SolutiontandtAnswertGuide:tGarman/Fox,tPersonaltFinancet14e,tChaptert1:tThinkingtLiketatFinancialtPlanner
Solution and Answer Guide t t t
GARMAN/FOX,T PERSONALT FINANCET 14E,T CHAPTERT 1:T THINKINGT LIKET AT FINANCIALT PLANNER
TABLE OF CONTENTST T
AnswersttotChaptertConcepttChecks ......................................................................................................... 2
WhattDotYoutRecommendtNow? ............................................................................................................... 4
Let’stTalktAbouttIt ...................................................................................................................................... 5
DotthetMath.................................................................................................................................................. 6
FinancialtPlanningtCases ............................................................................................................................ 8
ExtendedtLearning .................................................................................................................................... 10
©t2024tCengage.tAlltRightstReserved.tMaytnottbetscanned,tcopied,tortduplicated,tortpostedttotatpubliclytaccessib 1
le
website,tintwholetortintpart.
, SolutiontandtAnswertGuide:tGarman/Fox,tPersonaltFinancet14e,tChaptert1:tThinkingtLiketatFinancialtPlanner
ANSWERS TO CHAPTER CONCEPT CHECKS
T T T T
LO1.1tRecognizetthetkeysttotachievingtfinancialtsuccess.
1. Explaintthetfivetstepstintthetfinancialtplanningtprocess.
Answer:tTheretaretfivetfundamentaltstepsttotthetpersonaltfinancialtplanningtprocess:t(1)tevaluatetyourtfinan
cialthealthttotyourteducationtandtcareertchoice;t(2)tdefinetyourtfinancialtgoals;t(3)tdeveloptatplantoftactionttot
achievetyourtgoals;t(4)timplementtspendingtandtsavingtplansttotmonitortandtcontroltprogressttowardtyourtgo
als;tandt(5)treviewtyourtfinancialtprogresstandtmaketchangestastappropriate.
2. Distinguishtamongtfinancialtsuccess,tfinancialtsecurity,tandtfinancialthappiness.
Answer:tFinancialtsuccesstistthetachievementtoftfinancialtaspirationstthattaretdesired,tplanned,tortattempte
d.tSuccesstistdefinedtbytthetindividualtortfamilytthattseekstit.tFinancialtsuccesstmaytbetdefinedtastbeingtablett
otlivetaccordingttotone’ststandardtoftliving.tFinancialtsecuritytistthattcomfortabletfeelingtthattyourtfinancialt
resourcestwilltbetadequatettotfulfilltanytneedstyouthavetastwelltastyourtwants.tFinancialthappinesstistthetex
periencetyouthavetwhentyoutaretsatisfiedtwithtmoneytmatters.tPeopletwhotarethappytaboutttheirtfinancestwil
ltseetatspillovertintotpositivetfeelingstabouttlifetintgeneral.
3. Summarizetwhattyoutwilltaccomplishtstudyingtpersonaltfinance.
Answer:tSeveraltthingstcantbetaccomplishedtbytstudyingtpersonaltfinance.tRecognizethowttotmanagetunexp
ectedtandtexpectedtfinancialtevents.tPaytastlittletastpossibletintincomettaxes.tUnderstandthowttoteffectivelytc
omparisontshoptfortvehiclestandthomes.tProtecttwhattwetown.tInvesttwisely.tAccumulatetandtprotecttthetwea
lthtthattwetmaytchoosettotspendtduringtourtnon-workingtyearst(e.g.,tretirement)tortdonate.
4. Whattaretthetbuildingtblocksttotachievingtfinancialtsuccess?
Answer:tThetbuildingtblockstfortachievingtfinancialtsuccesstincludetatfoundationtoftregulartincometthattpro
videstthetmeansttotsupporttyourtlifestyletandtsavetfortdesiredtgoalstintthetfuture.tThetfoundationtsupportstatb
asetoftvarioustbankingtaccounts,tinsurancetprotection,tandtemployeetbenefits.tThentwetcantestablishtgoals,tat
recordkeepingtsystem,tatbudget,tandtantemergencytsavingstfund.tWetwilltalsotmanagetvarioustexpensestsuch
tasthousing,ttransportation,tinsurance,tandtthetpaymenttofttaxes.tWetwilltalsotneedttothandletcredit,tsavings,ta
ndteducationaltcosts.tFinally,twetinvesttintvarioustinvestmenttalternativestsuchtastmutualtfunds,tstocks,tandtb
onds,toftentfortretirement.tAstatresulttoftalltthesetbuildingtblocks,twetaretmoretaptttothavetatfinanciallytsucce
ssfultlife.
LO1.2tUnderstandthowttheteconomytaffectstyourtpersonaltfinancialtsuccess.
1. Summarizetthetphasestoftthetbusinesstcycle.
Answer:tThetbusinesstcycletentailstatwaveliketpatterntoftrisingtandtfallingteconomictactivitytastmeasuredtby
teconomictindicatorstliketunemploymenttratestortthetgrosstdomestictproduct.tThetphasestoftthetbusinesstcycle
tincludetexpansiont(preferredtstage—
productiontisthigh,tunemploymenttlow,tinteresttratestlowtortfalling,tstocktmarkettandtconsumertdemandthigh
),tpeak,tcontraction,tdownturn,ttrough,tandtrecovery.
2. Describettwotstatisticstthatthelptpredicttthetfuturetdirectiontofttheteconomy.
Answer:tForecastingtthetstatetofttheteconomytinvolvestpredicting,testimating,tortcalculatingtwhattwillthapp
entintadvance.tWetneedttotbetablettotforecasttthetstatetofttheteconomy,tinflation,tandtinteresttratestsotthattweth
avetadvancetwarningtoftthetdirectionstandtstrengthtoftchangestinteconomicttrendstsincettheytwilltaffecttourtpe
rsonaltfinances.tTwotstatisticstwetcouldtwatchtaretthetconsumertconfidencetindext(howtconsumerstfeeltabou
tttheteconomytandttheirtpersonaltfinances)tandtthetindextoftleadingteconomictindicatorst(compositetindex,tav
eragesttentcomponentstofteconomictgrowth).
©t2024tCengage.tAlltRightstReserved.tMaytnottbetscanned,tcopied,tortduplicated,tortpostedttotatpubliclytaccessib 2
le
website,tintwholetortintpart.
, SolutiontandtAnswertGuide:tGarman/Fox,tPersonaltFinancet14e,tChaptert1:tThinkingtLiketatFinancialtPlanner
3. Givetantexampletofthowtinflationtaffectstincometandtconsumption.
Answer:tInflationtreducestthetpurchasingtpowertoftthetdollar.tThistmeanstthattourtincometwilltnottgotastfart
and,tthus,tintrealttermstwilltbetloweredtbytinflation.tBecausetitemstcosttmore,twetwillthavettotconsumetlessta
ndtmaytcuttbacktontsometexpendituresttotbetablettotaffordtthosetwithtathighertpriority.
LO1.3tThinktliketanteconomisttwhentmakingtfinancialtdecisions.
1. Definetopportunitytcosttandtgivetantexampletofthowtopportunitytcoststmighttaffecttyourtfinancialt
decisiontmaking.
Answer:tThetopportunitytcosttoftatdecisiontistmeasuredtastthetvaluetoftthetnext-
besttalternativetthattmusttbetforgone.tIftwe,tfortexample,tputtourtretirementtsavingstintatregulartsavingstaccou
nttinsteadtoftintattax-
tshelteredtretirementtaccount,twetmaytbetforgoingtthettaxtbenefitstassociatedtwithtinvestingtintretirementtacc
ountstsuchtastIRAstort401(k)tplans.tIntanothertexample,tiftwetdecidettotborrowtthetmaximumtstudenttloanta
mounttfortwhichtwetqualifyttotlivetatbittmoretcomfortablytwhiletintcollege,twetwilltnottbetablettotlivetastnicel
y,tsavetastmuchtfortthetdowntpaymenttontathometortsavetfortretirementtoncetwetgraduatetbecausetoftthethigh
ertloantpayments.
2. Explaintandtgivetantexampletofthowtmarginaltutilitytandtmarginaltcosttmaketsometfinancialt
decisionsteasier.
Answer:tMarginaltanalysistfocusestontthetnexttincrementtoftusefulnesstortcosttwhentmakingtfinancialtdecisi
ons.tMarginaltutilitytistthetextratsatisfactiontderivedtfromthavingtonetmoretincrementaltunittoftatproducttort
service.tMarginaltcosttistthetadditionaltcosttoftthattunit.tWhentmarginaltutilitytexceedst marginaltcost,tandtw
etcomparetthettwo,twetcantmaketbettertfinancialtdecisions.tAstantexample,tiftyoutmusttflyttotsometdestination
,tistthetmarginaltcosttoftcheckingtatbagtusingtatcarry-ontworthtthetmarginaltutility?
3. Describetandtgivetantexampletofthowtyourtmarginaltincomettaxtratetcantaffecttfinancialtdecisiont
making.
Answer:tAstourtincometrises,twetwilltfindtourselvestinthighertandthigherttaxtbrackets.tOnettypetoftdecisiontt
hattistaffectedtbytincomettaxestisthowtwetshouldtinvesttfortretirement.tWetmighttwantttotinvesttthroughtat401
(k)tplantinsteadtoftkeepingtourtretirementtmoneytintatsavingstaccount,twhichtisttaxable.
Sincetmostttypestoftincometarettaxable,tittistimportanttthattwetunderstandtthetimpacttoftincomettaxestontfinan
cialtdecisions.tOftparticulartimportancetistthetmarginalttaxtratet(thettaxtratetattwhichtourtlasttdollartearnedtistt
axed).tIftwetaretintthet25tpercenttmarginalttaxtbracket,twetwilltgetttotkeept75tpercentt(100tpercenttminust25tp
ercent)toftourtlastttaxabletdollartearned.tIftthetincometisttax-
freetincome,tontthetotherthand,twetwouldtgetttotkeept100tpercenttoftit.tTherefore,tittistimportantttotknowtourt
marginalttaxtratetastwelltastwhatttypestoftincometaretsubjectttotfederaltincomettaxes.tIttistalsotimportantttotre
membertthetimpacttoftstatetincomettaxestandtSocialtSecurityttaxes.
LO1.4tPerformttimetvaluetoftmoneytcalculationstintpersonaltfinancialtdecisiontmaking.
1. Whattaretthettwotcommontquestionstabouttmoney?
Answer:tThettwotcommontquestionstabouttmoneytaretitstfuturetvaluetandtpresenttvalue.tFuturetvaluetistwh
attinvestmenttortseriestoftinvestmentstwilltbetattatpointtintthetfuture.tPresenttvaluetisthowtmuchtwetwouldtn
eedttotinvestttodaytand/ortintatseriestoftfuturetinvestmentsttotprovidetsometamounttintthetfuture.
2. Explaintthetdifferencetbetweentsimpletinteresttandtcompoundtinterest,tandtdescribetwhytthatt
differencetistcritical.
Answer:tSimpletinteresttistmoneytpaidtontatprincipaltamounttfortatgiventnumbertoftyears.tThetinteresttistpai
dtonlytontthetprincipalt(thetoriginaltamounttinvested).tFortexample,twetmighttputt$1,000tintatbanktsavingstac
counttatt5tpercenttinteresttfortonetyear.tWetwouldthavetaccumulatedt$50tintthattyear.
©t2024tCengage.tAlltRightstReserved.tMaytnottbetscanned,tcopied,tortduplicated,tortpostedttotatpubliclytaccessib 3
le
website,tintwholetortintpart.
, SolutiontandtAnswertGuide:tGarman/Fox,tPersonaltFinancet14e,tChaptert1:tThinkingtLiketatFinancialtPlanner
Compoundtinteresttistinteresttpaidtontinteresttandtprincipal.tFortexample,tiftwetleavetyourt$1,000tontdepos
ittandtdotnottwithdrawtthet$50tinteresttattthetendtoftthetyear,twetwilltearntinteresttontbothtthetdeposittandttheti
nteresttearnedtduringtthetfirsttyear.tThistdifferencetintthettypestoftinteresttpaidtistimportanttastcompoundtinte
resttistthetbasictprincipletoftaccumulatingtwealth.tIftwetinvesttregularlytoverttime,tourtmoneytwilltgrowtduett
otthetpowertoftcompoundtinterest.
3. UsetTablet1-
1ttotcalculatetthetfuturetvaluetoft(a)t$2,000tatt5tpercenttfortfourtyears,t(b)t$4,500tatt9tpercenttforte
ighttyears,tandt(c)t$10,000tatt6tpercenttforttentyears.
Answer:
a. $2,000tatt5tpercenttfortfourtyearstwouldtequalt$2,431t($2,000t×t1.2155).
b. $4,500tatt9tpercenttforteighttyearstwouldtequalt$8,966.70t($4,500t×t1.9926).
c. $10,000tatt6tpercenttfort10tyearstwouldtequalt$17,908t($10,000t×t1.7908).
[returnttottop]
WHAT DO YOU RECOMMEND NOW?
T T T T
Nowtthattyouthavetreadtthetchaptertontthetimportancetoftpersonaltfinance,twhattdotyoutrecommendttotJingtWángtintth
etcasetattthetbeginningtoftthetchapter.
1. Participatingtinthertemployer’st401(k)tretirementtplan?
Answer:tJingtshouldtparticipatetinthertemployer’stplantbecausethertcontributionstreducetherttaxabletincomet
andtwilltgrowttax-
shelteredtuntiltwithdrawntattretirement.tBytdoingtso,tshetwilltqualifytforthertemployertcontributions,ttherebyt
receivingtadditionalttax-
shelteredtincometthattwilltgotdirectlytintothertretirementtaccount.tIftJingtcontributedt8tpercenttofthertsalary,th
ertemployertwouldtmatchtittwitht4tpercenttfortattotaltoft12tpercent.tHerttotaltcontributiontwouldtbet$9,600tba
sedtonthertsalarytoft$80,000.
2. Understandingttheteffectstofthertmarginalttaxtratetonthertfinancialtdecisions?
Answer:tJingtshouldtusethertmarginalttaxtratettotassessthowtchangestinthertincometandtthetfinancialtdecisio
nstshetwilltmaketwouldtbetaffectedtbyttaxes.tForteverytextratdollartthattshetcontributesttothertretirementtplan,
tfortexample,tshetwilltsavet$0.25tinttaxestiftshetistintthet25tpercentttaxtbracket.tAlso,tiftshetearnstantextratdoll
ar,tittwilltbettaxedtatthertmarginaltrate.
3. Consideringtthetcurrenttstatetofttheteconomytinthertpersonaltfinancialtplanning?
Answer:tJingtshouldtstaytinformedtaboutteconomicttrendstastindicatedtintchangestintthetgrosstdomestictpro
duct,tindextoftleadingteconomictindicators,tandtconsumertpricetindex.tShetshouldtalsotkeepttracktoftthetfeder
altfundstratetastantindicatortoftinteresttratestinttheteconomy.tShetshouldtbetablettotmakethertowntestimatetfort
economictgrowth,tinflation,tandtinteresttratestovertthetnexttcoupletoftyears.
4. UsingttimetvaluetoftmoneytconsiderationsttotprojecttwhatthertRoth-IRAtmighttbetworthtattaget63?
Answer:tJingtcouldtusetAppendixtA.1ttotcalculatethowtmuchthertIRAtfundt(currentlyt$2,000)twouldtgrowtin
t40tyears.tShetwouldtneedttotassumetatratetoftreturntontthetfunds.tAnt8ttot10tpercenttratetwouldtbetappropriat
etgiventthetinvestmenttopportunitiestavailablettothertinthertIRA.tAtt8tpercent,thertaccounttwouldtbetworthtab
outt$43,449t(21.7245t×t$2,000).
5. Usingttimetvaluetoftmoneytconsiderationsttotprojecttwhatthert401(k)tplantmighttbetworthtattaget63tift
shetwerettotparticipatetfully?
©t2024tCengage.tAlltRightstReserved.tMaytnottbetscanned,tcopied,tortduplicated,tortpostedttotatpubliclytaccessib 4
le
website,tintwholetortintpart.
Solution and Answer Guide t t t
GARMAN/FOX,T PERSONALT FINANCET 14E,T CHAPTERT 1:T THINKINGT LIKET AT FINANCIALT PLANNER
TABLE OF CONTENTST T
AnswersttotChaptertConcepttChecks ......................................................................................................... 2
WhattDotYoutRecommendtNow? ............................................................................................................... 4
Let’stTalktAbouttIt ...................................................................................................................................... 5
DotthetMath.................................................................................................................................................. 6
FinancialtPlanningtCases ............................................................................................................................ 8
ExtendedtLearning .................................................................................................................................... 10
©t2024tCengage.tAlltRightstReserved.tMaytnottbetscanned,tcopied,tortduplicated,tortpostedttotatpubliclytaccessib 1
le
website,tintwholetortintpart.
, SolutiontandtAnswertGuide:tGarman/Fox,tPersonaltFinancet14e,tChaptert1:tThinkingtLiketatFinancialtPlanner
ANSWERS TO CHAPTER CONCEPT CHECKS
T T T T
LO1.1tRecognizetthetkeysttotachievingtfinancialtsuccess.
1. Explaintthetfivetstepstintthetfinancialtplanningtprocess.
Answer:tTheretaretfivetfundamentaltstepsttotthetpersonaltfinancialtplanningtprocess:t(1)tevaluatetyourtfinan
cialthealthttotyourteducationtandtcareertchoice;t(2)tdefinetyourtfinancialtgoals;t(3)tdeveloptatplantoftactionttot
achievetyourtgoals;t(4)timplementtspendingtandtsavingtplansttotmonitortandtcontroltprogressttowardtyourtgo
als;tandt(5)treviewtyourtfinancialtprogresstandtmaketchangestastappropriate.
2. Distinguishtamongtfinancialtsuccess,tfinancialtsecurity,tandtfinancialthappiness.
Answer:tFinancialtsuccesstistthetachievementtoftfinancialtaspirationstthattaretdesired,tplanned,tortattempte
d.tSuccesstistdefinedtbytthetindividualtortfamilytthattseekstit.tFinancialtsuccesstmaytbetdefinedtastbeingtablett
otlivetaccordingttotone’ststandardtoftliving.tFinancialtsecuritytistthattcomfortabletfeelingtthattyourtfinancialt
resourcestwilltbetadequatettotfulfilltanytneedstyouthavetastwelltastyourtwants.tFinancialthappinesstistthetex
periencetyouthavetwhentyoutaretsatisfiedtwithtmoneytmatters.tPeopletwhotarethappytaboutttheirtfinancestwil
ltseetatspillovertintotpositivetfeelingstabouttlifetintgeneral.
3. Summarizetwhattyoutwilltaccomplishtstudyingtpersonaltfinance.
Answer:tSeveraltthingstcantbetaccomplishedtbytstudyingtpersonaltfinance.tRecognizethowttotmanagetunexp
ectedtandtexpectedtfinancialtevents.tPaytastlittletastpossibletintincomettaxes.tUnderstandthowttoteffectivelytc
omparisontshoptfortvehiclestandthomes.tProtecttwhattwetown.tInvesttwisely.tAccumulatetandtprotecttthetwea
lthtthattwetmaytchoosettotspendtduringtourtnon-workingtyearst(e.g.,tretirement)tortdonate.
4. Whattaretthetbuildingtblocksttotachievingtfinancialtsuccess?
Answer:tThetbuildingtblockstfortachievingtfinancialtsuccesstincludetatfoundationtoftregulartincometthattpro
videstthetmeansttotsupporttyourtlifestyletandtsavetfortdesiredtgoalstintthetfuture.tThetfoundationtsupportstatb
asetoftvarioustbankingtaccounts,tinsurancetprotection,tandtemployeetbenefits.tThentwetcantestablishtgoals,tat
recordkeepingtsystem,tatbudget,tandtantemergencytsavingstfund.tWetwilltalsotmanagetvarioustexpensestsuch
tasthousing,ttransportation,tinsurance,tandtthetpaymenttofttaxes.tWetwilltalsotneedttothandletcredit,tsavings,ta
ndteducationaltcosts.tFinally,twetinvesttintvarioustinvestmenttalternativestsuchtastmutualtfunds,tstocks,tandtb
onds,toftentfortretirement.tAstatresulttoftalltthesetbuildingtblocks,twetaretmoretaptttothavetatfinanciallytsucce
ssfultlife.
LO1.2tUnderstandthowttheteconomytaffectstyourtpersonaltfinancialtsuccess.
1. Summarizetthetphasestoftthetbusinesstcycle.
Answer:tThetbusinesstcycletentailstatwaveliketpatterntoftrisingtandtfallingteconomictactivitytastmeasuredtby
teconomictindicatorstliketunemploymenttratestortthetgrosstdomestictproduct.tThetphasestoftthetbusinesstcycle
tincludetexpansiont(preferredtstage—
productiontisthigh,tunemploymenttlow,tinteresttratestlowtortfalling,tstocktmarkettandtconsumertdemandthigh
),tpeak,tcontraction,tdownturn,ttrough,tandtrecovery.
2. Describettwotstatisticstthatthelptpredicttthetfuturetdirectiontofttheteconomy.
Answer:tForecastingtthetstatetofttheteconomytinvolvestpredicting,testimating,tortcalculatingtwhattwillthapp
entintadvance.tWetneedttotbetablettotforecasttthetstatetofttheteconomy,tinflation,tandtinteresttratestsotthattweth
avetadvancetwarningtoftthetdirectionstandtstrengthtoftchangestinteconomicttrendstsincettheytwilltaffecttourtpe
rsonaltfinances.tTwotstatisticstwetcouldtwatchtaretthetconsumertconfidencetindext(howtconsumerstfeeltabou
tttheteconomytandttheirtpersonaltfinances)tandtthetindextoftleadingteconomictindicatorst(compositetindex,tav
eragesttentcomponentstofteconomictgrowth).
©t2024tCengage.tAlltRightstReserved.tMaytnottbetscanned,tcopied,tortduplicated,tortpostedttotatpubliclytaccessib 2
le
website,tintwholetortintpart.
, SolutiontandtAnswertGuide:tGarman/Fox,tPersonaltFinancet14e,tChaptert1:tThinkingtLiketatFinancialtPlanner
3. Givetantexampletofthowtinflationtaffectstincometandtconsumption.
Answer:tInflationtreducestthetpurchasingtpowertoftthetdollar.tThistmeanstthattourtincometwilltnottgotastfart
and,tthus,tintrealttermstwilltbetloweredtbytinflation.tBecausetitemstcosttmore,twetwillthavettotconsumetlessta
ndtmaytcuttbacktontsometexpendituresttotbetablettotaffordtthosetwithtathighertpriority.
LO1.3tThinktliketanteconomisttwhentmakingtfinancialtdecisions.
1. Definetopportunitytcosttandtgivetantexampletofthowtopportunitytcoststmighttaffecttyourtfinancialt
decisiontmaking.
Answer:tThetopportunitytcosttoftatdecisiontistmeasuredtastthetvaluetoftthetnext-
besttalternativetthattmusttbetforgone.tIftwe,tfortexample,tputtourtretirementtsavingstintatregulartsavingstaccou
nttinsteadtoftintattax-
tshelteredtretirementtaccount,twetmaytbetforgoingtthettaxtbenefitstassociatedtwithtinvestingtintretirementtacc
ountstsuchtastIRAstort401(k)tplans.tIntanothertexample,tiftwetdecidettotborrowtthetmaximumtstudenttloanta
mounttfortwhichtwetqualifyttotlivetatbittmoretcomfortablytwhiletintcollege,twetwilltnottbetablettotlivetastnicel
y,tsavetastmuchtfortthetdowntpaymenttontathometortsavetfortretirementtoncetwetgraduatetbecausetoftthethigh
ertloantpayments.
2. Explaintandtgivetantexampletofthowtmarginaltutilitytandtmarginaltcosttmaketsometfinancialt
decisionsteasier.
Answer:tMarginaltanalysistfocusestontthetnexttincrementtoftusefulnesstortcosttwhentmakingtfinancialtdecisi
ons.tMarginaltutilitytistthetextratsatisfactiontderivedtfromthavingtonetmoretincrementaltunittoftatproducttort
service.tMarginaltcosttistthetadditionaltcosttoftthattunit.tWhentmarginaltutilitytexceedst marginaltcost,tandtw
etcomparetthettwo,twetcantmaketbettertfinancialtdecisions.tAstantexample,tiftyoutmusttflyttotsometdestination
,tistthetmarginaltcosttoftcheckingtatbagtusingtatcarry-ontworthtthetmarginaltutility?
3. Describetandtgivetantexampletofthowtyourtmarginaltincomettaxtratetcantaffecttfinancialtdecisiont
making.
Answer:tAstourtincometrises,twetwilltfindtourselvestinthighertandthigherttaxtbrackets.tOnettypetoftdecisiontt
hattistaffectedtbytincomettaxestisthowtwetshouldtinvesttfortretirement.tWetmighttwantttotinvesttthroughtat401
(k)tplantinsteadtoftkeepingtourtretirementtmoneytintatsavingstaccount,twhichtisttaxable.
Sincetmostttypestoftincometarettaxable,tittistimportanttthattwetunderstandtthetimpacttoftincomettaxestontfinan
cialtdecisions.tOftparticulartimportancetistthetmarginalttaxtratet(thettaxtratetattwhichtourtlasttdollartearnedtistt
axed).tIftwetaretintthet25tpercenttmarginalttaxtbracket,twetwilltgetttotkeept75tpercentt(100tpercenttminust25tp
ercent)toftourtlastttaxabletdollartearned.tIftthetincometisttax-
freetincome,tontthetotherthand,twetwouldtgetttotkeept100tpercenttoftit.tTherefore,tittistimportantttotknowtourt
marginalttaxtratetastwelltastwhatttypestoftincometaretsubjectttotfederaltincomettaxes.tIttistalsotimportantttotre
membertthetimpacttoftstatetincomettaxestandtSocialtSecurityttaxes.
LO1.4tPerformttimetvaluetoftmoneytcalculationstintpersonaltfinancialtdecisiontmaking.
1. Whattaretthettwotcommontquestionstabouttmoney?
Answer:tThettwotcommontquestionstabouttmoneytaretitstfuturetvaluetandtpresenttvalue.tFuturetvaluetistwh
attinvestmenttortseriestoftinvestmentstwilltbetattatpointtintthetfuture.tPresenttvaluetisthowtmuchtwetwouldtn
eedttotinvestttodaytand/ortintatseriestoftfuturetinvestmentsttotprovidetsometamounttintthetfuture.
2. Explaintthetdifferencetbetweentsimpletinteresttandtcompoundtinterest,tandtdescribetwhytthatt
differencetistcritical.
Answer:tSimpletinteresttistmoneytpaidtontatprincipaltamounttfortatgiventnumbertoftyears.tThetinteresttistpai
dtonlytontthetprincipalt(thetoriginaltamounttinvested).tFortexample,twetmighttputt$1,000tintatbanktsavingstac
counttatt5tpercenttinteresttfortonetyear.tWetwouldthavetaccumulatedt$50tintthattyear.
©t2024tCengage.tAlltRightstReserved.tMaytnottbetscanned,tcopied,tortduplicated,tortpostedttotatpubliclytaccessib 3
le
website,tintwholetortintpart.
, SolutiontandtAnswertGuide:tGarman/Fox,tPersonaltFinancet14e,tChaptert1:tThinkingtLiketatFinancialtPlanner
Compoundtinteresttistinteresttpaidtontinteresttandtprincipal.tFortexample,tiftwetleavetyourt$1,000tontdepos
ittandtdotnottwithdrawtthet$50tinteresttattthetendtoftthetyear,twetwilltearntinteresttontbothtthetdeposittandttheti
nteresttearnedtduringtthetfirsttyear.tThistdifferencetintthettypestoftinteresttpaidtistimportanttastcompoundtinte
resttistthetbasictprincipletoftaccumulatingtwealth.tIftwetinvesttregularlytoverttime,tourtmoneytwilltgrowtduett
otthetpowertoftcompoundtinterest.
3. UsetTablet1-
1ttotcalculatetthetfuturetvaluetoft(a)t$2,000tatt5tpercenttfortfourtyears,t(b)t$4,500tatt9tpercenttforte
ighttyears,tandt(c)t$10,000tatt6tpercenttforttentyears.
Answer:
a. $2,000tatt5tpercenttfortfourtyearstwouldtequalt$2,431t($2,000t×t1.2155).
b. $4,500tatt9tpercenttforteighttyearstwouldtequalt$8,966.70t($4,500t×t1.9926).
c. $10,000tatt6tpercenttfort10tyearstwouldtequalt$17,908t($10,000t×t1.7908).
[returnttottop]
WHAT DO YOU RECOMMEND NOW?
T T T T
Nowtthattyouthavetreadtthetchaptertontthetimportancetoftpersonaltfinance,twhattdotyoutrecommendttotJingtWángtintth
etcasetattthetbeginningtoftthetchapter.
1. Participatingtinthertemployer’st401(k)tretirementtplan?
Answer:tJingtshouldtparticipatetinthertemployer’stplantbecausethertcontributionstreducetherttaxabletincomet
andtwilltgrowttax-
shelteredtuntiltwithdrawntattretirement.tBytdoingtso,tshetwilltqualifytforthertemployertcontributions,ttherebyt
receivingtadditionalttax-
shelteredtincometthattwilltgotdirectlytintothertretirementtaccount.tIftJingtcontributedt8tpercenttofthertsalary,th
ertemployertwouldtmatchtittwitht4tpercenttfortattotaltoft12tpercent.tHerttotaltcontributiontwouldtbet$9,600tba
sedtonthertsalarytoft$80,000.
2. Understandingttheteffectstofthertmarginalttaxtratetonthertfinancialtdecisions?
Answer:tJingtshouldtusethertmarginalttaxtratettotassessthowtchangestinthertincometandtthetfinancialtdecisio
nstshetwilltmaketwouldtbetaffectedtbyttaxes.tForteverytextratdollartthattshetcontributesttothertretirementtplan,
tfortexample,tshetwilltsavet$0.25tinttaxestiftshetistintthet25tpercentttaxtbracket.tAlso,tiftshetearnstantextratdoll
ar,tittwilltbettaxedtatthertmarginaltrate.
3. Consideringtthetcurrenttstatetofttheteconomytinthertpersonaltfinancialtplanning?
Answer:tJingtshouldtstaytinformedtaboutteconomicttrendstastindicatedtintchangestintthetgrosstdomestictpro
duct,tindextoftleadingteconomictindicators,tandtconsumertpricetindex.tShetshouldtalsotkeepttracktoftthetfeder
altfundstratetastantindicatortoftinteresttratestinttheteconomy.tShetshouldtbetablettotmakethertowntestimatetfort
economictgrowth,tinflation,tandtinteresttratestovertthetnexttcoupletoftyears.
4. UsingttimetvaluetoftmoneytconsiderationsttotprojecttwhatthertRoth-IRAtmighttbetworthtattaget63?
Answer:tJingtcouldtusetAppendixtA.1ttotcalculatethowtmuchthertIRAtfundt(currentlyt$2,000)twouldtgrowtin
t40tyears.tShetwouldtneedttotassumetatratetoftreturntontthetfunds.tAnt8ttot10tpercenttratetwouldtbetappropriat
etgiventthetinvestmenttopportunitiestavailablettothertinthertIRA.tAtt8tpercent,thertaccounttwouldtbetworthtab
outt$43,449t(21.7245t×t$2,000).
5. Usingttimetvaluetoftmoneytconsiderationsttotprojecttwhatthert401(k)tplantmighttbetworthtattaget63tift
shetwerettotparticipatetfully?
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le
website,tintwholetortintpart.
