Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
Solution and Answer Guide
GARMAN/FOX, PERSONAL FINANCE 15E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
TABLE OF CONTENTS
Answers to Chapter Concept Checks............................................................................2
What Do You Recommend Now?.................................................................................5
Let’s Talk About It.......................................................................................................6
Do the Math..................................................................................................................7
Financial Planning Cases...........................................................................................10
Extended Learning......................................................................................................13
© 2025 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 15e, Chapter 1: Thinking Like a Financial Planner
ANSWERS TO CHAPTER CONCEPT CHECKS
LO010 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
financial health relative to education and career choice; (2) define financial goals; (3) develop a plan of
action to achieve goals; (4) implement spending and saving plans to monitor and control progress
toward goals; and (5) review 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 our financial resources will be adequate to fulfill our needs as well as our
wants. Financial happiness is the experience we have when we are satisfied with money matters.
People who are happy about their finances will experience a spillover into positive feelings about life
in general.
3. Summarize what is accomplished by studying personal finance.
Answer: Several things can be accomplished by studying personal finance. We recognize how to
manage unexpected and expected financial events. We pay as little as legally possible in income taxes.
We understand how to effectively comparison shop for vehicles and homes. We protect what we own
and invest wisely. We accumulate and protect the wealth that we may choose to spend during our
nonworking 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 provides the means to support -our lifestyle and save for our 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 recordkeeping 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 retirement. As a result of all
these building blocks, we are more apt to have a financially successful life.
LO02 UNDERSTAND HOW THE ECONOMY AFFECTS YOUR PERSONAL
FINANCIAL SUCCESS.00
1. Summarize the phases of the business cycle.
Answer: The business cycle involves a wavelike pattern of rising and falling economic activity as
measured by economic indicators like unemployment rates or the gross domestic product. The phases
of the business cycle include 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.1
2. Describe two statistics that help predict the future direction of the economy.
© 2025 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 15e, Chapter 1: Thinking Like a Financial Planner
Answer: Forecasting the state of the economy involves predicting, estimating, or calculating in
advance what will happen. We need to be able to forecast the state of the economy, inflation, and
interest rates so that we have advance warning of the directions and strength of changes in economic
trends, because they will affect our personal finances. Two statistics we could watch are the consumer
confidence index (how consumers feel about the economy and their personal finances) and the index of
leading economic indicators (composite index, which averages ten components of economic growth).
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; in real terms, it will be lowered by inflation. Because items cost more, we will have to consume
less and may cut back on some expenditures in order to be able to afford those with a higher priority.
LO03 APPLY ECONOMIC CONCEPTS IN MAKING FINANCIAL
DECISIONS.00
1. Define opportunity cost and give an example of how opportunity costs might affect
financial decision 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 instead of
in a tax-sheltered retirement account, we may be forgoing the tax benefits associated with investing in
retirement accounts 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,
later we will not be able to live as well, save as much for the down payment on a home, or save for
retirement once we graduate, because our student loan payments will be higher.
2. Explain and give an example of how marginal utility and marginal cost make some
financial decisions easier.
Answer: Marginal analysis focuses on the next increment of usefulness (utility) or cost when making
financial decisions. Marginal utility is the extra satisfaction derived from having one more
incremental unit of a product or service. Marginal cost is the additional cost of that one unit. When
marginal utility exceeds marginal cost, and we compare the two, we can make better financial
decisions. To maximize utility, we seek options where the added utility per last dollar spent is
maximized. As an example, if one must fly to some destination, is the marginal cost of checking a bag
versus using a carry-on worth the marginal utility? We continually ask, Is this the best way to spend
those last few dollars now?
3. Describe and give an example of how the marginal income tax rate can affect
financial decision making.2
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) plan instead of keeping our retirement money in a savings account, which is
taxable. Because 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). If we are in the 22 percent marginal tax bracket, we will get to
keep 78 percent (100 percent minus 22 percent) of our 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 marginal 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.
© 2025 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 15e, Chapter 1: Thinking Like a Financial Planner
LO04 PERFORM TIME VALUE OF MONEY CALCULATIONS IN PERSONAL
FINANCIAL DECISION MAKING.00
1. What are the two common time value of money questions?
Answer: The two common questions about money are its future value and its present value. Future
value is what lump-sum investments or series of investments will be at a point in the future. Present
value is how much we would need to invest 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 difference is critical for long-term financial planning.
Answer: Simple interest is money paid on a principal amount for a given number of years. The
interest is paid only 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. Compound interest is interest paid on interest and principal. For example, if we leave the
$1,000 on deposit and 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; compound interest is one of the most basic principles of accumulating wealth. If we
invest regularly over time, our money will grow due to the power of compound interest.1
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 years, 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?
After reading the chapter on thinking like a financial planner, what do you recommend to Jing Wáng in the case 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 and will grow tax-sheltered until withdrawn at retirement. By doing so, she will qualify for her
employer match, thereby receiving 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 on 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 she will make would be affected by taxes. For every extra dollar that she contributes to her
retirement plan, for example, she will save $0.25 in taxes if she is in the combined state and federal 25
percent tax bracket. Also, if she earns an extra dollar investing it will be taxed at her marginal rate. The
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
Solution and Answer Guide
GARMAN/FOX, PERSONAL FINANCE 15E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
TABLE OF CONTENTS
Answers to Chapter Concept Checks............................................................................2
What Do You Recommend Now?.................................................................................5
Let’s Talk About It.......................................................................................................6
Do the Math..................................................................................................................7
Financial Planning Cases...........................................................................................10
Extended Learning......................................................................................................13
© 2025 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 15e, Chapter 1: Thinking Like a Financial Planner
ANSWERS TO CHAPTER CONCEPT CHECKS
LO010 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
financial health relative to education and career choice; (2) define financial goals; (3) develop a plan of
action to achieve goals; (4) implement spending and saving plans to monitor and control progress
toward goals; and (5) review 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 our financial resources will be adequate to fulfill our needs as well as our
wants. Financial happiness is the experience we have when we are satisfied with money matters.
People who are happy about their finances will experience a spillover into positive feelings about life
in general.
3. Summarize what is accomplished by studying personal finance.
Answer: Several things can be accomplished by studying personal finance. We recognize how to
manage unexpected and expected financial events. We pay as little as legally possible in income taxes.
We understand how to effectively comparison shop for vehicles and homes. We protect what we own
and invest wisely. We accumulate and protect the wealth that we may choose to spend during our
nonworking 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 provides the means to support -our lifestyle and save for our 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 recordkeeping 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 retirement. As a result of all
these building blocks, we are more apt to have a financially successful life.
LO02 UNDERSTAND HOW THE ECONOMY AFFECTS YOUR PERSONAL
FINANCIAL SUCCESS.00
1. Summarize the phases of the business cycle.
Answer: The business cycle involves a wavelike pattern of rising and falling economic activity as
measured by economic indicators like unemployment rates or the gross domestic product. The phases
of the business cycle include 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.1
2. Describe two statistics that help predict the future direction of the economy.
© 2025 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 15e, Chapter 1: Thinking Like a Financial Planner
Answer: Forecasting the state of the economy involves predicting, estimating, or calculating in
advance what will happen. We need to be able to forecast the state of the economy, inflation, and
interest rates so that we have advance warning of the directions and strength of changes in economic
trends, because they will affect our personal finances. Two statistics we could watch are the consumer
confidence index (how consumers feel about the economy and their personal finances) and the index of
leading economic indicators (composite index, which averages ten components of economic growth).
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; in real terms, it will be lowered by inflation. Because items cost more, we will have to consume
less and may cut back on some expenditures in order to be able to afford those with a higher priority.
LO03 APPLY ECONOMIC CONCEPTS IN MAKING FINANCIAL
DECISIONS.00
1. Define opportunity cost and give an example of how opportunity costs might affect
financial decision 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 instead of
in a tax-sheltered retirement account, we may be forgoing the tax benefits associated with investing in
retirement accounts 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,
later we will not be able to live as well, save as much for the down payment on a home, or save for
retirement once we graduate, because our student loan payments will be higher.
2. Explain and give an example of how marginal utility and marginal cost make some
financial decisions easier.
Answer: Marginal analysis focuses on the next increment of usefulness (utility) or cost when making
financial decisions. Marginal utility is the extra satisfaction derived from having one more
incremental unit of a product or service. Marginal cost is the additional cost of that one unit. When
marginal utility exceeds marginal cost, and we compare the two, we can make better financial
decisions. To maximize utility, we seek options where the added utility per last dollar spent is
maximized. As an example, if one must fly to some destination, is the marginal cost of checking a bag
versus using a carry-on worth the marginal utility? We continually ask, Is this the best way to spend
those last few dollars now?
3. Describe and give an example of how the marginal income tax rate can affect
financial decision making.2
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) plan instead of keeping our retirement money in a savings account, which is
taxable. Because 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). If we are in the 22 percent marginal tax bracket, we will get to
keep 78 percent (100 percent minus 22 percent) of our 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 marginal 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.
© 2025 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 15e, Chapter 1: Thinking Like a Financial Planner
LO04 PERFORM TIME VALUE OF MONEY CALCULATIONS IN PERSONAL
FINANCIAL DECISION MAKING.00
1. What are the two common time value of money questions?
Answer: The two common questions about money are its future value and its present value. Future
value is what lump-sum investments or series of investments will be at a point in the future. Present
value is how much we would need to invest 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 difference is critical for long-term financial planning.
Answer: Simple interest is money paid on a principal amount for a given number of years. The
interest is paid only 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. Compound interest is interest paid on interest and principal. For example, if we leave the
$1,000 on deposit and 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; compound interest is one of the most basic principles of accumulating wealth. If we
invest regularly over time, our money will grow due to the power of compound interest.1
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 years, 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?
After reading the chapter on thinking like a financial planner, what do you recommend to Jing Wáng in the case 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 and will grow tax-sheltered until withdrawn at retirement. By doing so, she will qualify for her
employer match, thereby receiving 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 on 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 she will make would be affected by taxes. For every extra dollar that she contributes to her
retirement plan, for example, she will save $0.25 in taxes if she is in the combined state and federal 25
percent tax bracket. Also, if she earns an extra dollar investing it will be taxed at her marginal rate. The
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
