Garman/Fox's Personal Finance, 14th Edition Solution and Answer Guide, 2026/2027 Complete Chapters 1 - 17, Verified Latest Version

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,TABLE OF CONTENTS E E




Answers to Chapter Concept Checks ........................................................................................................... 2
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What Do You Recommend Now? ................................................................................................................. 4
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Let’s TalkAbout It ........................................................................................................................................ 5
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Do the Math................................................................................................................................................... 6
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FinancialPlanningCases.............................................................................................................................. 8
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ExtendedLearning ..................................................................................................................................... 10
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,ANSWERS TO CHAPTER CONCEPT CHECKS E E E E




LO1.1Recognize the keys to achieving financial success.
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1. Explain the five steps in the financial planning process.
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Answer: There are five fundamental steps to the personal financial planning process: (1) evaluate your
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financial health to your education and career choice; (2) define your financial goals; (3) develop a plan of action
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to achieve your goals; (4) implement spending and saving plans to monitor and control progress toward your
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goals; and (5) review your financial progress and make changes as appropriate.
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2. Distinguish among financial success, financial security, and financial happiness. e e e e e e e e




Answer: Financial success is the achievement of financial aspirations that are desired, planned, or attempted.
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Success is defined by the individual or family that seeks it. Financial success may be defined as being able to live
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according to one’s standard of living. Financial security is that comfortable feeling that your financial
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resources will be adequate to fulfill any needs you have as well as your wants. Financial happiness is the
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experience you have when you are satisfied with money matters. People who are happy about their finances
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will see a spillover into positive feelings about life in general.
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3. Summarize what you will accomplish studying personal finance. e e e e e e e




Answer: Several things can be accomplished by studying personal finance. Recognize how to manage
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unexpected and expected financial events. Pay as little as possible in income taxes. Understand how to
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effectivelycomparison shop for vehicles andhomes. Protect what we own. Invest wisely. Accumulate and
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protect the wealth that we may choose to spend during our non-working years (e.g., retirement) or donate.
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4. What are the building blocks to achieving financialsuccess?
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Answer: The building blocks for achieving financial success include a foundation of regular income that
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provides the means to support your lifestyle and save for desired goals in the future. The foundation supports a
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base of various banking accounts, insurance protection, and employee benefits. Then we can establish goals, a
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recordkeeping system, a budget, and an emergency savings fund. We will also manage various expenses such
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ashousing, transportation, insurance, and the payment of taxes. We will also need to handle credit, savings, and
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educational costs. Finally, we invest in various investment alternatives such as mutual funds, stocks, and
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bonds, often for retirement. As a result of all these building blocks, we are more apt to have a financially
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successful life.
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LO1.2Understandhowthe economy affects your personal financial success.
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1. Summarize the phases of the business cycle. e e e e e e




Answer: The business cycle entails a wavelike pattern of rising and falling economic activity as measured by
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economic indicators like unemployment rates or the gross domestic product. The phases of the business cycle
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include expansion (preferred stage—production is high, unemployment low, interest rates low or falling,
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stock market and consumer demand high), peak, contraction, downturn, trough, and recovery.
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2. Describetwo statistics that help predict the future direction of the economy.
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Answer: Forecasting the state of the economy involves predicting, estimating, or calculating what will happen
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in advance. We need to be able to forecast the state of the economy, inflation, and interest rates so that we have
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advance warning of the directions and strength of changes in economic trends since they will affect our personal
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finances. Two statistics we could watch are the consumer confidence index (how consumers feel about the
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economy and their personal finances) and the index of leading economic indicators (composite index,
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averages ten components of economic growth).
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, 3. Givean exampleof how inflation affectsincome andconsumption.
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Answer: Inflation reduces the purchasing power of the dollar. This means that our income will not go as far
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and, thus, in real terms will be lowered by inflation. Because items cost more, we will have to consume less and
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may cut back on some expenditures to be able to afford those with a higher priority.
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LO1.3Think like an economist when making financial decisions.
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1. Define opportunity cost and give anexample of how opportunity costs might affect your financial
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decision making.
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Answer: The opportunity cost of a decision is measured as the value of the next-best alternative that must be
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forgone. If we, for example, put our retirement savings in a regular savings account instead of in a tax- sheltered
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retirement account, we may be forgoing the tax benefits associated with investing in retirement accounts such
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as IRAs or 401(k) plans. In another example, if we decide to borrow the maximum student loan amount for
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which we qualify to live a bit more comfortably while in college, we will not be able to live as nicely, save as
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much for the down payment on a home or save for retirement once we graduate because of the higher loan
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payments.
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2. Explain and give anexample of how marginal utility and marginal cost make some financial
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decisions easier.
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Answer: Marginal analysis focuses on the next increment of usefulness or cost when making financial
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decisions. Marginal utility is the extra satisfaction derived from having one more incremental unit of a
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product or service. Marginal cost is the additional cost of that unit. When marginal utility exceeds marginal
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cost, and we compare thetwo, we can make better financial decisions. As an example, if you must fly to some
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destination, is the marginal cost of checking a bag using a carry-on worth the marginal utility?
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3. Describe and give an example of how your marginal income tax rate can affect financial decision
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making.
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Answer: As our income rises, we will find ourselves in higher and higher tax brackets. One type of decision
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that is affected by income taxes is how we should invest for retirement. We might want to invest through a 401(k)
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plan instead of keeping our retirement money in a savings account, which is taxable.
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Since most types of income are taxable, it is important that we understand the impact of income taxes on financial
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decisions. Of particular importance is the marginal tax rate (the tax rate at which our last dollar earned is taxed).
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If we are in the 25 percent marginal tax bracket, we will get to keep 75 percent (100 percent minus 25 percent) of
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our last taxable dollar earned. If the income istax-free income, on the other hand, we would get to keep 100
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percent of it. Therefore, it is important to know our marginal tax rate as well as what types of income are subject
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to federal income taxes. It is also important to remember the impact of state income taxes and Social Security
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taxes.
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LO1.4 Performtime value of money calculations in personal financial decision making.
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1. What arethe two commonquestions about money?
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Answer: The two common questions about money are its future valueand present value. Future value is what
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investment or series of investments will be at a point in the future. Present value is how much we would need to
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invest today and/or in a series of future investments to provide some amount in the future.
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2. Explain the difference between simple interest and compound interest, and describe why that
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difference is critical.
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Answer: Simple interest is money paid on a principal amount for a given number of years. The interest is paid
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only on the principal (the original amount invested). For example, we might put $1,000 in a bank savings
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account at 5 percent interest for one year. We would have accumulated $50 in that year.
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