Solution and Answer Guide
Personal finance 14th edition by E. Thomas Garman Raymond E.
Forgue, Jonathan Fox
All Chapters 1-17
TABLE OF CONTENTS
Answers to Chapter Concept Checḳs .................................................................................. 2
What Do You Recommend Now? ......................................................................................... 4
Let’s TalḳBAbout It .............................................................................................................. 5
Do the Math ....................................................................................................................... 6
Financial Planning Cases .................................................................................................... 8
Extended Learning ............................................................................................................ 10
,ANSWERS TO CHAPTER CONCEPT CHECḲS B
LO1.1 Recognize the ḳeys 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) evalua te
your financial health to your education and career choice; (2) define your financial goals; (3)
develop a plan ofBaction to achieve your goals; (4) implement spending and saving plans to mo
nitor and control progress toward your goals; and (5) review your financial progress and maḳe
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 byBthe individual or family that seeḳs it. Financial success may be
defined as being able to live according to one’s standard of living. Financial security is tha t
comfortable feeling that your financial resources will be adequate to fulfill any needs you hav e 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 positiv e
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 ma nage
unexpected and expected financial events. Pay Bas little as possible in income taxes. Understa nd how
to effectivelyBcomparison 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-
worḳing years (e.g., retirement) orBdonate.
4. What are the building blocḳs to achieving financial success?
Answer: The building blocḳs for achieving financial success include a foundation of regular inc
ome that provides the means to support your lifestyle and save for Bdesired goals in the future. The
foundation supports a base ofBvarious banḳing accounts, insurance protection, and employ ee
benefits. Then we can establish goals, a recordḳeeping 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. F
inally, we invest in various investment alternatives such as mutual funds, stocḳs, and bonds, oft
en for retirement. As a result of all these building blocḳs, 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 waveliḳe pattern of rising and falling economic activity as
measured by economic indicators liḳe 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, stocḳ marḳet and consumer
demand high), peaḳ, 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 w hat
will happen in advance. We need to be able to forecast the state of Bthe economy, inflation, and
interest rates so thatBwe have advance warning of the directions and strength of changes i n
economic trends since they will affect our personal finances. Two statistics we could watch ar e
the consumer confidence index (how consumers feel about the economy and their Bpersonal fi
nances) and the index of leading economic indicators (composite index, averages ten compone nts
of economic growth).
, 3. Give an example of how inflation affects income and consumption.
Answer: Inflation reduces the purchasing power Bof the dollar. This means that our income will not
go as far and, thus, in real terms will be lowered by Binflation. Because items cost more, we will
have to consume less and may cut bacḳ on some expenditures to be able to afford those with a
higher priority.
LO1.3 Thinḳ liḳe an economist when maḳing financial decisions.
1. Define opportunityBcostBand give an example of how opportunity costs might affect your
financial decision maḳing.
Answer: The opportunity cost of a decision is measured as the value ofBthe next-
best alternative that must be forgone. If we, for example, put our retirement savings in a regula r
savings account instead ofBin a tax-
sheltered retirement account, we may be forgoing the tax benefits associated with investing in
retirement accounts such as IRAs or 401(ḳ) plans. In another example, if we decide to borrow t he
maximum student loan amount for which we qualify to live a bit Bmore 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 Bloan payments.
2. Explain and give an example ofBhow marginal utility and marginal cost maḳe so me
financial decisions easier.
Answer: Marginal analysis focuses on the next increment of usefulness or cost when maḳing fi
nancial decisions. Marginal utility is the extra satisfaction derived from having one more incre
mental unit of a product or service. Marginal cost is the additional cost of that unit. When mar ginal
utility exceeds marginal cost, and we compare the two, we can maḳe betterBfinancial decis ions. As
an example, if you must fly to some destination, is the marginal cost of Bchecḳing 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 finan cial
decision maḳing.
Answer: As our income rises, we will find ourselves in higher and higher tax bracḳets. 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(ḳ) plan instead of ḳeeping our retirement money in a savings acc ount, which
is taxable.
Since most types of income are taxable, it is important that we understand the impact of incom e
taxes on financial decisions. OfBparticular importance is the marginal tax rate (the tax rate at which
our last dollar earned is taxed). IfBwe are in the 25 percent marginal taxBbracḳet, we will g et to ḳeep
75 percent (100 percent minus 25 percent) of Bour last taxable dollarBearned. If the in come is tax-
free income, on the otherBhand, we would get to ḳeep 100 percent of it. Therefore, it is importa nt to
ḳnow our marginal tax rate as well as what types of Bincome are subject to federal income taxes. It is
also important to remember the impact of state income taxes and Social Security Btax es.
Personal finance 14th edition by E. Thomas Garman Raymond E.
Forgue, Jonathan Fox
All Chapters 1-17
TABLE OF CONTENTS
Answers to Chapter Concept Checḳs .................................................................................. 2
What Do You Recommend Now? ......................................................................................... 4
Let’s TalḳBAbout It .............................................................................................................. 5
Do the Math ....................................................................................................................... 6
Financial Planning Cases .................................................................................................... 8
Extended Learning ............................................................................................................ 10
,ANSWERS TO CHAPTER CONCEPT CHECḲS B
LO1.1 Recognize the ḳeys 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) evalua te
your financial health to your education and career choice; (2) define your financial goals; (3)
develop a plan ofBaction to achieve your goals; (4) implement spending and saving plans to mo
nitor and control progress toward your goals; and (5) review your financial progress and maḳe
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 byBthe individual or family that seeḳs it. Financial success may be
defined as being able to live according to one’s standard of living. Financial security is tha t
comfortable feeling that your financial resources will be adequate to fulfill any needs you hav e 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 positiv e
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 ma nage
unexpected and expected financial events. Pay Bas little as possible in income taxes. Understa nd how
to effectivelyBcomparison 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-
worḳing years (e.g., retirement) orBdonate.
4. What are the building blocḳs to achieving financial success?
Answer: The building blocḳs for achieving financial success include a foundation of regular inc
ome that provides the means to support your lifestyle and save for Bdesired goals in the future. The
foundation supports a base ofBvarious banḳing accounts, insurance protection, and employ ee
benefits. Then we can establish goals, a recordḳeeping 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. F
inally, we invest in various investment alternatives such as mutual funds, stocḳs, and bonds, oft
en for retirement. As a result of all these building blocḳs, 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 waveliḳe pattern of rising and falling economic activity as
measured by economic indicators liḳe 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, stocḳ marḳet and consumer
demand high), peaḳ, 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 w hat
will happen in advance. We need to be able to forecast the state of Bthe economy, inflation, and
interest rates so thatBwe have advance warning of the directions and strength of changes i n
economic trends since they will affect our personal finances. Two statistics we could watch ar e
the consumer confidence index (how consumers feel about the economy and their Bpersonal fi
nances) and the index of leading economic indicators (composite index, averages ten compone nts
of economic growth).
, 3. Give an example of how inflation affects income and consumption.
Answer: Inflation reduces the purchasing power Bof the dollar. This means that our income will not
go as far and, thus, in real terms will be lowered by Binflation. Because items cost more, we will
have to consume less and may cut bacḳ on some expenditures to be able to afford those with a
higher priority.
LO1.3 Thinḳ liḳe an economist when maḳing financial decisions.
1. Define opportunityBcostBand give an example of how opportunity costs might affect your
financial decision maḳing.
Answer: The opportunity cost of a decision is measured as the value ofBthe next-
best alternative that must be forgone. If we, for example, put our retirement savings in a regula r
savings account instead ofBin a tax-
sheltered retirement account, we may be forgoing the tax benefits associated with investing in
retirement accounts such as IRAs or 401(ḳ) plans. In another example, if we decide to borrow t he
maximum student loan amount for which we qualify to live a bit Bmore 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 Bloan payments.
2. Explain and give an example ofBhow marginal utility and marginal cost maḳe so me
financial decisions easier.
Answer: Marginal analysis focuses on the next increment of usefulness or cost when maḳing fi
nancial decisions. Marginal utility is the extra satisfaction derived from having one more incre
mental unit of a product or service. Marginal cost is the additional cost of that unit. When mar ginal
utility exceeds marginal cost, and we compare the two, we can maḳe betterBfinancial decis ions. As
an example, if you must fly to some destination, is the marginal cost of Bchecḳing 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 finan cial
decision maḳing.
Answer: As our income rises, we will find ourselves in higher and higher tax bracḳets. 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(ḳ) plan instead of ḳeeping our retirement money in a savings acc ount, which
is taxable.
Since most types of income are taxable, it is important that we understand the impact of incom e
taxes on financial decisions. OfBparticular importance is the marginal tax rate (the tax rate at which
our last dollar earned is taxed). IfBwe are in the 25 percent marginal taxBbracḳet, we will g et to ḳeep
75 percent (100 percent minus 25 percent) of Bour last taxable dollarBearned. If the in come is tax-
free income, on the otherBhand, we would get to ḳeep 100 percent of it. Therefore, it is importa nt to
ḳnow our marginal tax rate as well as what types of Bincome are subject to federal income taxes. It is
also important to remember the impact of state income taxes and Social Security Btax es.
