgagwavelikegpatterngofgrisinggandgfallinggeconomicgactivitygasgmeasu
redgbygeconomicgindicatorsglikegunemploymentgratesgorgtheggrossgdomesticgproduct.gThegphasesgofgthegb
usinessgcyclegincludegexpansiong(preferredgstage—
productiongisghigh,gunemploymentglow,ginterestgratesglowgorgfalling,gstockgmarketgandgconsumergdeman
dghigh),gpeak,gcontraction,gdownturn,gtrough,gandgrecovery.
2. Describegtwogstatisticsgthatghelpgpredictgthegfuturegdirectiongofgthegeconomy.
Answer:gForecastinggthegstategofgthegeconomyginvolvesgpredicting,gestimating,gorgcalculatinggwhatgwillg
happengingadvance.gWegneedgtogbegablegtogforecastgthegstategofgthegeconomy,ginflation,gandginterestgrates
gsogthatgweghavegadvancegwarninggofgthegdirectionsgandgstrengthgofgchangesgingeconomicgtrendsgsincegth
eygwillgaffectgourgpersonalgfinances.gTwogstatisticsgwegcouldgwatchgaregthegconsumergconfidencegindexg
(howgconsumersgfeelgaboutgthegeconomygandgtheirgpersonalgfinances)gandgthegindexgofgleadinggeconomi
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 2
essible
website,gingwholegorgingpart.
, SolutiongandgAnswergGuide:gGarman/Fox,gPersonalgFinanceg14e,gChapterg1:gThinkinggLikegagFinancialgPl
anner
cgindicatorsg(compositegindex,gaveragesgtengcomponentsgofgeconomicggrowth).
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 3
essible
website,gingwholegorgingpart.
, SolutiongandgAnswergGuide:gGarman/Fox,gPersonalgFinanceg14e,gChapterg1:gThinkinggLikegagFinancialgPl
anner
3. Givegangexamplegofghowginflationgaffectsgincomegandgconsumption.
Answer:gInflationgreducesgthegpurchasinggpowergofgthegdollar.gThisgmeansgthatgourgincomegwillgnotggo
gasgfargand,gthus,gingrealgtermsgwillgbegloweredgbyginflation.gBecausegitemsgcostgmore, gwegwillghavegtogc
onsumeglessgandgmaygcutgbackgongsomegexpendituresgtogbegablegtogaffordgthosegwithgaghighergpriority.
LO1.3gThinkglikegangeconomistgwhengmakinggfinancialgdecisions.
1. Definegopportunitygcostgandggivegangexamplegofghowgopportunitygcostsgmightgaffectgyourgfinan
cialgdecisiongmaking.
Answer:gThegopportunitygcostgofgagdecisiongisgmeasuredgasgthegvaluegofgthegnext-
bestgalternativegthatgmustgbegforgone.gIfgwe,gforgexample,gputgourgretirementgsavingsgingagregulargsaving
sgaccountginsteadgofgingagtax-
gshelteredgretirementgaccount,gwegmaygbegforgoinggthegtaxgbenefitsgassociatedgwithginvestinggingretireme
ntgaccountsgsuchgasgIRAsgorg401(k)gplans.gInganothergexample,gifgwegdecidegtogborrowgthegmaximumgst
udentgloangamountgforgwhichgwegqualifygtoglivegagbitgmoregcomfortablygwhilegingcollege,gwegwillgnotgb
egablegtoglivegasgnicely,gsavegasgmuchgforgthegdowngpaymentgongaghomegorgsavegforgretirementgoncegwe
ggraduategbecausegofgtheghighergloangpayments.
2. Explaingandggivegangexamplegofghowgmarginalgutilitygandgmarginalgcostgmakegsomegfinan
cialgdecisionsgeasier.
Answer:gMarginalganalysisgfocusesgongthegnextgincrementgofgusefulnessgorgcostgwhengmakinggfinancialg
decisions.gMarginalgutilitygisgthegextragsatisfactiongderivedgfromghavinggonegmoregincrementalgunitgofga
gproductgorgservice.gMarginalgcostgisgthegadditionalgcostgofgthatgunit.gWhengmarginalgutilitygexceedsg m
arginalgcost,gandgwegcomparegthegtwo,gwegcangmakegbettergfinancialgdecisions.gAsgangexample,gifgyougm
ustgflygtogsomegdestination,gisgthegmarginalgcostgofgcheckinggagbaggusinggagcarry-
ongworthgthegmarginalgutility?
3. Describegandggivegangexamplegofghowgyourgmarginalgincomegtaxgrategcangaffectgfinancialgdecis
iongmaking.
Answer:gAsgourgincomegrises,gwegwillgfindgourselvesginghighergandghighergtaxgbrackets.gOnegtypegofgde
cisiongthatgisgaffectedgbygincomegtaxesgisghowgwegshouldginvestgforgretirement.gWegmightgwantgtoginvest
gthroughgag401(k)gplanginsteadgofgkeepinggourgretirementgmoneygingagsavingsgaccount,gwhichgisgtaxable.
Sincegmostgtypesgofgincomegaregtaxable,gitgisgimportantgthatgwegunderstandgthegimpactgofgincomegtaxesgo
ngfinancialgdecisions.gOfgparticulargimportancegisgthegmarginalgtaxgrateg(thegtaxgrategatgwhichgourglastgdo
llargearnedgisgtaxed).gIfgwegaregingtheg25gpercentgmarginalgtaxgbracket,gwegwillggetgtogkeepg75gpercentg(
100gpercentgminusg25gpercent)gofgourglastgtaxablegdollargearned.gIfgthegincomegisgtax-
freegincome,gongthegotherghand,gwegwouldggetgtogkeepg100gpercentgofgit.gTherefore,gitgisgimportantgtogkn
owgourgmarginalgtaxgrategasgwellgasgwhatgtypesgofgincomegaregsubjectgtogfederalgincomegtaxes.gItgisgalso
gimportantgtogremember gthegimpactgofgstategincomegtaxesgandgSocialgSecuritygtaxes.
LO1.4gPerformgtimegvaluegofgmoneygcalculationsgingpersonalgfinancialgdecisiongmaking.
1. Whatgaregthegtwogcommongquestionsgaboutgmoney?
Answer:gThegtwogcommongquestionsgaboutgmoneygaregitsgfuturegvaluegandgpresentgvalue.gFuturegvalueg
isgwhatginvestmentgorgseriesgofginvestmentsgwillgbegatgagpointgingthegfuture.gPresentgvaluegisghowgmuch
gwegwouldgneedgtoginvestgtodaygand/orgingagseriesgofgfutureginvestmentsgtogprovidegsomegamountgingtheg
future.
2. Explaingthegdifferencegbetweengsimpleginterestgandgcompoundginterest,gandgdescribegwhygt
hatgdifferencegisgcritical.
Answer:gSimpleginterestgisgmoneygpaidgongagprincipalgamountgforgaggivengnumbergofgyears.gTheginteres
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 4
essible
website,gingwholegorgingpart.
anner
Solution and Answer Guide g g g
GARMAN/FOX,G PERSONALG FINANCEG 14E,G CHAPTERG 1:G THINKINGG LIKEG AG FINANCIALG PLANNER
TABLE OF CONTENTSG G
AnswersgtogChaptergConceptgChecks ....................................................................................................... 2
WhatgDogYougRecommendgNow? ............................................................................................................. 4
Let’sgTalkgAboutgIt ..................................................................................................................................... 5
DogthegMath................................................................................................................................................. 6
FinancialgPlanninggCases ........................................................................................................................... 8
ExtendedgLearning.................................................................................................................................... 10
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 1
essible
website,gingwholegorgingpart.
, SolutiongandgAnswergGuide:gGarman/Fox,gPersonalgFinanceg14e,gChapterg1:gThinkinggLikegagFinancialgPl
anner
ANSWERS TO CHAPTER CONCEPT CHECKS
G G G G
LO1.1gRecognizegthegkeysgtogachievinggfinancialgsuccess.
1. Explaingthegfivegstepsgingthegfinancialgplanninggprocess.
Answer:gTheregaregfivegfundamentalgstepsgtogthegpersonalgfinancialgplanninggprocess:g(1)gevaluategyourg
financialghealthgtogyourgeducationgandgcareergchoice;g(2)gdefinegyourgfinancialggoals;g(3)gdevelopgagplang
ofgactiongtogachievegyourggoals;g(4)gimplementgspendinggandgsavinggplansgtogmonitorgandgcontrolgprogr
essgtowardgyourggoals;gandg(5)greviewgyourgfinancialgprogressgandgmakegchangesgasgappropriate.
2. Distinguishgamonggfinancialgsuccess,gfinancialgsecurity,gandgfinancialghappiness.
Answer:gFinancialgsuccessgisgthegachievementgofgfinancialgaspirationsgthatgaregdesired,gplanned,gorgatte
mpted.gSuccessgisgdefinedgbygthegindividualgorgfamilygthatgseeksgit.gFinancialgsuccessgmaygbegdefinedgas
gbeinggablegtoglivegaccordinggtogone’sgstandardgofgliving.gFinancialgsecuritygisgthatgcomfortablegfeelingg
thatgyourgfinancialgresourcesgwillgbegadequategtogfulfillganygneedsgyoughavegasgwellgasgyourgwants.gFina
ncialghappinessgisgthegexperiencegyoughavegwhengyougaregsatisfiedgwithgmoneygmatters.gPeoplegwhogar
eghappygaboutgtheirgfinancesgwillgseegagspillovergintogpositivegfeelingsgaboutglifeginggeneral.
3. Summarizegwhatgyougwillgaccomplishgstudyinggpersonalgfinance.
Answer:gSeveralgthingsgcangbegaccomplishedgbygstudyinggpersonalgfinance.gRecognizeghowgtogmanageg
unexpectedgandgexpectedgfinancialgevents.gPaygasglittlegasgpossiblegingincomegtaxes.gUnderstandghowgtog
effectivelygcomparisongshopgforgvehiclesgandghomes.gProtectgwhatgwegown.gInvestgwisely.gAccumulatega
ndgprotectgthegwealthgthatgwegmaygchoosegtogspendgduringgourgnon-
workinggyearsg(e.g.,gretirement)gorgdonate.
4. Whatgaregthegbuildinggblocksgtogachievinggfinancialgsuccess?
Answer:gThegbuildinggblocksgforgachievinggfinancialgsuccessgincludegagfoundationgofgregulargincomegth
atgprovidesgthegmeansgtogsupportgyourglifestylegandgsavegforgdesiredggoalsgingthegfuture.gThegfoundation
gsupportsgagbasegofgvariousgbankinggaccounts,ginsurancegprotection,gandgemployeegbenefits.gThengwegca
ngestablishggoals,gagrecordkeepinggsystem,gagbudget,gandgangemergencygsavingsgfund.gWegwillgalsogman
agegvariousgexpensesgsuchgasghousing,gtransportation,ginsurance,gandgthegpaymentgofgtaxes.gWegwillgalso
gneedgtoghandlegcredit,gsavings,gandgeducationalgcosts.gFinally,gweginvestgingvariousginvestmentgalternati
vesgsuchgasgmutualgfunds,gstocks,gandgbonds,goftengforgretirement.gAsgagresultgofgallgthesegbuildinggbloc
ks,gwegaregmoregaptgtoghavegagfinanciallygsuccessfulglife.
LO1.2gUnderstandghowgthegeconomygaffectsgyourgpersonalgfinancialgsuccess.
1. Summarizegthegphasesgofgthegbusinessgcycle.
Answer:gThegbusinessgcyclegentailsgagwavelikegpatterngofgrisinggandgfallinggeconomicgactivitygasgmeasu
redgbygeconomicgindicatorsglikegunemploymentgratesgorgtheggrossgdomesticgproduct.gThegphasesgofgthegb
usinessgcyclegincludegexpansiong(preferredgstage—
productiongisghigh,gunemploymentglow,ginterestgratesglowgorgfalling,gstockgmarketgandgconsumergdeman
dghigh),gpeak,gcontraction,gdownturn,gtrough,gandgrecovery.
2. Describegtwogstatisticsgthatghelpgpredictgthegfuturegdirectiongofgthegeconomy.
Answer:gForecastinggthegstategofgthegeconomyginvolvesgpredicting,gestimating,gorgcalculatinggwhatgwillg
happengingadvance.gWegneedgtogbegablegtogforecastgthegstategofgthegeconomy,ginflation,gandginterestgrates
gsogthatgweghavegadvancegwarninggofgthegdirectionsgandgstrengthgofgchangesgingeconomicgtrendsgsincegth
eygwillgaffectgourgpersonalgfinances.gTwogstatisticsgwegcouldgwatchgaregthegconsumergconfidencegindexg
(howgconsumersgfeelgaboutgthegeconomygandgtheirgpersonalgfinances)gandgthegindexgofgleadinggeconomi
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 2
essible
website,gingwholegorgingpart.
, SolutiongandgAnswergGuide:gGarman/Fox,gPersonalgFinanceg14e,gChapterg1:gThinkinggLikegagFinancialgPl
anner
cgindicatorsg(compositegindex,gaveragesgtengcomponentsgofgeconomicggrowth).
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 3
essible
website,gingwholegorgingpart.
, SolutiongandgAnswergGuide:gGarman/Fox,gPersonalgFinanceg14e,gChapterg1:gThinkinggLikegagFinancialgPl
anner
3. Givegangexamplegofghowginflationgaffectsgincomegandgconsumption.
Answer:gInflationgreducesgthegpurchasinggpowergofgthegdollar.gThisgmeansgthatgourgincomegwillgnotggo
gasgfargand,gthus,gingrealgtermsgwillgbegloweredgbyginflation.gBecausegitemsgcostgmore, gwegwillghavegtogc
onsumeglessgandgmaygcutgbackgongsomegexpendituresgtogbegablegtogaffordgthosegwithgaghighergpriority.
LO1.3gThinkglikegangeconomistgwhengmakinggfinancialgdecisions.
1. Definegopportunitygcostgandggivegangexamplegofghowgopportunitygcostsgmightgaffectgyourgfinan
cialgdecisiongmaking.
Answer:gThegopportunitygcostgofgagdecisiongisgmeasuredgasgthegvaluegofgthegnext-
bestgalternativegthatgmustgbegforgone.gIfgwe,gforgexample,gputgourgretirementgsavingsgingagregulargsaving
sgaccountginsteadgofgingagtax-
gshelteredgretirementgaccount,gwegmaygbegforgoinggthegtaxgbenefitsgassociatedgwithginvestinggingretireme
ntgaccountsgsuchgasgIRAsgorg401(k)gplans.gInganothergexample,gifgwegdecidegtogborrowgthegmaximumgst
udentgloangamountgforgwhichgwegqualifygtoglivegagbitgmoregcomfortablygwhilegingcollege,gwegwillgnotgb
egablegtoglivegasgnicely,gsavegasgmuchgforgthegdowngpaymentgongaghomegorgsavegforgretirementgoncegwe
ggraduategbecausegofgtheghighergloangpayments.
2. Explaingandggivegangexamplegofghowgmarginalgutilitygandgmarginalgcostgmakegsomegfinan
cialgdecisionsgeasier.
Answer:gMarginalganalysisgfocusesgongthegnextgincrementgofgusefulnessgorgcostgwhengmakinggfinancialg
decisions.gMarginalgutilitygisgthegextragsatisfactiongderivedgfromghavinggonegmoregincrementalgunitgofga
gproductgorgservice.gMarginalgcostgisgthegadditionalgcostgofgthatgunit.gWhengmarginalgutilitygexceedsg m
arginalgcost,gandgwegcomparegthegtwo,gwegcangmakegbettergfinancialgdecisions.gAsgangexample,gifgyougm
ustgflygtogsomegdestination,gisgthegmarginalgcostgofgcheckinggagbaggusinggagcarry-
ongworthgthegmarginalgutility?
3. Describegandggivegangexamplegofghowgyourgmarginalgincomegtaxgrategcangaffectgfinancialgdecis
iongmaking.
Answer:gAsgourgincomegrises,gwegwillgfindgourselvesginghighergandghighergtaxgbrackets.gOnegtypegofgde
cisiongthatgisgaffectedgbygincomegtaxesgisghowgwegshouldginvestgforgretirement.gWegmightgwantgtoginvest
gthroughgag401(k)gplanginsteadgofgkeepinggourgretirementgmoneygingagsavingsgaccount,gwhichgisgtaxable.
Sincegmostgtypesgofgincomegaregtaxable,gitgisgimportantgthatgwegunderstandgthegimpactgofgincomegtaxesgo
ngfinancialgdecisions.gOfgparticulargimportancegisgthegmarginalgtaxgrateg(thegtaxgrategatgwhichgourglastgdo
llargearnedgisgtaxed).gIfgwegaregingtheg25gpercentgmarginalgtaxgbracket,gwegwillggetgtogkeepg75gpercentg(
100gpercentgminusg25gpercent)gofgourglastgtaxablegdollargearned.gIfgthegincomegisgtax-
freegincome,gongthegotherghand,gwegwouldggetgtogkeepg100gpercentgofgit.gTherefore,gitgisgimportantgtogkn
owgourgmarginalgtaxgrategasgwellgasgwhatgtypesgofgincomegaregsubjectgtogfederalgincomegtaxes.gItgisgalso
gimportantgtogremember gthegimpactgofgstategincomegtaxesgandgSocialgSecuritygtaxes.
LO1.4gPerformgtimegvaluegofgmoneygcalculationsgingpersonalgfinancialgdecisiongmaking.
1. Whatgaregthegtwogcommongquestionsgaboutgmoney?
Answer:gThegtwogcommongquestionsgaboutgmoneygaregitsgfuturegvaluegandgpresentgvalue.gFuturegvalueg
isgwhatginvestmentgorgseriesgofginvestmentsgwillgbegatgagpointgingthegfuture.gPresentgvaluegisghowgmuch
gwegwouldgneedgtoginvestgtodaygand/orgingagseriesgofgfutureginvestmentsgtogprovidegsomegamountgingtheg
future.
2. Explaingthegdifferencegbetweengsimpleginterestgandgcompoundginterest,gandgdescribegwhygt
hatgdifferencegisgcritical.
Answer:gSimpleginterestgisgmoneygpaidgongagprincipalgamountgforgaggivengnumbergofgyears.gTheginteres
©g2024gCengage.gAllgRightsgReserved.gMaygnotgbegscanned,gcopied,gorgduplicated,gorgpostedgtogagpubliclygacc 4
essible
website,gingwholegorgingpart.
