Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
Solution and Answer Guide pp pp pp
GARMAN/FOX, PERSONAL FINANCE 14E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
PP P P P P PP P P PP P P P P P P P P
TABLE OF CONTENTS PP PP
Answers to Chapter Concept Checks ....................................................................................................... 2
pp pp pp pp
What Do You Recommend Now? ............................................................................................................. 4
pp pp pp pp
Let’s Talk About It..................................................................................................................................... 5
pp pp pp
Do the Math ................................................................................................................................................ 6
pp pp
Financial Planning Cases ........................................................................................................................... 8
pp pp
Extended Learning.................................................................................................................................... 10
pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
1
accessible
pp
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
ANSWERS TO CHAPTER CONCEPT CHECKS PP PP PP PP
LO1.1 Recognize the keys to achieving financial success.
pp pp pp pp pp pp pp
1. Explain the five steps in the financial planning process.
pp pp pp pp pp pp pp pp
Answer: There are five fundamental steps to the personal financial planning process: (1) evaluate
pp pp pp pp pp pp pp pp pp pp pp pp pp
your financial health to your education and career choice; (2) define your financial goals; (3) develop a
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
plan of action to achieve your goals; (4) implement spending and saving plans to monitor and control
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
progress toward your goals; and (5) review your financial progress and make changes as appropriate.
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
2. Distinguish among financial success, financial security, and financial happiness.
pp pp pp pp pp pp pp pp
Answer: Financial success is the achievement of financial aspirations that are desired, planned, or
pp pp pp pp pp pp pp pp pp pp pp pp pp
attempted. Success is defined by the individual or family that seeks it. Financial success may be
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
defined as being able to live according to one’s standard of living. Financial security is that
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
comfortable feeling that your financial resources will be adequate to fulfill any needs you have as
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
well as your wants. Financial happiness is the experience you have when you are satisfied with
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
money matters. People who are happy about their finances will see a spillover into positive feelings
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
about life in general.
pp pp pp pp
3. Summarize what you will accomplish studying personal finance.
pp pp pp pp pp pp pp
Answer: Several things can be accomplished by studying personal finance. Recognize how to manage
pp pp pp pp pp pp pp pp pp pp pp pp pp
unexpected and expected financial events. Pay as little as possible in income taxes. Understand how to
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
effectively comparison shop for vehicles and homes. Protect what we own. Invest wisely. Accumulate and
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
protect the wealth that we may choose to spend during our non-working years (e.g., retirement) or donate.
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
4. What are the building blocks to achieving financial success?
pp pp pp pp pp pp pp pp
Answer: The building blocks for achieving financial success include a foundation of regular income
pp pp pp pp pp pp pp pp pp pp pp pp pp
that provides the means to support your lifestyle and save for desired goals in the future. The
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
foundation supports a base of various banking accounts, insurance protection, and employee benefits.
pp pp pp pp pp pp pp pp pp pp pp pp pp
Then we can establish goals, a recordkeeping system, a budget, and an emergency savings fund. We
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
will also manage various expenses such as housing, transportation, insurance, and the payment of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
taxes. We will also need to handle credit, savings, and educational costs. Finally, we invest in various
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
investment alternatives such as mutual funds, stocks, and bonds, often for retirement. As a result of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
all these building blocks, we are more apt to have a financially successful life.
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
LO1.2 Understand how the economy affects your personal financial success.
pp pp pp pp pp pp pp pp pp
1. Summarize the phases of the business cycle. pp pp pp pp pp pp
Answer: The business cycle entails a wavelike pattern of rising and falling economic activity as
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
measured by economic indicators like unemployment rates or the gross domestic product. The phases
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
of the business cycle include expansion (preferred stage—production is high, unemployment low,
pp pp pp pp pp pp pp pp pp pp pp pp
interest rates low or falling, stock market and consumer demand high), peak, contraction, downturn,
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
trough, and recovery.
pp pp pp
2. Describe two statistics that help predict the future direction of the economy.
pp pp pp pp pp pp pp pp pp pp pp
Answer: Forecasting the state of the economy involves predicting, estimating, or calculating what will
pp pp pp pp pp pp pp pp pp pp pp pp pp
happen in advance. We need to be able to forecast the state of the economy, inflation, and interest
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
rates so that we have advance warning of the directions and strength of changes in economic trends
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
since they will affect our personal finances. Two statistics we could watch are the consumer
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
confidence index (how consumers feel about the economy and their personal finances) and the index
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
2
accessible
pp
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
pp of leading economic indicators (composite index, averages ten components of economic growth).
pp pp pp pp pp pp pp pp pp pp pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
3
accessible
pp
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
3. Give an example of how inflation affects income and consumption.
pp pp pp pp pp pp pp pp pp
Answer: Inflation reduces the purchasing power of the dollar. This means that our income will not
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
go as far and, thus, in real terms will be lowered by inflation. Because items cost more, we will have
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
to consume less and may cut back on some expenditures to be able to afford those with a higher
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
priority.
pp
LO1.3 Think like an economist when making financial decisions.
pp pp pp pp pp pp pp pp
1. Define opportunity cost and give an example of how opportunity costs might affect your
pp pp pp pp pp pp pp pp pp pp pp pp pp
financial decision making.
pp pp pp
Answer: The opportunity cost of a decision is measured as the value of the next-best alternative that
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
must be forgone. If we, for example, put our retirement savings in a regular savings account instead
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
of in a tax- sheltered retirement account, we may be forgoing the tax benefits associated with
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
investing in retirement accounts such as IRAs or 401(k) plans. In another example, if we decide to
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
borrow the maximum student loan amount for which we qualify to live a bit more comfortably while
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
in college, we will not be able to live as nicely, save as much for the down payment on a home or
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
save for retirement once we graduate because of the higher loan payments.
pp pp pp pp pp pp pp pp pp pp pp pp
2. Explain and give an example of how marginal utility and marginal cost make some
pp pp pp pp pp pp pp pp pp pp pp pp pp
financial decisions easier.
pp pp pp
Answer: Marginal analysis focuses on the next increment of usefulness or cost when making financial
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
decisions. Marginal utility is the extra satisfaction derived from having one more incremental unit of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
a product or service. Marginal cost is the additional cost of that unit. When marginal utility exceeds
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
marginal cost, and we compare the two, we can make better financial decisions. As an example, if you
p p pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
must fly to some destination, is the marginal cost of checking a bag using a carry-on worth the
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
marginal utility?
pp pp
3. Describe and give an example of how your marginal income tax rate can affect financial
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
decision making.
pp pp
Answer: As our income rises, we will find ourselves in higher and higher tax brackets. One type of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
decision that is affected by income taxes is how we should invest for retirement. We might want to
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
invest through a 401(k) plan instead of keeping our retirement money in a savings account, which is
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
taxable.
pp
Since most types of income are taxable, it is important that we understand the impact of income taxes
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
on financial decisions. Of particular importance is the marginal tax rate (the tax rate at which our last
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
dollar earned is taxed). If we are in the 25 percent marginal tax bracket, we will get to keep 75
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
percent (100 percent minus 25 percent) of our last taxable dollar earned. If the income is tax-free
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
income, on the other hand, we would get to keep 100 percent of it. Therefore, it is important to know
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
our marginal tax rate as well as what types of income are subject to federal income taxes. It is also
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
important to remember the impact of state income taxes and Social Security taxes.
pp pp pp pp pp pp pp pp pp pp pp pp pp
LO1.4 Perform time value of money calculations in personal financial decision making.
pp pp pp pp pp pp pp pp pp pp pp
1. What are the two common questions about money?
pp pp pp pp pp pp pp
Answer: The two common questions about money are its future value and present value. Future value
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
is what investment or series of investments will be at a point in the future. Present value is how
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
much we would need to invest today and/or in a series of future investments to provide some amount
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
in the future.
pp pp pp
2. Explain the difference between simple interest and compound interest, and describe why
pp pp pp pp pp pp pp pp pp pp pp
that difference is critical.
pp pp pp pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
4
accessible
pp
website, in whole or in part.
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
Solution and Answer Guide pp pp pp
GARMAN/FOX, PERSONAL FINANCE 14E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
PP P P P P PP P P PP P P P P P P P P
TABLE OF CONTENTS PP PP
Answers to Chapter Concept Checks ....................................................................................................... 2
pp pp pp pp
What Do You Recommend Now? ............................................................................................................. 4
pp pp pp pp
Let’s Talk About It..................................................................................................................................... 5
pp pp pp
Do the Math ................................................................................................................................................ 6
pp pp
Financial Planning Cases ........................................................................................................................... 8
pp pp
Extended Learning.................................................................................................................................... 10
pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
1
accessible
pp
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
ANSWERS TO CHAPTER CONCEPT CHECKS PP PP PP PP
LO1.1 Recognize the keys to achieving financial success.
pp pp pp pp pp pp pp
1. Explain the five steps in the financial planning process.
pp pp pp pp pp pp pp pp
Answer: There are five fundamental steps to the personal financial planning process: (1) evaluate
pp pp pp pp pp pp pp pp pp pp pp pp pp
your financial health to your education and career choice; (2) define your financial goals; (3) develop a
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
plan of action to achieve your goals; (4) implement spending and saving plans to monitor and control
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
progress toward your goals; and (5) review your financial progress and make changes as appropriate.
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
2. Distinguish among financial success, financial security, and financial happiness.
pp pp pp pp pp pp pp pp
Answer: Financial success is the achievement of financial aspirations that are desired, planned, or
pp pp pp pp pp pp pp pp pp pp pp pp pp
attempted. Success is defined by the individual or family that seeks it. Financial success may be
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
defined as being able to live according to one’s standard of living. Financial security is that
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
comfortable feeling that your financial resources will be adequate to fulfill any needs you have as
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
well as your wants. Financial happiness is the experience you have when you are satisfied with
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
money matters. People who are happy about their finances will see a spillover into positive feelings
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
about life in general.
pp pp pp pp
3. Summarize what you will accomplish studying personal finance.
pp pp pp pp pp pp pp
Answer: Several things can be accomplished by studying personal finance. Recognize how to manage
pp pp pp pp pp pp pp pp pp pp pp pp pp
unexpected and expected financial events. Pay as little as possible in income taxes. Understand how to
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
effectively comparison shop for vehicles and homes. Protect what we own. Invest wisely. Accumulate and
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
protect the wealth that we may choose to spend during our non-working years (e.g., retirement) or donate.
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
4. What are the building blocks to achieving financial success?
pp pp pp pp pp pp pp pp
Answer: The building blocks for achieving financial success include a foundation of regular income
pp pp pp pp pp pp pp pp pp pp pp pp pp
that provides the means to support your lifestyle and save for desired goals in the future. The
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
foundation supports a base of various banking accounts, insurance protection, and employee benefits.
pp pp pp pp pp pp pp pp pp pp pp pp pp
Then we can establish goals, a recordkeeping system, a budget, and an emergency savings fund. We
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
will also manage various expenses such as housing, transportation, insurance, and the payment of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
taxes. We will also need to handle credit, savings, and educational costs. Finally, we invest in various
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
investment alternatives such as mutual funds, stocks, and bonds, often for retirement. As a result of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
all these building blocks, we are more apt to have a financially successful life.
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
LO1.2 Understand how the economy affects your personal financial success.
pp pp pp pp pp pp pp pp pp
1. Summarize the phases of the business cycle. pp pp pp pp pp pp
Answer: The business cycle entails a wavelike pattern of rising and falling economic activity as
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
measured by economic indicators like unemployment rates or the gross domestic product. The phases
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
of the business cycle include expansion (preferred stage—production is high, unemployment low,
pp pp pp pp pp pp pp pp pp pp pp pp
interest rates low or falling, stock market and consumer demand high), peak, contraction, downturn,
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
trough, and recovery.
pp pp pp
2. Describe two statistics that help predict the future direction of the economy.
pp pp pp pp pp pp pp pp pp pp pp
Answer: Forecasting the state of the economy involves predicting, estimating, or calculating what will
pp pp pp pp pp pp pp pp pp pp pp pp pp
happen in advance. We need to be able to forecast the state of the economy, inflation, and interest
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
rates so that we have advance warning of the directions and strength of changes in economic trends
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
since they will affect our personal finances. Two statistics we could watch are the consumer
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
confidence index (how consumers feel about the economy and their personal finances) and the index
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
2
accessible
pp
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
pp of leading economic indicators (composite index, averages ten components of economic growth).
pp pp pp pp pp pp pp pp pp pp pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
3
accessible
pp
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial
pp pp pp pp pp pp pp pp pp pp pp pp pp
Planner
3. Give an example of how inflation affects income and consumption.
pp pp pp pp pp pp pp pp pp
Answer: Inflation reduces the purchasing power of the dollar. This means that our income will not
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
go as far and, thus, in real terms will be lowered by inflation. Because items cost more, we will have
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
to consume less and may cut back on some expenditures to be able to afford those with a higher
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
priority.
pp
LO1.3 Think like an economist when making financial decisions.
pp pp pp pp pp pp pp pp
1. Define opportunity cost and give an example of how opportunity costs might affect your
pp pp pp pp pp pp pp pp pp pp pp pp pp
financial decision making.
pp pp pp
Answer: The opportunity cost of a decision is measured as the value of the next-best alternative that
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
must be forgone. If we, for example, put our retirement savings in a regular savings account instead
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
of in a tax- sheltered retirement account, we may be forgoing the tax benefits associated with
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
investing in retirement accounts such as IRAs or 401(k) plans. In another example, if we decide to
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
borrow the maximum student loan amount for which we qualify to live a bit more comfortably while
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
in college, we will not be able to live as nicely, save as much for the down payment on a home or
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
save for retirement once we graduate because of the higher loan payments.
pp pp pp pp pp pp pp pp pp pp pp pp
2. Explain and give an example of how marginal utility and marginal cost make some
pp pp pp pp pp pp pp pp pp pp pp pp pp
financial decisions easier.
pp pp pp
Answer: Marginal analysis focuses on the next increment of usefulness or cost when making financial
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
decisions. Marginal utility is the extra satisfaction derived from having one more incremental unit of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
a product or service. Marginal cost is the additional cost of that unit. When marginal utility exceeds
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
marginal cost, and we compare the two, we can make better financial decisions. As an example, if you
p p pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
must fly to some destination, is the marginal cost of checking a bag using a carry-on worth the
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
marginal utility?
pp pp
3. Describe and give an example of how your marginal income tax rate can affect financial
pp pp pp pp pp pp pp pp pp pp pp pp pp pp
decision making.
pp pp
Answer: As our income rises, we will find ourselves in higher and higher tax brackets. One type of
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
decision that is affected by income taxes is how we should invest for retirement. We might want to
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
invest through a 401(k) plan instead of keeping our retirement money in a savings account, which is
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
taxable.
pp
Since most types of income are taxable, it is important that we understand the impact of income taxes
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
on financial decisions. Of particular importance is the marginal tax rate (the tax rate at which our last
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
dollar earned is taxed). If we are in the 25 percent marginal tax bracket, we will get to keep 75
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
percent (100 percent minus 25 percent) of our last taxable dollar earned. If the income is tax-free
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
income, on the other hand, we would get to keep 100 percent of it. Therefore, it is important to know
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
our marginal tax rate as well as what types of income are subject to federal income taxes. It is also
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
important to remember the impact of state income taxes and Social Security taxes.
pp pp pp pp pp pp pp pp pp pp pp pp pp
LO1.4 Perform time value of money calculations in personal financial decision making.
pp pp pp pp pp pp pp pp pp pp pp
1. What are the two common questions about money?
pp pp pp pp pp pp pp
Answer: The two common questions about money are its future value and present value. Future value
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
is what investment or series of investments will be at a point in the future. Present value is how
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
much we would need to invest today and/or in a series of future investments to provide some amount
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
in the future.
pp pp pp
2. Explain the difference between simple interest and compound interest, and describe why
pp pp pp pp pp pp pp pp pp pp pp
that difference is critical.
pp pp pp pp
© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp pp
4
accessible
pp
website, in whole or in part.
