Solution and Answer Guide : Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner 1 © 202 4 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part. 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 Solution and Answer Guide : Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner 2 © 202 4 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part. 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 secu rity 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 expect ed 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 y ears (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 fo r 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 variou s 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 Underst and 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 activit y as measured by economic indicators like unemployment rates or the gross domestic product . The phases of the business cycle includ e 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 directi on 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 int erest 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) . Solution and Answer Guide : Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner 3 © 202 4 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part. 3. Give an example of how inflation affects income and consumption. Answer: Inflation reduces the purchas ing 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 high er 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 inst ead 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 mar ginal 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 satis faction 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 oursel ves 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) pl an 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 ra te (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 accumu lated $50 in that year.
