SolutionjandjAnswerjGuide:jGarman/Fox,jPersonaljFinancej14e,jChapterj1:jThinkingjLikejajFinancialjPlanner
Solution and Answer Guide j j j
GARMAN/FOX,J PERSONALJ FINANCEJ 14E,J CHAPTERJ 1:J THINKINGJ LIKEJ AJ FINANCIALJ PLANNER
TABLE OF CONTENTSJ J
AnswersjtojChapterjConceptjChecks ......................................................................................................... 2
WhatjDojYoujRecommendjNow? ............................................................................................................... 4
Let’sjTalkjAboutjIt ...................................................................................................................................... 5
DojthejMath.................................................................................................................................................. 6
FinancialjPlanningjCases ............................................................................................................................ 8
ExtendedjLearning .................................................................................................................................... 10
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 1
website,jinjwholejorjinjpart.
, SolutionjandjAnswerjGuide:jGarman/Fox,jPersonaljFinancej14e,jChapterj1:jThinkingjLikejajFinancialjPlanner
ANSWERS TO CHAPTER CONCEPT CHECKS
J J J J
LO1.1jRecognizejthejkeysjtojachievingjfinancialjsuccess.
1. Explainjthejfivejstepsjinjthejfinancialjplanningjprocess.
Answer:jTherejarejfivejfundamentaljstepsjtojthejpersonaljfinancialjplanningjprocess:j(1)jevaluatejyourjfinan
cialjhealthjtojyourjeducationjandjcareerjchoice;j(2)jdefinejyourjfinancialjgoals;j(3)jdevelopjajplanjofjactionjtoj
achievejyourjgoals;j(4)jimplementjspendingjandjsavingjplansjtojmonitorjandjcontroljprogressjtowardjyourjgo
als;jandj(5)jreviewjyourjfinancialjprogressjandjmakejchangesjasjappropriate.
2. Distinguishjamongjfinancialjsuccess,jfinancialjsecurity,jandjfinancialjhappiness.
Answer:jFinancialjsuccessjisjthejachievementjofjfinancialjaspirationsjthatjarejdesired,jplanned,jorjattempte
d.jSuccessjisjdefinedjbyjthejindividualjorjfamilyjthatjseeksjit.jFinancialjsuccessjmayjbejdefinedjasjbeingjablejt
ojlivejaccordingjtojone’sjstandardjofjliving.jFinancialjsecurityjisjthatjcomfortablejfeelingjthatjyourjfinancialj
resourcesjwilljbejadequatejtojfulfilljanyjneedsjyoujhavejasjwelljasjyourjwants.jFinancialjhappinessjisjthejex
periencejyoujhavejwhenjyoujarejsatisfiedjwithjmoneyjmatters.jPeoplejwhojarejhappyjaboutjtheirjfinancesjwil
ljseejajspilloverjintojpositivejfeelingsjaboutjlifejinjgeneral.
3. Summarizejwhatjyoujwilljaccomplishjstudyingjpersonaljfinance.
Answer:jSeveraljthingsjcanjbejaccomplishedjbyjstudyingjpersonaljfinance.jRecognizejhowjtojmanagejunexp
ectedjandjexpectedjfinancialjevents.jPayjasjlittlejasjpossiblejinjincomejtaxes.jUnderstandjhowjtojeffectivelyjc
omparisonjshopjforjvehiclesjandjhomes.jProtectjwhatjwejown.jInvestjwisely.jAccumulatejandjprotectjthejwea
lthjthatjwejmayjchoosejtojspendjduringjourjnon-workingjyearsj(e.g.,jretirement)jorjdonate.
4. Whatjarejthejbuildingjblocksjtojachievingjfinancialjsuccess?
Answer:jThejbuildingjblocksjforjachievingjfinancialjsuccessjincludejajfoundationjofjregularjincomejthatjpro
videsjthejmeansjtojsupportjyourjlifestylejandjsavejforjdesiredjgoalsjinjthejfuture.jThejfoundationjsupportsjajb
asejofjvariousjbankingjaccounts,jinsurancejprotection,jandjemployeejbenefits.jThenjwejcanjestablishjgoals,jaj
recordkeepingjsystem,jajbudget,jandjanjemergencyjsavingsjfund.jWejwilljalsojmanagejvariousjexpensesjsuch
jasjhousing,jtransportation,jinsurance,jandjthejpaymentjofjtaxes.jWejwilljalsojneedjtojhandlejcredit,jsavings,ja
ndjeducationaljcosts.jFinally,jwejinvestjinjvariousjinvestmentjalternativesjsuchjasjmutualjfunds,jstocks,jandjb
onds,joftenjforjretirement.jAsjajresultjofjalljthesejbuildingjblocks,jwejarejmorejaptjtojhavejajfinanciallyjsucce
ssfuljlife.
LO1.2jUnderstandjhowjthejeconomyjaffectsjyourjpersonaljfinancialjsuccess.
1. Summarizejthejphasesjofjthejbusinessjcycle.
Answer:jThejbusinessjcyclejentailsjajwavelikejpatternjofjrisingjandjfallingjeconomicjactivityjasjmeasuredjby
jeconomicjindicatorsjlikejunemploymentjratesjorjthejgrossjdomesticjproduct.jThejphasesjofjthejbusinessjcycle
jincludejexpansionj(preferredjstage—
productionjisjhigh,junemploymentjlow,jinterestjratesjlowjorjfalling,jstockjmarketjandjconsumerjdemandjhigh
),jpeak,jcontraction,jdownturn,jtrough,jandjrecovery.
2. Describejtwojstatisticsjthatjhelpjpredictjthejfuturejdirectionjofjthejeconomy.
Answer:jForecastingjthejstatejofjthejeconomyjinvolvesjpredicting,jestimating,jorjcalculatingjwhatjwilljhapp
enjinjadvance.jWejneedjtojbejablejtojforecastjthejstatejofjthejeconomy,jinflation,jandjinterestjratesjsojthatjwejh
avejadvancejwarningjofjthejdirectionsjandjstrengthjofjchangesjinjeconomicjtrendsjsincejtheyjwilljaffectjourjpe
rsonaljfinances.jTwojstatisticsjwejcouldjwatchjarejthejconsumerjconfidencejindexj(howjconsumersjfeeljabou
tjthejeconomyjandjtheirjpersonaljfinances)jandjthejindexjofjleadingjeconomicjindicatorsj(compositejindex,jav
eragesjtenjcomponentsjofjeconomicjgrowth).
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 2
website,jinjwholejorjinjpart.
, SolutionjandjAnswerjGuide:jGarman/Fox,jPersonaljFinancej14e,jChapterj1:jThinkingjLikejajFinancialjPlanner
3. Givejanjexamplejofjhowjinflationjaffectsjincomejandjconsumption.
Answer:jInflationjreducesjthejpurchasingjpowerjofjthejdollar.jThisjmeansjthatjourjincomejwilljnotjgojasjfarj
and,jthus,jinjrealjtermsjwilljbejloweredjbyjinflation.jBecausejitemsjcostjmore,jwejwilljhavejtojconsumejlessja
ndjmayjcutjbackjonjsomejexpendituresjtojbejablejtojaffordjthosejwithjajhigherjpriority.
LO1.3jThinkjlikejanjeconomistjwhenjmakingjfinancialjdecisions.
1. Definejopportunityjcostjandjgivejanjexamplejofjhowjopportunityjcostsjmightjaffectjyourjfinancialj
decisionjmaking.
Answer:jThejopportunityjcostjofjajdecisionjisjmeasuredjasjthejvaluejofjthejnext-
bestjalternativejthatjmustjbejforgone.jIfjwe,jforjexample,jputjourjretirementjsavingsjinjajregularjsavingsjaccou
ntjinsteadjofjinjajtax-
jshelteredjretirementjaccount,jwejmayjbejforgoingjthejtaxjbenefitsjassociatedjwithjinvestingjinjretirementjacc
ountsjsuchjasjIRAsjorj401(k)jplans.jInjanotherjexample,jifjwejdecidejtojborrowjthejmaximumjstudentjloanja
mountjforjwhichjwejqualifyjtojlivejajbitjmorejcomfortablyjwhilejinjcollege,jwejwilljnotjbejablejtojlivejasjnicel
y,jsavejasjmuchjforjthejdownjpaymentjonjajhomejorjsavejforjretirementjoncejwejgraduatejbecausejofjthejhigh
erjloanjpayments.
2. Explainjandjgivejanjexamplejofjhowjmarginaljutilityjandjmarginaljcostjmakejsomejfinancialj
decisionsjeasier.
Answer:jMarginaljanalysisjfocusesjonjthejnextjincrementjofjusefulnessjorjcostjwhenjmakingjfinancialjdecisi
ons.jMarginaljutilityjisjthejextrajsatisfactionjderivedjfromjhavingjonejmorejincrementaljunitjofjajproductjorj
service.jMarginaljcostjisjthejadditionaljcostjofjthatjunit.jWhenjmarginaljutilityjexceedsj marginaljcost,jandjw
ejcomparejthejtwo,jwejcanjmakejbetterjfinancialjdecisions.jAsjanjexample,jifjyoujmustjflyjtojsomejdestination
,jisjthejmarginaljcostjofjcheckingjajbagjusingjajcarry-onjworthjthejmarginaljutility?
3. Describejandjgivejanjexamplejofjhowjyourjmarginaljincomejtaxjratejcanjaffectjfinancialjdecisionj
making.
Answer:jAsjourjincomejrises,jwejwilljfindjourselvesjinjhigherjandjhigherjtaxjbrackets.jOnejtypejofjdecisionjt
hatjisjaffectedjbyjincomejtaxesjisjhowjwejshouldjinvestjforjretirement.jWejmightjwantjtojinvestjthroughjaj401
(k)jplanjinsteadjofjkeepingjourjretirementjmoneyjinjajsavingsjaccount,jwhichjisjtaxable.
Sincejmostjtypesjofjincomejarejtaxable,jitjisjimportantjthatjwejunderstandjthejimpactjofjincomejtaxesjonjfinan
cialjdecisions.jOfjparticularjimportancejisjthejmarginaljtaxjratej(thejtaxjratejatjwhichjourjlastjdollarjearnedjisjt
axed).jIfjwejarejinjthej25jpercentjmarginaljtaxjbracket,jwejwilljgetjtojkeepj75jpercentj(100jpercentjminusj25jp
ercent)jofjourjlastjtaxablejdollarjearned.jIfjthejincomejisjtax-
freejincome,jonjthejotherjhand,jwejwouldjgetjtojkeepj100jpercentjofjit.jTherefore,jitjisjimportantjtojknowjourj
marginaljtaxjratejasjwelljasjwhatjtypesjofjincomejarejsubjectjtojfederaljincomejtaxes.jItjisjalsojimportantjtojre
memberjthejimpactjofjstatejincomejtaxesjandjSocialjSecurityjtaxes.
LO1.4jPerformjtimejvaluejofjmoneyjcalculationsjinjpersonaljfinancialjdecisionjmaking.
1. Whatjarejthejtwojcommonjquestionsjaboutjmoney?
Answer:jThejtwojcommonjquestionsjaboutjmoneyjarejitsjfuturejvaluejandjpresentjvalue.jFuturejvaluejisjwh
atjinvestmentjorjseriesjofjinvestmentsjwilljbejatjajpointjinjthejfuture.jPresentjvaluejisjhowjmuchjwejwouldjn
eedjtojinvestjtodayjand/orjinjajseriesjofjfuturejinvestmentsjtojprovidejsomejamountjinjthejfuture.
2. Explainjthejdifferencejbetweenjsimplejinterestjandjcompoundjinterest,jandjdescribejwhyjthatj
differencejisjcritical.
Answer:jSimplejinterestjisjmoneyjpaidjonjajprincipaljamountjforjajgivenjnumberjofjyears.jThejinterestjisjpai
djonlyjonjthejprincipalj(thejoriginaljamountjinvested).jForjexample,jwejmightjputj$1,000jinjajbankjsavingsjac
countjatj5jpercentjinterestjforjonejyear.jWejwouldjhavejaccumulatedj$50jinjthatjyear.
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 3
website,jinjwholejorjinjpart.
, SolutionjandjAnswerjGuide:jGarman/Fox,jPersonaljFinancej14e,jChapterj1:jThinkingjLikejajFinancialjPlanner
Compoundjinterestjisjinterestjpaidjonjinterestjandjprincipal.jForjexample,jifjwejleavejyourj$1,000jonjdepos
itjandjdojnotjwithdrawjthej$50jinterestjatjthejendjofjthejyear,jwejwilljearnjinterestjonjbothjthejdepositjandjtheji
nterestjearnedjduringjthejfirstjyear.jThisjdifferencejinjthejtypesjofjinterestjpaidjisjimportantjasjcompoundjinte
restjisjthejbasicjprinciplejofjaccumulatingjwealth.jIfjwejinvestjregularlyjoverjtime,jourjmoneyjwilljgrowjduejt
ojthejpowerjofjcompoundjinterest.
3. UsejTablej1-
1jtojcalculatejthejfuturejvaluejofj(a)j$2,000jatj5jpercentjforjfourjyears,j(b)j$4,500jatj9jpercentjforje
ightjyears,jandj(c)j$10,000jatj6jpercentjforjtenjyears.
Answer:
a. $2,000jatj5jpercentjforjfourjyearsjwouldjequalj$2,431j($2,000j×j1.2155).
b. $4,500jatj9jpercentjforjeightjyearsjwouldjequalj$8,966.70j($4,500j×j1.9926).
c. $10,000jatj6jpercentjforj10jyearsjwouldjequalj$17,908j($10,000j×j1.7908).
[returnjtojtop]
WHAT DO YOU RECOMMEND NOW?
J J J J
Nowjthatjyoujhavejreadjthejchapterjonjthejimportancejofjpersonaljfinance,jwhatjdojyoujrecommendjtojJingjWángjinjth
ejcasejatjthejbeginningjofjthejchapter.
1. Participatingjinjherjemployer’sj401(k)jretirementjplan?
Answer:jJingjshouldjparticipatejinjherjemployer’sjplanjbecausejherjcontributionsjreducejherjtaxablejincomej
andjwilljgrowjtax-
shelteredjuntiljwithdrawnjatjretirement.jByjdoingjso,jshejwilljqualifyjforjherjemployerjcontributions,jtherebyj
receivingjadditionaljtax-
shelteredjincomejthatjwilljgojdirectlyjintojherjretirementjaccount.jIfjJingjcontributedj8jpercentjofjherjsalary,jh
erjemployerjwouldjmatchjitjwithj4jpercentjforjajtotaljofj12jpercent.jHerjtotaljcontributionjwouldjbej$9,600jba
sedjonjherjsalaryjofj$80,000.
2. Understandingjthejeffectsjofjherjmarginaljtaxjratejonjherjfinancialjdecisions?
Answer:jJingjshouldjusejherjmarginaljtaxjratejtojassessjhowjchangesjinjherjincomejandjthejfinancialjdecisio
nsjshejwilljmakejwouldjbejaffectedjbyjtaxes.jForjeveryjextrajdollarjthatjshejcontributesjtojherjretirementjplan,
jforjexample,jshejwilljsavej$0.25jinjtaxesjifjshejisjinjthej25jpercentjtaxjbracket.jAlso,jifjshejearnsjanjextrajdoll
ar,jitjwilljbejtaxedjatjherjmarginaljrate.
3. Consideringjthejcurrentjstatejofjthejeconomyjinjherjpersonaljfinancialjplanning?
Answer:jJingjshouldjstayjinformedjaboutjeconomicjtrendsjasjindicatedjinjchangesjinjthejgrossjdomesticjpro
duct,jindexjofjleadingjeconomicjindicators,jandjconsumerjpricejindex.jShejshouldjalsojkeepjtrackjofjthejfeder
aljfundsjratejasjanjindicatorjofjinterestjratesjinjthejeconomy.jShejshouldjbejablejtojmakejherjownjestimatejforj
economicjgrowth,jinflation,jandjinterestjratesjoverjthejnextjcouplejofjyears.
4. UsingjtimejvaluejofjmoneyjconsiderationsjtojprojectjwhatjherjRoth-IRAjmightjbejworthjatjagej63?
Answer:jJingjcouldjusejAppendixjA.1jtojcalculatejhowjmuchjherjIRAjfundj(currentlyj$2,000)jwouldjgrowjin
j40jyears.jShejwouldjneedjtojassumejajratejofjreturnjonjthejfunds.jAnj8jtoj10jpercentjratejwouldjbejappropriat
ejgivenjthejinvestmentjopportunitiesjavailablejtojherjinjherjIRA.jAtj8jpercent,jherjaccountjwouldjbejworthjab
outj$43,449j(21.7245j×j$2,000).
5. Usingjtimejvaluejofjmoneyjconsiderationsjtojprojectjwhatjherj401(k)jplanjmightjbejworthjatjagej63jifj
shejwerejtojparticipatejfully?
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 4
website,jinjwholejorjinjpart.
Solution and Answer Guide j j j
GARMAN/FOX,J PERSONALJ FINANCEJ 14E,J CHAPTERJ 1:J THINKINGJ LIKEJ AJ FINANCIALJ PLANNER
TABLE OF CONTENTSJ J
AnswersjtojChapterjConceptjChecks ......................................................................................................... 2
WhatjDojYoujRecommendjNow? ............................................................................................................... 4
Let’sjTalkjAboutjIt ...................................................................................................................................... 5
DojthejMath.................................................................................................................................................. 6
FinancialjPlanningjCases ............................................................................................................................ 8
ExtendedjLearning .................................................................................................................................... 10
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 1
website,jinjwholejorjinjpart.
, SolutionjandjAnswerjGuide:jGarman/Fox,jPersonaljFinancej14e,jChapterj1:jThinkingjLikejajFinancialjPlanner
ANSWERS TO CHAPTER CONCEPT CHECKS
J J J J
LO1.1jRecognizejthejkeysjtojachievingjfinancialjsuccess.
1. Explainjthejfivejstepsjinjthejfinancialjplanningjprocess.
Answer:jTherejarejfivejfundamentaljstepsjtojthejpersonaljfinancialjplanningjprocess:j(1)jevaluatejyourjfinan
cialjhealthjtojyourjeducationjandjcareerjchoice;j(2)jdefinejyourjfinancialjgoals;j(3)jdevelopjajplanjofjactionjtoj
achievejyourjgoals;j(4)jimplementjspendingjandjsavingjplansjtojmonitorjandjcontroljprogressjtowardjyourjgo
als;jandj(5)jreviewjyourjfinancialjprogressjandjmakejchangesjasjappropriate.
2. Distinguishjamongjfinancialjsuccess,jfinancialjsecurity,jandjfinancialjhappiness.
Answer:jFinancialjsuccessjisjthejachievementjofjfinancialjaspirationsjthatjarejdesired,jplanned,jorjattempte
d.jSuccessjisjdefinedjbyjthejindividualjorjfamilyjthatjseeksjit.jFinancialjsuccessjmayjbejdefinedjasjbeingjablejt
ojlivejaccordingjtojone’sjstandardjofjliving.jFinancialjsecurityjisjthatjcomfortablejfeelingjthatjyourjfinancialj
resourcesjwilljbejadequatejtojfulfilljanyjneedsjyoujhavejasjwelljasjyourjwants.jFinancialjhappinessjisjthejex
periencejyoujhavejwhenjyoujarejsatisfiedjwithjmoneyjmatters.jPeoplejwhojarejhappyjaboutjtheirjfinancesjwil
ljseejajspilloverjintojpositivejfeelingsjaboutjlifejinjgeneral.
3. Summarizejwhatjyoujwilljaccomplishjstudyingjpersonaljfinance.
Answer:jSeveraljthingsjcanjbejaccomplishedjbyjstudyingjpersonaljfinance.jRecognizejhowjtojmanagejunexp
ectedjandjexpectedjfinancialjevents.jPayjasjlittlejasjpossiblejinjincomejtaxes.jUnderstandjhowjtojeffectivelyjc
omparisonjshopjforjvehiclesjandjhomes.jProtectjwhatjwejown.jInvestjwisely.jAccumulatejandjprotectjthejwea
lthjthatjwejmayjchoosejtojspendjduringjourjnon-workingjyearsj(e.g.,jretirement)jorjdonate.
4. Whatjarejthejbuildingjblocksjtojachievingjfinancialjsuccess?
Answer:jThejbuildingjblocksjforjachievingjfinancialjsuccessjincludejajfoundationjofjregularjincomejthatjpro
videsjthejmeansjtojsupportjyourjlifestylejandjsavejforjdesiredjgoalsjinjthejfuture.jThejfoundationjsupportsjajb
asejofjvariousjbankingjaccounts,jinsurancejprotection,jandjemployeejbenefits.jThenjwejcanjestablishjgoals,jaj
recordkeepingjsystem,jajbudget,jandjanjemergencyjsavingsjfund.jWejwilljalsojmanagejvariousjexpensesjsuch
jasjhousing,jtransportation,jinsurance,jandjthejpaymentjofjtaxes.jWejwilljalsojneedjtojhandlejcredit,jsavings,ja
ndjeducationaljcosts.jFinally,jwejinvestjinjvariousjinvestmentjalternativesjsuchjasjmutualjfunds,jstocks,jandjb
onds,joftenjforjretirement.jAsjajresultjofjalljthesejbuildingjblocks,jwejarejmorejaptjtojhavejajfinanciallyjsucce
ssfuljlife.
LO1.2jUnderstandjhowjthejeconomyjaffectsjyourjpersonaljfinancialjsuccess.
1. Summarizejthejphasesjofjthejbusinessjcycle.
Answer:jThejbusinessjcyclejentailsjajwavelikejpatternjofjrisingjandjfallingjeconomicjactivityjasjmeasuredjby
jeconomicjindicatorsjlikejunemploymentjratesjorjthejgrossjdomesticjproduct.jThejphasesjofjthejbusinessjcycle
jincludejexpansionj(preferredjstage—
productionjisjhigh,junemploymentjlow,jinterestjratesjlowjorjfalling,jstockjmarketjandjconsumerjdemandjhigh
),jpeak,jcontraction,jdownturn,jtrough,jandjrecovery.
2. Describejtwojstatisticsjthatjhelpjpredictjthejfuturejdirectionjofjthejeconomy.
Answer:jForecastingjthejstatejofjthejeconomyjinvolvesjpredicting,jestimating,jorjcalculatingjwhatjwilljhapp
enjinjadvance.jWejneedjtojbejablejtojforecastjthejstatejofjthejeconomy,jinflation,jandjinterestjratesjsojthatjwejh
avejadvancejwarningjofjthejdirectionsjandjstrengthjofjchangesjinjeconomicjtrendsjsincejtheyjwilljaffectjourjpe
rsonaljfinances.jTwojstatisticsjwejcouldjwatchjarejthejconsumerjconfidencejindexj(howjconsumersjfeeljabou
tjthejeconomyjandjtheirjpersonaljfinances)jandjthejindexjofjleadingjeconomicjindicatorsj(compositejindex,jav
eragesjtenjcomponentsjofjeconomicjgrowth).
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 2
website,jinjwholejorjinjpart.
, SolutionjandjAnswerjGuide:jGarman/Fox,jPersonaljFinancej14e,jChapterj1:jThinkingjLikejajFinancialjPlanner
3. Givejanjexamplejofjhowjinflationjaffectsjincomejandjconsumption.
Answer:jInflationjreducesjthejpurchasingjpowerjofjthejdollar.jThisjmeansjthatjourjincomejwilljnotjgojasjfarj
and,jthus,jinjrealjtermsjwilljbejloweredjbyjinflation.jBecausejitemsjcostjmore,jwejwilljhavejtojconsumejlessja
ndjmayjcutjbackjonjsomejexpendituresjtojbejablejtojaffordjthosejwithjajhigherjpriority.
LO1.3jThinkjlikejanjeconomistjwhenjmakingjfinancialjdecisions.
1. Definejopportunityjcostjandjgivejanjexamplejofjhowjopportunityjcostsjmightjaffectjyourjfinancialj
decisionjmaking.
Answer:jThejopportunityjcostjofjajdecisionjisjmeasuredjasjthejvaluejofjthejnext-
bestjalternativejthatjmustjbejforgone.jIfjwe,jforjexample,jputjourjretirementjsavingsjinjajregularjsavingsjaccou
ntjinsteadjofjinjajtax-
jshelteredjretirementjaccount,jwejmayjbejforgoingjthejtaxjbenefitsjassociatedjwithjinvestingjinjretirementjacc
ountsjsuchjasjIRAsjorj401(k)jplans.jInjanotherjexample,jifjwejdecidejtojborrowjthejmaximumjstudentjloanja
mountjforjwhichjwejqualifyjtojlivejajbitjmorejcomfortablyjwhilejinjcollege,jwejwilljnotjbejablejtojlivejasjnicel
y,jsavejasjmuchjforjthejdownjpaymentjonjajhomejorjsavejforjretirementjoncejwejgraduatejbecausejofjthejhigh
erjloanjpayments.
2. Explainjandjgivejanjexamplejofjhowjmarginaljutilityjandjmarginaljcostjmakejsomejfinancialj
decisionsjeasier.
Answer:jMarginaljanalysisjfocusesjonjthejnextjincrementjofjusefulnessjorjcostjwhenjmakingjfinancialjdecisi
ons.jMarginaljutilityjisjthejextrajsatisfactionjderivedjfromjhavingjonejmorejincrementaljunitjofjajproductjorj
service.jMarginaljcostjisjthejadditionaljcostjofjthatjunit.jWhenjmarginaljutilityjexceedsj marginaljcost,jandjw
ejcomparejthejtwo,jwejcanjmakejbetterjfinancialjdecisions.jAsjanjexample,jifjyoujmustjflyjtojsomejdestination
,jisjthejmarginaljcostjofjcheckingjajbagjusingjajcarry-onjworthjthejmarginaljutility?
3. Describejandjgivejanjexamplejofjhowjyourjmarginaljincomejtaxjratejcanjaffectjfinancialjdecisionj
making.
Answer:jAsjourjincomejrises,jwejwilljfindjourselvesjinjhigherjandjhigherjtaxjbrackets.jOnejtypejofjdecisionjt
hatjisjaffectedjbyjincomejtaxesjisjhowjwejshouldjinvestjforjretirement.jWejmightjwantjtojinvestjthroughjaj401
(k)jplanjinsteadjofjkeepingjourjretirementjmoneyjinjajsavingsjaccount,jwhichjisjtaxable.
Sincejmostjtypesjofjincomejarejtaxable,jitjisjimportantjthatjwejunderstandjthejimpactjofjincomejtaxesjonjfinan
cialjdecisions.jOfjparticularjimportancejisjthejmarginaljtaxjratej(thejtaxjratejatjwhichjourjlastjdollarjearnedjisjt
axed).jIfjwejarejinjthej25jpercentjmarginaljtaxjbracket,jwejwilljgetjtojkeepj75jpercentj(100jpercentjminusj25jp
ercent)jofjourjlastjtaxablejdollarjearned.jIfjthejincomejisjtax-
freejincome,jonjthejotherjhand,jwejwouldjgetjtojkeepj100jpercentjofjit.jTherefore,jitjisjimportantjtojknowjourj
marginaljtaxjratejasjwelljasjwhatjtypesjofjincomejarejsubjectjtojfederaljincomejtaxes.jItjisjalsojimportantjtojre
memberjthejimpactjofjstatejincomejtaxesjandjSocialjSecurityjtaxes.
LO1.4jPerformjtimejvaluejofjmoneyjcalculationsjinjpersonaljfinancialjdecisionjmaking.
1. Whatjarejthejtwojcommonjquestionsjaboutjmoney?
Answer:jThejtwojcommonjquestionsjaboutjmoneyjarejitsjfuturejvaluejandjpresentjvalue.jFuturejvaluejisjwh
atjinvestmentjorjseriesjofjinvestmentsjwilljbejatjajpointjinjthejfuture.jPresentjvaluejisjhowjmuchjwejwouldjn
eedjtojinvestjtodayjand/orjinjajseriesjofjfuturejinvestmentsjtojprovidejsomejamountjinjthejfuture.
2. Explainjthejdifferencejbetweenjsimplejinterestjandjcompoundjinterest,jandjdescribejwhyjthatj
differencejisjcritical.
Answer:jSimplejinterestjisjmoneyjpaidjonjajprincipaljamountjforjajgivenjnumberjofjyears.jThejinterestjisjpai
djonlyjonjthejprincipalj(thejoriginaljamountjinvested).jForjexample,jwejmightjputj$1,000jinjajbankjsavingsjac
countjatj5jpercentjinterestjforjonejyear.jWejwouldjhavejaccumulatedj$50jinjthatjyear.
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 3
website,jinjwholejorjinjpart.
, SolutionjandjAnswerjGuide:jGarman/Fox,jPersonaljFinancej14e,jChapterj1:jThinkingjLikejajFinancialjPlanner
Compoundjinterestjisjinterestjpaidjonjinterestjandjprincipal.jForjexample,jifjwejleavejyourj$1,000jonjdepos
itjandjdojnotjwithdrawjthej$50jinterestjatjthejendjofjthejyear,jwejwilljearnjinterestjonjbothjthejdepositjandjtheji
nterestjearnedjduringjthejfirstjyear.jThisjdifferencejinjthejtypesjofjinterestjpaidjisjimportantjasjcompoundjinte
restjisjthejbasicjprinciplejofjaccumulatingjwealth.jIfjwejinvestjregularlyjoverjtime,jourjmoneyjwilljgrowjduejt
ojthejpowerjofjcompoundjinterest.
3. UsejTablej1-
1jtojcalculatejthejfuturejvaluejofj(a)j$2,000jatj5jpercentjforjfourjyears,j(b)j$4,500jatj9jpercentjforje
ightjyears,jandj(c)j$10,000jatj6jpercentjforjtenjyears.
Answer:
a. $2,000jatj5jpercentjforjfourjyearsjwouldjequalj$2,431j($2,000j×j1.2155).
b. $4,500jatj9jpercentjforjeightjyearsjwouldjequalj$8,966.70j($4,500j×j1.9926).
c. $10,000jatj6jpercentjforj10jyearsjwouldjequalj$17,908j($10,000j×j1.7908).
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WHAT DO YOU RECOMMEND NOW?
J J J J
Nowjthatjyoujhavejreadjthejchapterjonjthejimportancejofjpersonaljfinance,jwhatjdojyoujrecommendjtojJingjWángjinjth
ejcasejatjthejbeginningjofjthejchapter.
1. Participatingjinjherjemployer’sj401(k)jretirementjplan?
Answer:jJingjshouldjparticipatejinjherjemployer’sjplanjbecausejherjcontributionsjreducejherjtaxablejincomej
andjwilljgrowjtax-
shelteredjuntiljwithdrawnjatjretirement.jByjdoingjso,jshejwilljqualifyjforjherjemployerjcontributions,jtherebyj
receivingjadditionaljtax-
shelteredjincomejthatjwilljgojdirectlyjintojherjretirementjaccount.jIfjJingjcontributedj8jpercentjofjherjsalary,jh
erjemployerjwouldjmatchjitjwithj4jpercentjforjajtotaljofj12jpercent.jHerjtotaljcontributionjwouldjbej$9,600jba
sedjonjherjsalaryjofj$80,000.
2. Understandingjthejeffectsjofjherjmarginaljtaxjratejonjherjfinancialjdecisions?
Answer:jJingjshouldjusejherjmarginaljtaxjratejtojassessjhowjchangesjinjherjincomejandjthejfinancialjdecisio
nsjshejwilljmakejwouldjbejaffectedjbyjtaxes.jForjeveryjextrajdollarjthatjshejcontributesjtojherjretirementjplan,
jforjexample,jshejwilljsavej$0.25jinjtaxesjifjshejisjinjthej25jpercentjtaxjbracket.jAlso,jifjshejearnsjanjextrajdoll
ar,jitjwilljbejtaxedjatjherjmarginaljrate.
3. Consideringjthejcurrentjstatejofjthejeconomyjinjherjpersonaljfinancialjplanning?
Answer:jJingjshouldjstayjinformedjaboutjeconomicjtrendsjasjindicatedjinjchangesjinjthejgrossjdomesticjpro
duct,jindexjofjleadingjeconomicjindicators,jandjconsumerjpricejindex.jShejshouldjalsojkeepjtrackjofjthejfeder
aljfundsjratejasjanjindicatorjofjinterestjratesjinjthejeconomy.jShejshouldjbejablejtojmakejherjownjestimatejforj
economicjgrowth,jinflation,jandjinterestjratesjoverjthejnextjcouplejofjyears.
4. UsingjtimejvaluejofjmoneyjconsiderationsjtojprojectjwhatjherjRoth-IRAjmightjbejworthjatjagej63?
Answer:jJingjcouldjusejAppendixjA.1jtojcalculatejhowjmuchjherjIRAjfundj(currentlyj$2,000)jwouldjgrowjin
j40jyears.jShejwouldjneedjtojassumejajratejofjreturnjonjthejfunds.jAnj8jtoj10jpercentjratejwouldjbejappropriat
ejgivenjthejinvestmentjopportunitiesjavailablejtojherjinjherjIRA.jAtj8jpercent,jherjaccountjwouldjbejworthjab
outj$43,449j(21.7245j×j$2,000).
5. Usingjtimejvaluejofjmoneyjconsiderationsjtojprojectjwhatjherj401(k)jplanjmightjbejworthjatjagej63jifj
shejwerejtojparticipatejfully?
©j2024jCengage.jAlljRightsjReserved.jMayjnotjbejscanned,jcopied,jorjduplicated,jorjpostedjtojajpubliclyjaccessible 4
website,jinjwholejorjinjpart.
