Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
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, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
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SolutionandAnswerGuide r r r
GARMAN/FOX, PERSONAL FINANCE 14E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
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TABLE OF CONTENTS RR RR
Answers to Chapter Concept Checks ........................................................................................................ 2
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What Do You Recommend Now? .............................................................................................................. 4
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Let’s Talk About It ..................................................................................................................................... 5
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Do the Math ................................................................................................................................................. 6
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Financial Planning Cases ............................................................................................................................ 8
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Extended Learning .................................................................................................................................... 10
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© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
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, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
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ANSWERS TO CHAPTER CONCEPT CHECKS RR RR RR RR
LO1.1 Recognize the keys to achieving financial success.
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1. Explain the five steps in the financial planning process.
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Answer: There are five fundamental steps to the personal financial planning process: (1) evaluate your
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financial health to your education and career choice; (2) define your financial goals; (3) develop a plan of
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action to achieve your goals; (4) implement spending and saving plans to monitor and control progress
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toward your goals; and (5) review your financial progress and make changes as appropriate.
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2. Distinguish among financial success, financial security, and financial happiness.
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Answer: Financial success is the achievement of financial aspirations that are desired, planned, or
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attempted. Success is defined by the individual or family that seeks it. Financial success may be defined as
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being able to live according to one’s standard of living. Financial security is that comfortable feeling that
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your financial resources will be adequate to fulfill any needs you have as well as your wants. Financial
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happiness is the experience you have when you are satisfied with money matters. People who are happy
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about their finances will see a spillover into positive feelings about life in general.
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3. Summarize what you will accomplish studying personal finance. rr rr rr rr rr rr rr
Answer: Several things can be accomplished by studying personal finance. Recognize how to manage
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unexpected and expected financial events. Pay as little as possible in income taxes. Understand how to
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effectively comparison shop for vehicles and homes. Protect what we own. Invest wisely. Accumulate and
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protect the wealth that we may choose to spend during our non-working years (e.g., retirement) or donate.
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4. What are the building blocks to achieving financial success?
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Answer: The building blocks for achieving financial success include a foundation of regular income that
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provides the means to support your lifestyle and save for desired goals in the future. The foundation
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supports a base of various banking accounts, insurance protection, and employee benefits. Then we can
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establish goals, a recordkeeping system, a budget, and an emergency savings fund. We will also manage
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various expenses such as housing, transportation, insurance, and the payment of taxes. We will also need to
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handle credit, savings, and educational costs. Finally, we invest in various investment alternatives such as
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mutual funds, stocks, and bonds, often for retirement. As a result of all these building blocks, we are
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more apt to have a financially successful life.
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LO1.2 Understand how the economy affects your personal financial success.
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1. Summarize the phases of the business cycle. rr rr rr rr rr rr
Answer: The business cycle entails a wavelike pattern of rising and falling economic activity as measured
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by economic indicators like unemployment rates or the gross domestic product. The phases of the business
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cycle include expansion (preferred stage—production is high, unemployment low, interest rates low or
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falling, stock market and consumer demand high), peak, contraction, downturn, trough, and recovery.
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2. Describe two statistics that help predict the future direction of the economy.
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Answer: Forecasting the state of the economy involves predicting, estimating, or calculating what will
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happen in advance. We need to be able to forecast the state of the economy, inflation, and interest rates so
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that we have advance warning of the directions and strength of changes in economic trends since they will
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affect our personal finances. Two statistics we could watch are the consumer confidence index (how
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consumers feel about the economy and their personal finances) and the index of leading economic
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indicators (composite index, averages ten components of economic growth).
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© 2024 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly
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, Solution and Answer Guide: Garman/Fox, Personal Finance 14e, Chapter 1: Thinking Like a Financial Planner
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3. Give an example of how inflation affects income and consumption.
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Answer: Inflation reduces the purchasing power of the dollar. This means that our income will not go as
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far and, thus, in real terms will be lowered by inflation. Because items cost more, we will have to consume
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less and may cut back on some expenditures to be able to afford those with a higher priority.
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LO1.3 Think like an economist when making financial decisions.
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1. Define opportunity cost and give an example of how opportunity costs might affect your
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financial decision making.
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Answer: The opportunity cost of a decision is measured as the value of the next-best alternative that must
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be forgone. If we, for example, put our retirement savings in a regular savings account instead of in a tax-
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sheltered retirement account, we may be forgoing the tax benefits associated with investing in retirement
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accounts such as IRAs or 401(k) plans. In another example, if we decide to borrow the maximum student
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loan amount for which we qualify to live a bit more comfortably while in college, we will not be able to
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live as nicely, save as much for the down payment on a home or save for retirement once we graduate
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because of the higher loan payments.
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2. Explain and give an example of how marginal utility and marginal cost make some
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financial decisions easier.
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Answer: Marginal analysis focuses on the next increment of usefulness or cost when making financial
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decisions. Marginal utility is the extra satisfaction derived from having one more incremental unit of a
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product or service. Marginal cost is the additional cost of that unit. When marginal utility exceeds
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marginal cost, and we compare the two, we can make better financial decisions. As an example, if you
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must fly to some destination, is the marginal cost of checking a bag using a carry-on worth the marginal
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utility?
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3. Describe and give an example of how your marginal income tax rate can affect financial
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decision making.
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Answer: As our income rises, we will find ourselves in higher and higher tax brackets. One type of
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decision that is affected by income taxes is how we should invest for retirement. We might want to invest
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through a 401(k) plan instead of keeping our retirement money in a savings account, which is taxable.
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Since most types of income are taxable, it is important that we understand the impact of income taxes on
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financial decisions. Of particular importance is the marginal tax rate (the tax rate at which our last dollar
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earned is taxed). If we are in the 25 percent marginal tax bracket, we will get to keep 75 percent (100
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percent minus 25 percent) of our last taxable dollar earned. If the income is tax-free income, on the other
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hand, we would get to keep 100 percent of it. Therefore, it is important to know our marginal tax rate as
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well as what types of income are subject to federal income taxes. It is also important to remember the
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impact of state income taxes and Social Security taxes.
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LO1.4 Perform time value of money calculations in personal financial decision making.
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1. What are the two common questions about money?
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Answer: The two common questions about money are its future value and present value. Future value is
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what investment or series of investments will be at a point in the future. Present value is how much we
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would need to invest today and/or in a series of future investments to provide some amount in the future.
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2. Explain the difference between simple interest and compound interest, and describe why
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that difference is critical.
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Answer: Simple interest is money paid on a principal amount for a given number of years. The interest is
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paid only on the principal (the original amount invested). For example, we might put $1,000 in a bank
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savings account at 5 percent interest for one year. We would have accumulated $50 in that year.
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