Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
Solution and Answer Guide
GARMAN/FOX , PERSONAL FINANCE 14E, CHAPTER 1: T HINKING LIKE A FINANCIAL P LANNER
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
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, 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
financial health to your education and career choice; (2) define your financial goals; (3) develop a plan of
action to achieve 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 resources 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 into 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
unexpected and expected financial events. Pay as little as possible in income taxes. Understand how to
effectively comparison shop for vehicles and homes. Protect what we own. Invest wisely. Accumulate and
protect the wealth that we 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
provides 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 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.
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 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.
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 in advance. 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 since 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, averages ten components of economic growth).
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, 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
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, 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 payments.
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 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 unit. When marginal utility exceeds
marginal cost, and we compare the two, we can make better financial decisions. As an example, if you must
fly to some destination, is the marginal 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
making.
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.
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). If we are in the 25 percent marginal tax bracket, we will get to keep 75 percent (100
percent minus 25 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.
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 investment 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.
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.
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, 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 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 as
compound interest is the basic 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 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).
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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 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 contributions, 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 25 percent tax bracket. Also, if she
earns an extra dollar, it will be 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
product, index of leading economic indicators, and consumer price index. She should also keep track of the
federal funds 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 were to participate fully?
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
Answer: Jing could use Appendix A.3 to calculate how much her contributions would grow in 40 years.
She would need to assume a rate of return on the funds. An 8 percent rate would be appropriate given the
investment opportunities available to her in her 401(k). At 8 percent, her account would be worth about
$2,486,942 (259.0565 × $9,600; $6,400 of Jing’s money and $3,200 from her employer).
6. Saving for retirement versus paying off student loans?
Answer: At a minimum Jing should contribute 8 percent of her salary to her retirement savings to take
advantage of her employer’s match. Jing’s retirement savings capitalizes on compounding and the time
value of money. Employer matching for retirement is free money and should not be left on the table. Jing is
paying off $35,000 in student loans and paying off any loan does provide a guaranteed rate of return.
However, it is unlikely that the return from paying off the student loan will exceed the value of the
retirement savings when it is combined with the employer match.
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LET’S TALK ABOUT IT
1. Economic Growth. How do federal government efforts help stimulate economic growth? How do these
efforts affect consumers?
Answer: Answers will vary depending on the student’s own financial situation. Tax cuts may help students
in the lower tax brackets. Efforts to revive the economy will help students keep or obtain jobs. Education-
related credits will help college students. Efforts to help people buy their first home will help students who
might be so interested.
2. The Business Cycle. Where do you think the United States is in the economic cycle now, and where does it
seem to be heading? List some indicators that suggest in which direction it may move.
Answer: At the time this edition was published, the economy was expanding with annual growth of around
2.3 percent. The gross domestic product was edging up, but growth has been an uneven pattern. Consumer
spending is up, despite inflation being at a four-decade high. Interest rates were raised by the Fed, so
borrowing is more expensive. The unemployment rate is declining slightly and is forecast to continue to
decline. Many people are benefiting from rising wages due to tighter labor markets. Along with inflation,
supply chain disruptions have been an issue. There has been an exuberant real estate market throughout the
pandemic but that is starting to cool due to the rise in interest rates and inflation. Federal infrastructure
spending programs were about to kick in and help some of the economic indicators.
3. Personal Finance Mistakes. What are some common mistakes that people make in personal finance?
Name two that might be the worst, and why?
Answer: Eleven mistakes that people make in personal finance are failing to (1) engage in long-term
personal financial planning, (2) engage in long-term budgeting, (3) engage in short-term budgeting, (4)
establish a cash reserve in case of emergencies, (5) save at a rate that is sufficiently high, (6) establish
adequate insurance protection, (7) manage income tax liabilities advantageously, (8) limit credit card debt,
(9) manage expenditures so as to prevent unexpected expenditures on a credit card, (10) engage in
investment planning, and (11) engage in retirement and estate planning. All eleven mistakes are important.
The three most important mistakes are saving at a rate that is too low, and inadequate retirement and estate
planning. Americans save at a rate that is very low. If you save just 1 percent more of your pay, you will
reap a high return at retirement. Also, if you withdraw money from your tax-sheltered retirement plan
before retirement, you will have a substantial shortfall when it comes time to retire.
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, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
4. Federal Reserve. Describe some economic circumstances that might persuade the Federal Reserve to
lower short-term interest rates.
Answer: This is a potential ―Class Activity exercise related to page 14 in the text.
The Federal Reserve Board might be persuaded to lower interest rates if the economy is in a downturn, a
trough, or even in the early stages of recovery. The goal would be to make borrowing easier and provide a
boost to the economy.
5. Opportunity Costs. People regularly make decisions in personal finance that have opportunity costs. Share
financial decisions you have made recently and identify the opportunity cost for each.
Answer: Students’ examples of decisions in personal finance that have opportunity costs will vary. Each
should focus not on the direct cost of the decision but on the lost opportunity that resulted from making the
decision.
6. Inherited Money. What would you do if you inherited $3,000 from an aunt? Identify three options.
Answer: Students’ options will vary by their financial circumstances. Common options might include
paying off debt, paying future schooling costs, or beginning a retirement savings program.
[return to top]
DO THE MATH
1. Real Income. Joshua Vermier of Topeka, Kansas, received a raise after his first year on the job to $45,800
from his initial salary of $44,000 (LO2 and LO3). What was Joshua’s raise stated as a percentage? If
inflation averaged 2.8 percent for the year, what was his real income after the raise? What was his real raise
stated as a percentage?
Solution: This is a potential ―Class Activity‖ exercise related to page 12 in the text.
Joshua received a $1,800 raise. As a percentage of his pre-raise income that was a raise of 4.1 percent
($1,800/$44,000 × 100). His real inflation-adjusted income after the raise is $45,553 ($45,800/1.028). As a
percentage, his real raise was 1.3 percent (4.1% − 2.8%).
2. Future Value. As a graduating senior, Chun Kumora of Charleston, West Virginia, is eager to enter the job
market at an anticipated annual salary of $54,000 (LO3 and LO4). Assuming an average inflation rate of 3
percent and an equal cost-of-living raise, what will his salary possibly become in 10 years? In 20 years?
(Hint: Use Appendix A.1.) To make real economic progress, how much of a raise (in dollars) does Chun
need to receive next year and the year after?
Solution: This is a potential ―Class Activity‖ exercise related to page 21 in the text.
Assuming an average inflation rate of 3 percent and an equal cost-of-living raise, Chun’s salary in 10 years
will be $72,571 ($54,000 × 1.3439). In 20 years, he could anticipate earning $97,529 ($54,000 × 1.8061).
To make real economic progress, Chun must receive raises greater than each year’s rate of inflation.
Otherwise, Chun is standing still because his raises will be required to compensate for the inflationary
increase in the cost of living.
3. Present and Future Values. Megan Berry, a freshman horticulture major at the University of Minnesota,
has some financial questions for the next three years of school and beyond (LO4). Answers to these
questions can be obtained by using Appendix A.
a. If Megan’s tuition, fees, and expenditures for books this year total $22,000, what will they be during
her senior year (three years from now), assuming costs rise 4 percent annually?
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, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
b. Megan is applying for a scholarship currently valued at $5,000. If she is awarded it at the end of next
year, how much is the scholarship worth in today’s dollars, assuming inflation of 3 percent?
c. Megan is already looking ahead to graduation and a job, and she wants to buy a new car not long after
her graduation. If after graduation she begins an investment program of $2,400 per year in an
investment yielding 4 percent, what will be the value of the fund after three years?
d. Megan’s Aunt Karroll, from Austin, Texas, told her that she would give Megan $1,000 at the end of
each year for the next three years to help with her college expenses. Assuming an annual interest rate
of 2 percent, what is the present value of that stream of payments?
Solution:
a. Assuming a 4 percent increase over the next three years, Megan’s tuition, fees, and books will cost
$24,748 ($22,000 × 1.1249).
b. Assuming an inflation rate of 3 percent, the scholarship is worth $4,855 in today’s dollars ($5,000 ×
0.9709).
c. With an annual contribution of $2,400 and an expected return of 4 percent, in three years Megan’s
savings will total $7,492 ($2,400 × 3.1216).
d. Assuming a 2 percent interest rate, the stream of payments from Megan’s aunt is presently worth
$2,884 ($1,000 × 2.8839).
4. Future Values. Using Table 1-1 calculate the following (LO4):
a. The future value of lump-sum investment of $4,000 in four years that earns 5 percent.
b. The future value of $1,500 saved each year for three years that earns 6 percent.
c. A person who invests $1,200 each year finds one choice that is expected to pay 3 percent per year and
another choice that may pay 4 percent. What is the difference in return if the investment is made for
four years?
d. The amount a person would need to deposit today with a 5 percent interest rate to have $2,000 in three
years.
Solution:
This is a potential ―Class Activity‖ exercise related to page 21 in the text.
a. The future value of $4,000 in four years, assuming a 5 percent rate of return, would be $4,862
($4,000 × 1.2155).
b. Assuming a 6 percent return, $1,500 saved each year for three years would be $4,775 ($1,500 ×
3.1836).
c. The $1,200 would grow to $5,020 ($1,200 × 4.1836) after four years at 3 percent and $5,096
($1,200 × 4.2465) at 4 percent. The difference is $76.
d. One would need to invest $1,728 now to have $2,000 in three years, assuming a 5 percent return
($2,000 × 0.8638).
5. Using the present and future value tables in Appendix A, or an alternate financial calculator, calculate
the following (LO4):
a. The amount a person would need to deposit today to be able to withdraw $6,000 each year for 10
years from an account earning 6 percent.
b. A person is offered a gift of $5,000 now or $8,000 five years from now. If such funds could be
expected to earn 8 percent over the next five years, which is the better choice?
c. A person wants to have $3,000 available to spend on an overseas trip four years from now. If such
funds could be expected to earn 6 percent, how much should be invested in a lump sum to realize
the $3,000 when needed?
d. A person invests $50,000 in an investment that earns 6 percent. If $6,000 is withdrawn each year,
how many years will it take for the fund to run out?
Solution:
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, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
a. One would need to invest $44,160 now to withdraw $6,000 per year for 10 years, assuming a 6
percent return ($6,000 × 7.3601).
b. $8,000 in five years is the better choice because the future value of $5,000 in five years, assuming
an 8 percent return, is $7,347 ($5,000 × 1.4693).
c. One would need to invest $2,376 now to have $3,000 in four years, assuming a 7 percent return
($3,000 × 0.7921).
d. The $50,000 investment will last approximately 12 years if it earns 6 percent and $6,000 is
withdrawn annually ($50,000/$6,000 = 8.33—look for the factor 8.33 in the 6 percent column of
the present value of a stream of equal payments table; Appendix A-4).
6. Inflation. Laureen Mauer, from Baton Rouge, Louisiana, earned a salary a year ago of $52,000 (LO2 and
LO3). If inflation during the year was 3.5 percent where she lives, how much of a decline in her purchasing
power occurred? Also, what would be her purchasing power if deflation of 1 percent occurred?
Solution:
This is a potential ―Class Activity‖ exercise related to page 12 in the text.
The 3.5 percent inflation resulted in a $1,820 reduction in purchasing power for Laureen (1.035 × $52,000)
minus $52,000. The 1 percent deflation would result in $420 increase in purchasing power for Lauren (0.01
× $52,000 = $520).
7. Use the Rule of 72. Using the Rule of 72, calculate how quickly $1,000 will double to $2,000 at interest
rates of 2 percent, 4 percent, 6 percent, 8 percent, and 10 percent (LO2).
Solution:
To calculate the years until an investment would double, divide the rate into seventy-two. For 2 percent it
would be 36 years, 4 percent would be 18 years, 6 percent would be 12 years, 8 percent would be 9 years,
and 10 percent would be 7.2 years.
8. Use the Rule of 72. Based on the Rule of 72 determine how long it would take to double an investment of
$5,000 if you could invest it at 7 percent. How long would it take to triple the investment (LO4)?
Solution:
This is a potential ―Class Activity‖ exercise related to page 22 in the text.
The investment would double in about 10.3 years (72/7). It would take about 15 years for the investment to
triple. For this tripling time use Appendix, A-1, and in the 7 percent, column look for the year that most
closely approximates a factor of three.
[return to top]
FINANCIAL PLANNING CASES
CASE 1: Harry and Belinda Johnson Consider Inflation and Children
Throughout this book, we will present a continuing narrative about Harry and Belinda Johnson. The
following is a brief description of the lives of this couple.
Harry is 28 years old and graduated five years ago with a bachelor’s degree in interior design from a
large Midwestern university near his hometown in Indiana. Since graduation Harry has been working in a
small interior design firm in Kansas City earning a salary of about $50,000.
Belinda is 27, has a degree in business administration from a university on the West Coast, and has
been employed in a medium-size manufacturing firm in California for about five years. Harry and Belinda
both worked on their schools’ student newspapers and met at a conference during their junior year in
college.
After all these years they met again socially in January in Kansas City, Missouri, where Belinda was
visiting relatives and by chance she and Harry were at the same museum. After getting reacquainted they
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
started dating and in only a matter of months Belinda got transferred from California to work in Kansas
City and in June they got married. Belinda is now employed as a stockbroker earning about $77,000
annually.
After the wedding they moved into his small apartment. They will face many financial challenges over
the next few decades as they buy their first home, decide on life insurance needs, begin a family, change
jobs, and invest for retirement.
a. Annually Harry receives $3,000 in interest income payments from a trust fund set up by his
deceased father’s estate. The amount will never change until it runs out in 20 years. What will be
the buying power of $3,000 in 10 years if inflation rises at 3 percent a year? (Hint: Use Appendix
A.2.)
b. Belinda and Harry have discussed starting a family but decided to wait for perhaps five more years
in order to get their careers moving along well and getting their personal finances solidly on the
road to success. They also know that having children is expensive. The government’s figure is that
the extra expense of a child would be about $16,000 a year through high school graduation. How
much money will they likely cumulatively spend on a child over 18 years assuming a 3 percent
inflation rate? (Hint: Use Appendix A.3.)
Solution:
a. $2,232 = $3,000 × 0.7441.
b. $374,630 = $16,000 × 23.4144.
CASE 2: Victor and Maria Hernandez Look at Future Income
Throughout this book, we will present a continuing narrative about Victor and Maria Hernandez. The
following is a brief description of the lives of this couple.
Victor and Maria, both in their late 30s, have two children: Jacob, age 13, and Nicholas, age 15. Victor
has had a long sales career with a retail appliance store in Fargo, North Dakota earning $53,000 annually.
Maria works as a medical records assistant earning $32,000.
a. Victor and Maria regularly buy and sell a number of items on eBay, Craig’s List, and through the
free community newspaper, from which they earn about $4,000 each year. What is the
accumulated future value of those amounts over 20 years if the annual earnings were invested
regularly and provided a 5 percent return each year? (Hint: Use Appendix A.3.)
b. What would Victor and Maria’s annual income be after 20 years if they both received an average
3 percent raise over their current $85,000 salary ($53,000 + $32,000) every year? (Hint: Use
Appendix A.1.)
Solution:
a. $132,264 = $4,000 × 33.0660.
b. $153,519 = $85,000 × 1.8061.
CASE 3: Julia Price Thinks About the Economy
Throughout this book, we will present a continuing case about Julia Price. Following is a brief description
about her. Six years ago, Julia graduated with a degree in aeronautical engineering and went to work as an
engineer in Alabama. Last year she moved to Seattle, Washington, to start a job as a mid-level systems
engineer on jet aircraft, and some of her design and coordination responsibilities include Department of
Defense projects. Julia thinks that the economy is going to get worse in the next two to three years, perhaps
even with prices declining (deflation). Offer your opinions about her thinking.
Solution:
The response to this question will vary depending upon the state of the economy when the students respond
to this question. The student’s response should include valid rationale, such as recent changes in the
inflation rate, rising/lowering gross domestic product data, increasing/decreasing unemployment rate, and
changes in the consumer confidence index.
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
CASE 4: Reasons to Study Personal Finance
Samantha Beliveau of Honolulu, Hawaii, is a senior in college, majoring in nutrition. She anticipates
getting married a year or so after graduation. Samantha has only one elective course remaining and is going
to choose between an advanced class in sociology and one in personal finance. As Samantha’s friend, you
want to persuade her to take personal finance, a course you enjoyed. Give some examples of how Samantha
might benefit from the study of personal finance.
Solution:
Samantha will benefit from acquiring financial knowledge because this knowledge will enable her to make
more intelligent decisions about how to spend or invest money and help her to eventually acquire some
degree of personal wealth. Samantha will learn about recordkeeping and budgeting, banking, and credit
use, saving and borrowing, protecting her income and assets, and planning for retirement and estate
transfer.
CASE 5: A Closer Look at Financial Success
You have been asked to give a brief speech on how to achieve financial success and financial security. Use
the five steps in the financial planning process and the building blocks to achieving financial success in
your speech. Outline your speech.
Solution:
Financial success is defined by the individual or family that seeks it. Success is the achievement of
financial aspirations that are desired, planned, or attempted. Financial happiness is the experience we have
when we are satisfied with money matters. People who are happy about their finances will see a spillover
into positive feelings about life in general.
A speaker could discuss the financial building blocks including a foundation of a regular income to support
our 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 recordkeeping
system, a budget, and an emergency savings fund. We will also manage various expenses such as housing
and transportation 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.
[return to top]
EXTENDED LEARNING
1. Opportunity and Marginal Costs. Survey two relatives or friends and ask about their decision-making
process when they most recently bought a vehicle. Find out if they thought about the opportunity costs
when making the purchase. Also ask if they used marginal costs in their thinking. Make a written summary
of your findings.
Solution:
A written paragraph about each person should include their thoughts about both opportunity costs (could
have spent the money on XYZ?) and marginal costs (for X dollars I obtained Y options on the vehicle).
2. Research Future Direction of the Economy. Survey three people to determine their opinions on the
direction of the economy over the next 12 months. Even though they may not know the meaning of these
exact terms, ask about their perceptions on such indicators as the (a) gross domestic product, (b) consumer
confidence, (c) inflation and deflation, (d) interest rates, and (e) federal fund rate. Make a table that
summarizes your findings.
Solution:
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website, in whole or in part.
Solution and Answer Guide
GARMAN/FOX , PERSONAL FINANCE 14E, CHAPTER 1: T HINKING LIKE A FINANCIAL P LANNER
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
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website, in whole or in part.
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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
financial health to your education and career choice; (2) define your financial goals; (3) develop a plan of
action to achieve 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 resources 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 into 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
unexpected and expected financial events. Pay as little as possible in income taxes. Understand how to
effectively comparison shop for vehicles and homes. Protect what we own. Invest wisely. Accumulate and
protect the wealth that we 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
provides 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 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.
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 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.
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 in advance. 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 since 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, averages ten components of economic growth).
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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
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, 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 payments.
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 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 unit. When marginal utility exceeds
marginal cost, and we compare the two, we can make better financial decisions. As an example, if you must
fly to some destination, is the marginal 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
making.
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.
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). If we are in the 25 percent marginal tax bracket, we will get to keep 75 percent (100
percent minus 25 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.
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 investment 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.
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.
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, 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 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 as
compound interest is the basic 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 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?
Now that you have read the chapter on the importance of personal finance, 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 contributions, 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 25 percent tax bracket. Also, if she
earns an extra dollar, it will be 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
product, index of leading economic indicators, and consumer price index. She should also keep track of the
federal funds 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 were to participate fully?
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
Answer: Jing could use Appendix A.3 to calculate how much her contributions would grow in 40 years.
She would need to assume a rate of return on the funds. An 8 percent rate would be appropriate given the
investment opportunities available to her in her 401(k). At 8 percent, her account would be worth about
$2,486,942 (259.0565 × $9,600; $6,400 of Jing’s money and $3,200 from her employer).
6. Saving for retirement versus paying off student loans?
Answer: At a minimum Jing should contribute 8 percent of her salary to her retirement savings to take
advantage of her employer’s match. Jing’s retirement savings capitalizes on compounding and the time
value of money. Employer matching for retirement is free money and should not be left on the table. Jing is
paying off $35,000 in student loans and paying off any loan does provide a guaranteed rate of return.
However, it is unlikely that the return from paying off the student loan will exceed the value of the
retirement savings when it is combined with the employer match.
[return to top]
LET’S TALK ABOUT IT
1. Economic Growth. How do federal government efforts help stimulate economic growth? How do these
efforts affect consumers?
Answer: Answers will vary depending on the student’s own financial situation. Tax cuts may help students
in the lower tax brackets. Efforts to revive the economy will help students keep or obtain jobs. Education-
related credits will help college students. Efforts to help people buy their first home will help students who
might be so interested.
2. The Business Cycle. Where do you think the United States is in the economic cycle now, and where does it
seem to be heading? List some indicators that suggest in which direction it may move.
Answer: At the time this edition was published, the economy was expanding with annual growth of around
2.3 percent. The gross domestic product was edging up, but growth has been an uneven pattern. Consumer
spending is up, despite inflation being at a four-decade high. Interest rates were raised by the Fed, so
borrowing is more expensive. The unemployment rate is declining slightly and is forecast to continue to
decline. Many people are benefiting from rising wages due to tighter labor markets. Along with inflation,
supply chain disruptions have been an issue. There has been an exuberant real estate market throughout the
pandemic but that is starting to cool due to the rise in interest rates and inflation. Federal infrastructure
spending programs were about to kick in and help some of the economic indicators.
3. Personal Finance Mistakes. What are some common mistakes that people make in personal finance?
Name two that might be the worst, and why?
Answer: Eleven mistakes that people make in personal finance are failing to (1) engage in long-term
personal financial planning, (2) engage in long-term budgeting, (3) engage in short-term budgeting, (4)
establish a cash reserve in case of emergencies, (5) save at a rate that is sufficiently high, (6) establish
adequate insurance protection, (7) manage income tax liabilities advantageously, (8) limit credit card debt,
(9) manage expenditures so as to prevent unexpected expenditures on a credit card, (10) engage in
investment planning, and (11) engage in retirement and estate planning. All eleven mistakes are important.
The three most important mistakes are saving at a rate that is too low, and inadequate retirement and estate
planning. Americans save at a rate that is very low. If you save just 1 percent more of your pay, you will
reap a high return at retirement. Also, if you withdraw money from your tax-sheltered retirement plan
before retirement, you will have a substantial shortfall when it comes time to retire.
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
4. Federal Reserve. Describe some economic circumstances that might persuade the Federal Reserve to
lower short-term interest rates.
Answer: This is a potential ―Class Activity exercise related to page 14 in the text.
The Federal Reserve Board might be persuaded to lower interest rates if the economy is in a downturn, a
trough, or even in the early stages of recovery. The goal would be to make borrowing easier and provide a
boost to the economy.
5. Opportunity Costs. People regularly make decisions in personal finance that have opportunity costs. Share
financial decisions you have made recently and identify the opportunity cost for each.
Answer: Students’ examples of decisions in personal finance that have opportunity costs will vary. Each
should focus not on the direct cost of the decision but on the lost opportunity that resulted from making the
decision.
6. Inherited Money. What would you do if you inherited $3,000 from an aunt? Identify three options.
Answer: Students’ options will vary by their financial circumstances. Common options might include
paying off debt, paying future schooling costs, or beginning a retirement savings program.
[return to top]
DO THE MATH
1. Real Income. Joshua Vermier of Topeka, Kansas, received a raise after his first year on the job to $45,800
from his initial salary of $44,000 (LO2 and LO3). What was Joshua’s raise stated as a percentage? If
inflation averaged 2.8 percent for the year, what was his real income after the raise? What was his real raise
stated as a percentage?
Solution: This is a potential ―Class Activity‖ exercise related to page 12 in the text.
Joshua received a $1,800 raise. As a percentage of his pre-raise income that was a raise of 4.1 percent
($1,800/$44,000 × 100). His real inflation-adjusted income after the raise is $45,553 ($45,800/1.028). As a
percentage, his real raise was 1.3 percent (4.1% − 2.8%).
2. Future Value. As a graduating senior, Chun Kumora of Charleston, West Virginia, is eager to enter the job
market at an anticipated annual salary of $54,000 (LO3 and LO4). Assuming an average inflation rate of 3
percent and an equal cost-of-living raise, what will his salary possibly become in 10 years? In 20 years?
(Hint: Use Appendix A.1.) To make real economic progress, how much of a raise (in dollars) does Chun
need to receive next year and the year after?
Solution: This is a potential ―Class Activity‖ exercise related to page 21 in the text.
Assuming an average inflation rate of 3 percent and an equal cost-of-living raise, Chun’s salary in 10 years
will be $72,571 ($54,000 × 1.3439). In 20 years, he could anticipate earning $97,529 ($54,000 × 1.8061).
To make real economic progress, Chun must receive raises greater than each year’s rate of inflation.
Otherwise, Chun is standing still because his raises will be required to compensate for the inflationary
increase in the cost of living.
3. Present and Future Values. Megan Berry, a freshman horticulture major at the University of Minnesota,
has some financial questions for the next three years of school and beyond (LO4). Answers to these
questions can be obtained by using Appendix A.
a. If Megan’s tuition, fees, and expenditures for books this year total $22,000, what will they be during
her senior year (three years from now), assuming costs rise 4 percent annually?
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b. Megan is applying for a scholarship currently valued at $5,000. If she is awarded it at the end of next
year, how much is the scholarship worth in today’s dollars, assuming inflation of 3 percent?
c. Megan is already looking ahead to graduation and a job, and she wants to buy a new car not long after
her graduation. If after graduation she begins an investment program of $2,400 per year in an
investment yielding 4 percent, what will be the value of the fund after three years?
d. Megan’s Aunt Karroll, from Austin, Texas, told her that she would give Megan $1,000 at the end of
each year for the next three years to help with her college expenses. Assuming an annual interest rate
of 2 percent, what is the present value of that stream of payments?
Solution:
a. Assuming a 4 percent increase over the next three years, Megan’s tuition, fees, and books will cost
$24,748 ($22,000 × 1.1249).
b. Assuming an inflation rate of 3 percent, the scholarship is worth $4,855 in today’s dollars ($5,000 ×
0.9709).
c. With an annual contribution of $2,400 and an expected return of 4 percent, in three years Megan’s
savings will total $7,492 ($2,400 × 3.1216).
d. Assuming a 2 percent interest rate, the stream of payments from Megan’s aunt is presently worth
$2,884 ($1,000 × 2.8839).
4. Future Values. Using Table 1-1 calculate the following (LO4):
a. The future value of lump-sum investment of $4,000 in four years that earns 5 percent.
b. The future value of $1,500 saved each year for three years that earns 6 percent.
c. A person who invests $1,200 each year finds one choice that is expected to pay 3 percent per year and
another choice that may pay 4 percent. What is the difference in return if the investment is made for
four years?
d. The amount a person would need to deposit today with a 5 percent interest rate to have $2,000 in three
years.
Solution:
This is a potential ―Class Activity‖ exercise related to page 21 in the text.
a. The future value of $4,000 in four years, assuming a 5 percent rate of return, would be $4,862
($4,000 × 1.2155).
b. Assuming a 6 percent return, $1,500 saved each year for three years would be $4,775 ($1,500 ×
3.1836).
c. The $1,200 would grow to $5,020 ($1,200 × 4.1836) after four years at 3 percent and $5,096
($1,200 × 4.2465) at 4 percent. The difference is $76.
d. One would need to invest $1,728 now to have $2,000 in three years, assuming a 5 percent return
($2,000 × 0.8638).
5. Using the present and future value tables in Appendix A, or an alternate financial calculator, calculate
the following (LO4):
a. The amount a person would need to deposit today to be able to withdraw $6,000 each year for 10
years from an account earning 6 percent.
b. A person is offered a gift of $5,000 now or $8,000 five years from now. If such funds could be
expected to earn 8 percent over the next five years, which is the better choice?
c. A person wants to have $3,000 available to spend on an overseas trip four years from now. If such
funds could be expected to earn 6 percent, how much should be invested in a lump sum to realize
the $3,000 when needed?
d. A person invests $50,000 in an investment that earns 6 percent. If $6,000 is withdrawn each year,
how many years will it take for the fund to run out?
Solution:
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, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
a. One would need to invest $44,160 now to withdraw $6,000 per year for 10 years, assuming a 6
percent return ($6,000 × 7.3601).
b. $8,000 in five years is the better choice because the future value of $5,000 in five years, assuming
an 8 percent return, is $7,347 ($5,000 × 1.4693).
c. One would need to invest $2,376 now to have $3,000 in four years, assuming a 7 percent return
($3,000 × 0.7921).
d. The $50,000 investment will last approximately 12 years if it earns 6 percent and $6,000 is
withdrawn annually ($50,000/$6,000 = 8.33—look for the factor 8.33 in the 6 percent column of
the present value of a stream of equal payments table; Appendix A-4).
6. Inflation. Laureen Mauer, from Baton Rouge, Louisiana, earned a salary a year ago of $52,000 (LO2 and
LO3). If inflation during the year was 3.5 percent where she lives, how much of a decline in her purchasing
power occurred? Also, what would be her purchasing power if deflation of 1 percent occurred?
Solution:
This is a potential ―Class Activity‖ exercise related to page 12 in the text.
The 3.5 percent inflation resulted in a $1,820 reduction in purchasing power for Laureen (1.035 × $52,000)
minus $52,000. The 1 percent deflation would result in $420 increase in purchasing power for Lauren (0.01
× $52,000 = $520).
7. Use the Rule of 72. Using the Rule of 72, calculate how quickly $1,000 will double to $2,000 at interest
rates of 2 percent, 4 percent, 6 percent, 8 percent, and 10 percent (LO2).
Solution:
To calculate the years until an investment would double, divide the rate into seventy-two. For 2 percent it
would be 36 years, 4 percent would be 18 years, 6 percent would be 12 years, 8 percent would be 9 years,
and 10 percent would be 7.2 years.
8. Use the Rule of 72. Based on the Rule of 72 determine how long it would take to double an investment of
$5,000 if you could invest it at 7 percent. How long would it take to triple the investment (LO4)?
Solution:
This is a potential ―Class Activity‖ exercise related to page 22 in the text.
The investment would double in about 10.3 years (72/7). It would take about 15 years for the investment to
triple. For this tripling time use Appendix, A-1, and in the 7 percent, column look for the year that most
closely approximates a factor of three.
[return to top]
FINANCIAL PLANNING CASES
CASE 1: Harry and Belinda Johnson Consider Inflation and Children
Throughout this book, we will present a continuing narrative about Harry and Belinda Johnson. The
following is a brief description of the lives of this couple.
Harry is 28 years old and graduated five years ago with a bachelor’s degree in interior design from a
large Midwestern university near his hometown in Indiana. Since graduation Harry has been working in a
small interior design firm in Kansas City earning a salary of about $50,000.
Belinda is 27, has a degree in business administration from a university on the West Coast, and has
been employed in a medium-size manufacturing firm in California for about five years. Harry and Belinda
both worked on their schools’ student newspapers and met at a conference during their junior year in
college.
After all these years they met again socially in January in Kansas City, Missouri, where Belinda was
visiting relatives and by chance she and Harry were at the same museum. After getting reacquainted they
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
started dating and in only a matter of months Belinda got transferred from California to work in Kansas
City and in June they got married. Belinda is now employed as a stockbroker earning about $77,000
annually.
After the wedding they moved into his small apartment. They will face many financial challenges over
the next few decades as they buy their first home, decide on life insurance needs, begin a family, change
jobs, and invest for retirement.
a. Annually Harry receives $3,000 in interest income payments from a trust fund set up by his
deceased father’s estate. The amount will never change until it runs out in 20 years. What will be
the buying power of $3,000 in 10 years if inflation rises at 3 percent a year? (Hint: Use Appendix
A.2.)
b. Belinda and Harry have discussed starting a family but decided to wait for perhaps five more years
in order to get their careers moving along well and getting their personal finances solidly on the
road to success. They also know that having children is expensive. The government’s figure is that
the extra expense of a child would be about $16,000 a year through high school graduation. How
much money will they likely cumulatively spend on a child over 18 years assuming a 3 percent
inflation rate? (Hint: Use Appendix A.3.)
Solution:
a. $2,232 = $3,000 × 0.7441.
b. $374,630 = $16,000 × 23.4144.
CASE 2: Victor and Maria Hernandez Look at Future Income
Throughout this book, we will present a continuing narrative about Victor and Maria Hernandez. The
following is a brief description of the lives of this couple.
Victor and Maria, both in their late 30s, have two children: Jacob, age 13, and Nicholas, age 15. Victor
has had a long sales career with a retail appliance store in Fargo, North Dakota earning $53,000 annually.
Maria works as a medical records assistant earning $32,000.
a. Victor and Maria regularly buy and sell a number of items on eBay, Craig’s List, and through the
free community newspaper, from which they earn about $4,000 each year. What is the
accumulated future value of those amounts over 20 years if the annual earnings were invested
regularly and provided a 5 percent return each year? (Hint: Use Appendix A.3.)
b. What would Victor and Maria’s annual income be after 20 years if they both received an average
3 percent raise over their current $85,000 salary ($53,000 + $32,000) every year? (Hint: Use
Appendix A.1.)
Solution:
a. $132,264 = $4,000 × 33.0660.
b. $153,519 = $85,000 × 1.8061.
CASE 3: Julia Price Thinks About the Economy
Throughout this book, we will present a continuing case about Julia Price. Following is a brief description
about her. Six years ago, Julia graduated with a degree in aeronautical engineering and went to work as an
engineer in Alabama. Last year she moved to Seattle, Washington, to start a job as a mid-level systems
engineer on jet aircraft, and some of her design and coordination responsibilities include Department of
Defense projects. Julia thinks that the economy is going to get worse in the next two to three years, perhaps
even with prices declining (deflation). Offer your opinions about her thinking.
Solution:
The response to this question will vary depending upon the state of the economy when the students respond
to this question. The student’s response should include valid rationale, such as recent changes in the
inflation rate, rising/lowering gross domestic product data, increasing/decreasing unemployment rate, and
changes in the consumer confidence index.
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
CASE 4: Reasons to Study Personal Finance
Samantha Beliveau of Honolulu, Hawaii, is a senior in college, majoring in nutrition. She anticipates
getting married a year or so after graduation. Samantha has only one elective course remaining and is going
to choose between an advanced class in sociology and one in personal finance. As Samantha’s friend, you
want to persuade her to take personal finance, a course you enjoyed. Give some examples of how Samantha
might benefit from the study of personal finance.
Solution:
Samantha will benefit from acquiring financial knowledge because this knowledge will enable her to make
more intelligent decisions about how to spend or invest money and help her to eventually acquire some
degree of personal wealth. Samantha will learn about recordkeeping and budgeting, banking, and credit
use, saving and borrowing, protecting her income and assets, and planning for retirement and estate
transfer.
CASE 5: A Closer Look at Financial Success
You have been asked to give a brief speech on how to achieve financial success and financial security. Use
the five steps in the financial planning process and the building blocks to achieving financial success in
your speech. Outline your speech.
Solution:
Financial success is defined by the individual or family that seeks it. Success is the achievement of
financial aspirations that are desired, planned, or attempted. Financial happiness is the experience we have
when we are satisfied with money matters. People who are happy about their finances will see a spillover
into positive feelings about life in general.
A speaker could discuss the financial building blocks including a foundation of a regular income to support
our 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 recordkeeping
system, a budget, and an emergency savings fund. We will also manage various expenses such as housing
and transportation 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.
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EXTENDED LEARNING
1. Opportunity and Marginal Costs. Survey two relatives or friends and ask about their decision-making
process when they most recently bought a vehicle. Find out if they thought about the opportunity costs
when making the purchase. Also ask if they used marginal costs in their thinking. Make a written summary
of your findings.
Solution:
A written paragraph about each person should include their thoughts about both opportunity costs (could
have spent the money on XYZ?) and marginal costs (for X dollars I obtained Y options on the vehicle).
2. Research Future Direction of the Economy. Survey three people to determine their opinions on the
direction of the economy over the next 12 months. Even though they may not know the meaning of these
exact terms, ask about their perceptions on such indicators as the (a) gross domestic product, (b) consumer
confidence, (c) inflation and deflation, (d) interest rates, and (e) federal fund rate. Make a table that
summarizes your findings.
Solution:
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