SOLUTION MANUAL
Personal Finance, 14th Edition
By E. Thomas Garman, Chapter 1 - 17
,TABLE OF CONTENTS
Part I: FINANCIAL PLANNING.
1. Understanding Personal Finance.
2. Career Planning.
3. Financial Statements, Goals, and Budgets.
Part II: MONEY MANAGEMENT.
4. Managing Income Taxes.
5. Managing Checking and Savings Accounts.
6. Building and Maintaining Good Credit.
7. Credit Cards and Consumer Loans.
8. Vehicles and Other Major Purchases.
9. Obtaining Affordable Housing.
Part III: INCOME AND ASSET PROTECTION.
10. Managing Property and Liability Risk.
11. Planning for Health Care Expenses.
12. Life Insurance Planning.
Part IV: INVESTMENTS.
13. Investment Fundamentals.
,14. Investing in Stocks and Bonds.
15. Mutual and Exchange-Traded Funds.
16. Real Estate and High-Risk Investments.
17. Retirement and Estate Planning.
Solution and Answer Guide
GARMAN/FOX, PERSONAL FINANCE 14E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
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
,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).
, 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.
Personal Finance, 14th Edition
By E. Thomas Garman, Chapter 1 - 17
,TABLE OF CONTENTS
Part I: FINANCIAL PLANNING.
1. Understanding Personal Finance.
2. Career Planning.
3. Financial Statements, Goals, and Budgets.
Part II: MONEY MANAGEMENT.
4. Managing Income Taxes.
5. Managing Checking and Savings Accounts.
6. Building and Maintaining Good Credit.
7. Credit Cards and Consumer Loans.
8. Vehicles and Other Major Purchases.
9. Obtaining Affordable Housing.
Part III: INCOME AND ASSET PROTECTION.
10. Managing Property and Liability Risk.
11. Planning for Health Care Expenses.
12. Life Insurance Planning.
Part IV: INVESTMENTS.
13. Investment Fundamentals.
,14. Investing in Stocks and Bonds.
15. Mutual and Exchange-Traded Funds.
16. Real Estate and High-Risk Investments.
17. Retirement and Estate Planning.
Solution and Answer Guide
GARMAN/FOX, PERSONAL FINANCE 14E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
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
,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).
, 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.
