Garman/Fox's Personal Finance, 14th Edition Solution and Answer Guide, 2025/2026 Complete Chapters 1 - 17, Verified Latest Version

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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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ANSWERS TO CHAPTER CONCEPT CHECKS
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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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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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