Solution mandmAnswermGuide:mGarman/Fox, mPersonalmFinancem14e,mChapter m1:mThinkingmLikemamFinancialm
Planner
Solution and Answer Guide m m m
GARMAN/FOX, PERSONAL FINANCE 14 E, CHAPTER 1: THINKING LIKE
M M M M M M M M AM FINANCIALM PLANNER
TABLE OF CONTENTS
M M
Answersmto mChaptermConceptmChecks...............................................................................................2
WhatmDo mYoumRecommendmNow? ....................................................................................................4
Let’smTalkmAboutmIt ..........................................................................................................................5
DomthemMath .....................................................................................................................................6
FinancialmPlanningmCases..................................................................................................................8
ExtendedmLearning ........................................................................................................................ 10
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 1
m accessible
website,m inmwhole morminm part.
, Solution mandmAnswermGuide:mGarman/Fox, mPersonalmFinancem14e,mChapter m1:mThinkingmLikemamFinancialm
Planner
ANSWERS TO CHAPTER CONCEPT CHECKS
M M M M
LO1.1 mRecognize mthemkeysmto machieving mfinancialmsuccess.
1. Explainmthemfivemstepsminmthemfinancial mplanning mprocess.
Answer:mTheremaremfivemfundamentalmstepsmto mthempersonalmfinancialmplanningmprocess: m(1)mevaluatemyou
rmfinancialmhealth mto myourmeducation mand mcareermchoice; m(2)mdefinemyourmfinancialmgoals; m(3)mdevelop ma mpl
an mof maction mto machievemyourmgoals; m(4)mimplement mspendingmandmsavingmplansmto mmonitormandmcontrolmp
rogressmtoward myourmgoals; mand m(5)mreviewmyourmfinancialmprogressmand mmakemchangesmasmappropriate.
2. Distinguishmamong mfinancial msuccess,mfinancial msecurity,mandmfinancial mhappiness.
Answer:mFinancial msuccessmismthemachievement mof mfinancialmaspirationsmthatmaremdesired,mplanned,mormatt
empted.mSuccessmismdefined mby mthemindividualmormfamily mthat mseeksmit.mFinancialmsuccessmmay mbemdefinedm
asmbeingmablemto mlivemaccordingmto mone’smstandard mofmliving.mFinancial msecurity mismthat mcomfortablemfeel
ingmthat myourmfinancialmresourcesmwillmbemadequate mto mfulfillmany mneedsmyou mhavemasmwellmasmyourmwants.
mFinancial mhappinessmismthe mexperience myou mhave mwhen myou mare msatisfied mwith mmoney mmatters.mPeople m
who maremhappy mabout mtheirmfinancesmwillmseema mspilloverminto mpositivemfeelingsmabout mlifemin mgeneral.
3. Summarize mwhatmyoumwill maccomplishmstudying mpersonal mfinance.
Answer:mSeveralmthingsmcan mbemaccomplished mby mstudyingmpersonalmfinance.mRecognizemhowmto mmanage
munexpected mandmexpected mfinancialmevents.mPay masmlittle masmpossible min mincome mtaxes.mUnderstand mhowm
to meffectively mcomparison mshop mformvehiclesmand mhomes.mProtect mwhat mwemown.mInvest mwisely.mAccumula
temand mprotect mthemwealth mthat mwemmay mchoosemto mspend mduringmourmnon-
workingmyearsm(e.g.,mretirement)mormdonate.
4. Whatmaremthembuilding mblocksmto machieving mfinancial msuccess?
Answer:mThembuildingmblocksmformachievingmfinancialmsuccessmincludema mfoundation mof mregularmincomemt
hat mprovidesmthemmeansmto msupport myourmlifestylemand msavemformdesired mgoalsmin mthemfuture.mThemfoundati
on msupportsma mbasemofmvariousmbankingmaccounts,minsurancemprotection,mandmemployeembenefits.mThen mwe
mcan mestablish mgoals,ma mrecordkeepingmsystem,ma mbudget,mand man memergency msavingsmfund.mWe mwillmalso m
managemvariousmexpensesmsuchmasmhousing,mtransportation,minsurance,mandmthempayment mof mtaxes.mWemwil
lmalso mneed mto mhandlemcredit,msavings,mand meducationalmcosts.mFinally,mweminvest min mvariousminvestment mal
ternativesmsuch masmmutualmfunds,mstocks,mand mbonds,moften mformretirement.mAsma mresult mof mallmthesembuildi
ngmblocks,mwemaremmoremapt mto mhavema mfinancially msuccessfulmlife.
LO1.2 mUnderstandmhowmthemeconomy maffectsmyourmpersonalmfinancialmsuccess.
1. Summarize mthemphasesmof mthembusinessmcycle.
Answer:mThembusinessmcyclementailsma mwavelikempattern mof mrisingmand mfallingmeconomicmactivity masmmeas
ured mby meconomic mindicatorsmlikemunemployment mratesmormthemgrossmdomesticmproduct.mThemphasesmofmthe
mbusinessmcycle minclude mexpansion m(preferred mstage—
production mismhigh,munemployment mlow,minterest mratesmlowmormfalling,mstock mmarket mand mconsumermdema
nd mhigh),mpeak,mcontraction,mdownturn,mtrough,mand mrecovery.
2. Describemtwo mstatisticsmthatmhelpmpredictmthemfuturemdirectionmof mthemeconomy.
Answer:mForecastingmthemstatemof mthemeconomy minvolvesmpredicting,mestimating,mormcalculatingmwhat mwill
mhappen min madvance.mWe mneed mto mbe mable mto mforecast mthe mstate mofmthe meconomy,minflation,mand minterest mra
tesmso mthat mwemhavemadvancemwarningmof mthemdirectionsmand mstrength mof mchangesmin meconomicmtrendsmsinc
emthey mwillmaffect mourmpersonalmfinances.mTwo mstatisticsmwemcould mwatch maremthemconsumermconfidence mi
ndex m(howmconsumersmfeelmabout mthemeconomymand mtheirmpersonalmfinances)mand mthemindex mof mleadingme
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 2
m accessible
website,m inmwhole morminm part.
, Solution mandmAnswermGuide:mGarman/Fox, mPersonalmFinancem14e,mChapter m1:mThinkingmLikemamFinancialm
Planner
conomicmindicatorsm(composite mindex,maveragesmten mcomponentsmof meconomicmgrowth).
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 3
m accessible
website,m inmwhole morminm part.
, Solution mandmAnswermGuide:mGarman/Fox, mPersonalmFinancem14e,mChapter m1:mThinkingmLikemamFinancialm
Planner
3. Givemanmexamplemof mhowminflationmaffectsmincomemandmconsumption.
Answer:mInflation mreducesmthempurchasingmpowermof mthemdollar.mThismmeansmthat mourmincomemwillmnot mg
o masmfarmand,mthus,min mrealmtermsmwillmbemlowered mby minflation.mBecausemitemsmcost mmore,mwemwillmhavemt
o mconsumemlessmand mmay mcutmback monmsomemexpendituresmto mbemablemto mafford mthosemwith ma mhighermprio
rity.
LO1.3 mThinkmlikemanmeconomistmwhenmmaking mfinancialmdecisions.
1. Definemopportunity m costmandmgivemanmexamplemof mhowmopportunity mcostsmmightmaffectmyourmfina
ncial mdecisionmmaking.
Answer:mThemopportunity mcost mof ma mdecision mismmeasured masmthemvaluemof mthemnext-
best malternativemthat mmust mbemforgone.mIf mwe,mformexample,mput mourmretirement msavingsmin ma mregularmsavin
gsmaccount minstead mof min ma mtax-
msheltered mretirement maccount,mwe mmay mbe mforgoingmthe mtax mbenefitsmassociated mwith minvestingmin mretire
ment maccountsmsuch masmIRAsmorm401(k)mplans.mIn manothermexample,mif mwemdecidemto mborrowmthemmaximu
m mstudent mloan mamount mformwhich mwemqualify mto mlivema mbit mmoremcomfortably mwhilemin mcollege,mwemwillm
not mbemablemto mlivemasmnicely,msavemasmmuchmformthemdown mpayment mon mamhomemormsavemformretirement mo
ncemwemgraduatembecausemof mthemhighermloan mpayments.
2. Explainmandmgivemanmexamplemofmhowmmarginalmutility mandmmarginal mcostmmakemsomemfin
ancial mdecisionsmeasier.
Answer:mMarginalmanalysismfocusesmon mthemnext mincrement mof musefulnessmormcost mwhen mmakingmfinancial
mdecisions.mMarginal mutility mismthe mextra msatisfaction mderived mfrommhavingmone mmore mincrementalmunit mo
f ma mproduct mormservice.mMarginal mcostmismthemadditionalmcost mof mthat munit.mWhen mmarginalmutility mexceed
sm marginalmcost,mand mwemcomparemthemtwo,mwemcanmmakembettermfinancialmdecisions.mAsman mexample,mif my
ou mmust mfly mto msomemdestination,mismthemmarginalmcost mof mcheckingma mbagmusingma mcarry-
on mworth mthemmarginalmutility?
3. Describemandmgivemanmexamplemofmhowmyourmmarginal mincomemtax mratemcanmaffectmfinancial mde
cisionmmaking.
Answer:mAsmourmincomemrises,mwem willmfind mourselvesm in mhighermand mhighermtax mbrackets.mOnemtypemof m
decision mthat mismaffected mbymincomemtaxesmismhowmwemshould minvest mformretirement.mWemmight mwant mto min
vest mthrough ma m401(k)mplan minstead mofmkeepingmourmretirement mmoney min ma msavingsmaccount,mwhich mismta
xable.
Sincemmost mtypesmof mincomemaremtaxable,mitmismimportant mthat mwemunderstand mthemimpact mofmincomemtaxes
mon mfinancialmdecisions.mOf mparticularmimportance mismthe mmarginalmtax mrate m(the mtaxmrate matmwhich mourmlast
mdollarmearned mismtaxed).mIf mwe mare min mthe m25 mpercent mmarginalmtax mbracket,mwe mwillmget mto mkeep m75 mperc
ent m(100 mpercent mminusm25 mpercent)mof mourmlast mtaxablemdollarmearned.mIf mthemincomemismtax-
freemincome,mon mthemothermhand,mwemwould mget mto mkeep m100 mpercent mof mit.mTherefore,mitmismimportant mto m
knowmourmmarginalmtax mratemasmwellmasmwhat mtypesmofmincomemaremsubjectmto mfederalmincomemtaxes.mIt mism
also mimportant mto mremembermthemimpact mof mstatemincomemtaxesmand mSocialmSecurity mtaxes.
LO1.4 mPerformmtimemvaluemofmmoney mcalculationsminmpersonalmfinancialmdecisionmmaking.
1. Whatmaremthemtwo mcommonmquestionsmaboutmmoney?
Answer:mThemtwo mcommon mquestionsmabout mmoney maremitsmfuturemvaluemand mpresent mvalue.mFuturemvalu
emismwhat minvestment mormseriesmof minvestmentsmwillmbemat ma mpoint min mthemfuture.mPresentmvaluemismhowm
much mwemwould mneed mto minvest mtoday mand/ormin ma mseriesmof mfutureminvestmentsmto mprovidemsomemamount
min mthe mfuture.
2. Explainmthemdifferencembetweenmsimpleminterestmandmcompoundminterest,mandmdescribemwhy
mthatmdifference mismcritical.
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 4
m accessible
website,m inmwhole morminm part.
Planner
Solution and Answer Guide m m m
GARMAN/FOX, PERSONAL FINANCE 14 E, CHAPTER 1: THINKING LIKE
M M M M M M M M AM FINANCIALM PLANNER
TABLE OF CONTENTS
M M
Answersmto mChaptermConceptmChecks...............................................................................................2
WhatmDo mYoumRecommendmNow? ....................................................................................................4
Let’smTalkmAboutmIt ..........................................................................................................................5
DomthemMath .....................................................................................................................................6
FinancialmPlanningmCases..................................................................................................................8
ExtendedmLearning ........................................................................................................................ 10
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 1
m accessible
website,m inmwhole morminm part.
, Solution mandmAnswermGuide:mGarman/Fox, mPersonalmFinancem14e,mChapter m1:mThinkingmLikemamFinancialm
Planner
ANSWERS TO CHAPTER CONCEPT CHECKS
M M M M
LO1.1 mRecognize mthemkeysmto machieving mfinancialmsuccess.
1. Explainmthemfivemstepsminmthemfinancial mplanning mprocess.
Answer:mTheremaremfivemfundamentalmstepsmto mthempersonalmfinancialmplanningmprocess: m(1)mevaluatemyou
rmfinancialmhealth mto myourmeducation mand mcareermchoice; m(2)mdefinemyourmfinancialmgoals; m(3)mdevelop ma mpl
an mof maction mto machievemyourmgoals; m(4)mimplement mspendingmandmsavingmplansmto mmonitormandmcontrolmp
rogressmtoward myourmgoals; mand m(5)mreviewmyourmfinancialmprogressmand mmakemchangesmasmappropriate.
2. Distinguishmamong mfinancial msuccess,mfinancial msecurity,mandmfinancial mhappiness.
Answer:mFinancial msuccessmismthemachievement mof mfinancialmaspirationsmthatmaremdesired,mplanned,mormatt
empted.mSuccessmismdefined mby mthemindividualmormfamily mthat mseeksmit.mFinancialmsuccessmmay mbemdefinedm
asmbeingmablemto mlivemaccordingmto mone’smstandard mofmliving.mFinancial msecurity mismthat mcomfortablemfeel
ingmthat myourmfinancialmresourcesmwillmbemadequate mto mfulfillmany mneedsmyou mhavemasmwellmasmyourmwants.
mFinancial mhappinessmismthe mexperience myou mhave mwhen myou mare msatisfied mwith mmoney mmatters.mPeople m
who maremhappy mabout mtheirmfinancesmwillmseema mspilloverminto mpositivemfeelingsmabout mlifemin mgeneral.
3. Summarize mwhatmyoumwill maccomplishmstudying mpersonal mfinance.
Answer:mSeveralmthingsmcan mbemaccomplished mby mstudyingmpersonalmfinance.mRecognizemhowmto mmanage
munexpected mandmexpected mfinancialmevents.mPay masmlittle masmpossible min mincome mtaxes.mUnderstand mhowm
to meffectively mcomparison mshop mformvehiclesmand mhomes.mProtect mwhat mwemown.mInvest mwisely.mAccumula
temand mprotect mthemwealth mthat mwemmay mchoosemto mspend mduringmourmnon-
workingmyearsm(e.g.,mretirement)mormdonate.
4. Whatmaremthembuilding mblocksmto machieving mfinancial msuccess?
Answer:mThembuildingmblocksmformachievingmfinancialmsuccessmincludema mfoundation mof mregularmincomemt
hat mprovidesmthemmeansmto msupport myourmlifestylemand msavemformdesired mgoalsmin mthemfuture.mThemfoundati
on msupportsma mbasemofmvariousmbankingmaccounts,minsurancemprotection,mandmemployeembenefits.mThen mwe
mcan mestablish mgoals,ma mrecordkeepingmsystem,ma mbudget,mand man memergency msavingsmfund.mWe mwillmalso m
managemvariousmexpensesmsuchmasmhousing,mtransportation,minsurance,mandmthempayment mof mtaxes.mWemwil
lmalso mneed mto mhandlemcredit,msavings,mand meducationalmcosts.mFinally,mweminvest min mvariousminvestment mal
ternativesmsuch masmmutualmfunds,mstocks,mand mbonds,moften mformretirement.mAsma mresult mof mallmthesembuildi
ngmblocks,mwemaremmoremapt mto mhavema mfinancially msuccessfulmlife.
LO1.2 mUnderstandmhowmthemeconomy maffectsmyourmpersonalmfinancialmsuccess.
1. Summarize mthemphasesmof mthembusinessmcycle.
Answer:mThembusinessmcyclementailsma mwavelikempattern mof mrisingmand mfallingmeconomicmactivity masmmeas
ured mby meconomic mindicatorsmlikemunemployment mratesmormthemgrossmdomesticmproduct.mThemphasesmofmthe
mbusinessmcycle minclude mexpansion m(preferred mstage—
production mismhigh,munemployment mlow,minterest mratesmlowmormfalling,mstock mmarket mand mconsumermdema
nd mhigh),mpeak,mcontraction,mdownturn,mtrough,mand mrecovery.
2. Describemtwo mstatisticsmthatmhelpmpredictmthemfuturemdirectionmof mthemeconomy.
Answer:mForecastingmthemstatemof mthemeconomy minvolvesmpredicting,mestimating,mormcalculatingmwhat mwill
mhappen min madvance.mWe mneed mto mbe mable mto mforecast mthe mstate mofmthe meconomy,minflation,mand minterest mra
tesmso mthat mwemhavemadvancemwarningmof mthemdirectionsmand mstrength mof mchangesmin meconomicmtrendsmsinc
emthey mwillmaffect mourmpersonalmfinances.mTwo mstatisticsmwemcould mwatch maremthemconsumermconfidence mi
ndex m(howmconsumersmfeelmabout mthemeconomymand mtheirmpersonalmfinances)mand mthemindex mof mleadingme
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 2
m accessible
website,m inmwhole morminm part.
, Solution mandmAnswermGuide:mGarman/Fox, mPersonalmFinancem14e,mChapter m1:mThinkingmLikemamFinancialm
Planner
conomicmindicatorsm(composite mindex,maveragesmten mcomponentsmof meconomicmgrowth).
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 3
m accessible
website,m inmwhole morminm part.
, Solution mandmAnswermGuide:mGarman/Fox, mPersonalmFinancem14e,mChapter m1:mThinkingmLikemamFinancialm
Planner
3. Givemanmexamplemof mhowminflationmaffectsmincomemandmconsumption.
Answer:mInflation mreducesmthempurchasingmpowermof mthemdollar.mThismmeansmthat mourmincomemwillmnot mg
o masmfarmand,mthus,min mrealmtermsmwillmbemlowered mby minflation.mBecausemitemsmcost mmore,mwemwillmhavemt
o mconsumemlessmand mmay mcutmback monmsomemexpendituresmto mbemablemto mafford mthosemwith ma mhighermprio
rity.
LO1.3 mThinkmlikemanmeconomistmwhenmmaking mfinancialmdecisions.
1. Definemopportunity m costmandmgivemanmexamplemof mhowmopportunity mcostsmmightmaffectmyourmfina
ncial mdecisionmmaking.
Answer:mThemopportunity mcost mof ma mdecision mismmeasured masmthemvaluemof mthemnext-
best malternativemthat mmust mbemforgone.mIf mwe,mformexample,mput mourmretirement msavingsmin ma mregularmsavin
gsmaccount minstead mof min ma mtax-
msheltered mretirement maccount,mwe mmay mbe mforgoingmthe mtax mbenefitsmassociated mwith minvestingmin mretire
ment maccountsmsuch masmIRAsmorm401(k)mplans.mIn manothermexample,mif mwemdecidemto mborrowmthemmaximu
m mstudent mloan mamount mformwhich mwemqualify mto mlivema mbit mmoremcomfortably mwhilemin mcollege,mwemwillm
not mbemablemto mlivemasmnicely,msavemasmmuchmformthemdown mpayment mon mamhomemormsavemformretirement mo
ncemwemgraduatembecausemof mthemhighermloan mpayments.
2. Explainmandmgivemanmexamplemofmhowmmarginalmutility mandmmarginal mcostmmakemsomemfin
ancial mdecisionsmeasier.
Answer:mMarginalmanalysismfocusesmon mthemnext mincrement mof musefulnessmormcost mwhen mmakingmfinancial
mdecisions.mMarginal mutility mismthe mextra msatisfaction mderived mfrommhavingmone mmore mincrementalmunit mo
f ma mproduct mormservice.mMarginal mcostmismthemadditionalmcost mof mthat munit.mWhen mmarginalmutility mexceed
sm marginalmcost,mand mwemcomparemthemtwo,mwemcanmmakembettermfinancialmdecisions.mAsman mexample,mif my
ou mmust mfly mto msomemdestination,mismthemmarginalmcost mof mcheckingma mbagmusingma mcarry-
on mworth mthemmarginalmutility?
3. Describemandmgivemanmexamplemofmhowmyourmmarginal mincomemtax mratemcanmaffectmfinancial mde
cisionmmaking.
Answer:mAsmourmincomemrises,mwem willmfind mourselvesm in mhighermand mhighermtax mbrackets.mOnemtypemof m
decision mthat mismaffected mbymincomemtaxesmismhowmwemshould minvest mformretirement.mWemmight mwant mto min
vest mthrough ma m401(k)mplan minstead mofmkeepingmourmretirement mmoney min ma msavingsmaccount,mwhich mismta
xable.
Sincemmost mtypesmof mincomemaremtaxable,mitmismimportant mthat mwemunderstand mthemimpact mofmincomemtaxes
mon mfinancialmdecisions.mOf mparticularmimportance mismthe mmarginalmtax mrate m(the mtaxmrate matmwhich mourmlast
mdollarmearned mismtaxed).mIf mwe mare min mthe m25 mpercent mmarginalmtax mbracket,mwe mwillmget mto mkeep m75 mperc
ent m(100 mpercent mminusm25 mpercent)mof mourmlast mtaxablemdollarmearned.mIf mthemincomemismtax-
freemincome,mon mthemothermhand,mwemwould mget mto mkeep m100 mpercent mof mit.mTherefore,mitmismimportant mto m
knowmourmmarginalmtax mratemasmwellmasmwhat mtypesmofmincomemaremsubjectmto mfederalmincomemtaxes.mIt mism
also mimportant mto mremembermthemimpact mof mstatemincomemtaxesmand mSocialmSecurity mtaxes.
LO1.4 mPerformmtimemvaluemofmmoney mcalculationsminmpersonalmfinancialmdecisionmmaking.
1. Whatmaremthemtwo mcommonmquestionsmaboutmmoney?
Answer:mThemtwo mcommon mquestionsmabout mmoney maremitsmfuturemvaluemand mpresent mvalue.mFuturemvalu
emismwhat minvestment mormseriesmof minvestmentsmwillmbemat ma mpoint min mthemfuture.mPresentmvaluemismhowm
much mwemwould mneed mto minvest mtoday mand/ormin ma mseriesmof mfutureminvestmentsmto mprovidemsomemamount
min mthe mfuture.
2. Explainmthemdifferencembetweenmsimpleminterestmandmcompoundminterest,mandmdescribemwhy
mthatmdifference mismcritical.
©m2024 mCengage.mAll mRightsmReserved.mMaymnotmbemscanned,m copied,mormduplicated,mormpostedmtomampublicly 4
m accessible
website,m inmwhole morminm part.
