, SOLUTION MANUAL FOR Personal Finance 15th Edition Garman
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, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
Solution and Answer Guide
GARMAN/FOX, PERSONAL FINANCE 15E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
TABLE OF CONTENTS
Answers to Chapter Concept Checks ....................................................................................... 2
What Do You Recommend Now?...............................................................................................5
Let’s Talk About It ....................................................................................................................... 6
Do the Math..................................................................................................................................7
Financial Planning Cases.........................................................................................................10
Extended Learning....................................................................................................................13
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
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 financial health relative to education and career choice; (2) define financial goals; (3)
develop a plan of action to achieve goals; (4) implement spending and saving plans to
monitor and control progress toward goals; and (5) review 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 our financial resources will be adequate to fulfill our
needs as well as our wants. Financial happiness is the experience we have when we are
satisfied with money matters. People who are happy about their finances will experience a
spillover into positive feelings about life in general.
3. Summarize what is accomplished by studying personal finance.
Answer: Several things can be accomplished by studying personal finance. We recognize
how to manage unexpected and expected financial events. We pay as little as legally
possible in income taxes. We understand how to effectively comparison shop for vehicles and
homes. We protect what we own and invest wisely. We accumulate and protect the wealth
that we may choose to spend during our nonworking 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 -our lifestyle and save for our 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 involves 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.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
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
in advance what will happen. 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, because 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, which
averages ten components of economic growth).
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; in real terms, it will be lowered by inflation. Because items cost more, we
will have to consume less and may cut back on some expenditures in order to be able to
afford those with a higher priority.
LO1.3 APPLY ECONOMIC CONCEPTS IN MAKING FINANCIAL DECISIONS.
1. Define opportunity cost and give an example of how opportunity costs might affect
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, later we will not be able to live as well,
save as much for the down payment on a home, or save for retirement once we graduate,
because our student loan payments will be higher.
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 (utility) 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 one
unit. When marginal utility exceeds marginal cost, and we compare the two, we can make
better financial decisions. To maximize utility, we seek options where the added utility per last
dollar spent is maximized. As an example, if one must fly to some destination, is the marginal
cost of checking a bag versus using a carry-on worth the marginal utility? We continually ask,
Is this the best way to spend those last few dollars now?
3. Describe and give an example of how the 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. Because 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 22 percent marginal tax bracket, we will get to keep 78 percent (100 percent minus
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
22 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 time value of money questions?
Answer: The two common questions about money are its future value and its present value.
Future value is what lump-sum investments 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 for long-term financial planning.
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. Compound interest is interest paid on interest and principal.
For example, if we leave the $1,000 on deposit and do not withdraw the $50 interest at the
end of the year, we will earn interest on both the deposit and the interest earned during the
first year. This difference in the types of interest paid is important; compound interest is one
of the most basic principles of accumulating wealth. If we invest regularly over time, our
money will grow due to the power of compound interest.
3. Use Table 1-1 to calculate the future value of (a) $2,000 at 5 percent for four years, (b)
$4,500 at 9 percent for eight years, and (c) $10,000 at 6 percent for ten years.
Answer:
a. $2,000 at 5 percent for four years would equal $2,431 ($2,000 × 1.2155).
b. $4,500 at 9 percent for eight years would equal $8,966.70 ($4,500 × 1.9926).
c. $10,000 at 6 percent for 10 years would equal $17,908 ($10,000 × 1.7908).
[return to top]
WHAT DO YOU RECOMMEND NOW?
After reading the chapter on thinking like a financial planner, what do you recommend to Jing Wáng in the
case at the beginning of the chapter?
1. Participating in her employer’s 401(k) retirement plan?
Answer: Jing should participate in her employer’s plan because her contributions reduce her
taxable income and will grow tax-sheltered until withdrawn at retirement. By doing so, she will
qualify for her employer match, thereby receiving additional tax-sheltered income that will go
directly into her retirement account. If Jing contributed 8 percent of her salary, her employer
would match it with 4 percent for a total of 12 percent. Her total contribution would be $9,600
based on her salary of $80,000.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
2. Understanding the effects of her marginal tax rate on her financial decisions?
Answer: Jing should use her marginal tax rate to assess how changes in her income and the
financial decisions she will make would be affected by taxes. For every extra dollar that she
contributes to her retirement plan, for example, she will save $0.25 in taxes if she is in the
combined state and federal 25 percent tax bracket. Also, if she earns an extra dollar investing
it will be taxed at her marginal rate. The higher the tax rate paid, the more appealing it is to
avoid these taxes with tax-exempt investments like municipal bonds.
3. Considering the current state of the economy in her personal financial planning?
Answer: Jing should stay informed about economic trends as indicated in changes in the
gross domestic product, index of leading economic indicators, and consumer price index. She
should also keep track of the federal funds rate as an indicator of interest rates in the
economy. She should be able to make her own estimate for economic growth, inflation, and
interest rates over the next couple of years.
4. Using time value of money considerations to project what her Roth-IRA might be worth at
age 63?
Answer: Jing could use Appendix A-1 to calculate how much her IRA fund (currently $2,000)
would grow in 40 years. She would need to assume a rate of return on the funds. An 8 to 10
percent rate would be appropriate given the investment opportunities available to her in her
IRA. At 8 percent, her account would be worth about $43,449 (21.7245 × $2,000).
5. Using time value of money considerations to project what her 401(k) plan might be worth
at age 63 if she were to participate fully?
Answer: Jing could use Appendix A-3 to calculate how much her contributions would grow in
40 years. She would need to assume a rate of return on the funds. An 8 percent rate would
be appropriate given the investment opportunities available to her in her 401(k). At 8 percent,
her account would be worth about $2,486,942 (259.0565 × $9,600; $6,400 of Jing’s money
and $3,200 from her employer).
6. Saving for retirement versus paying off student loans?
Answer: At a minimum Jing should contribute 8 percent of her salary to her retirement
savings to take advantage of her employer’s match. Jing’s retirement savings capitalizes on
compounding and the time value of money. Employer matching for retirement is free money
and should not be left on the table. Jing is paying off $35,000 in student loans, and paying off
any loan does provide a guaranteed rate of return. However, it is unlikely that the return from
paying off the student loan will exceed the value of the retirement savings when it is
combined with the employer match. Of course, this decision depends on the interest rate paid
on the student loan and how it compares to the expected rate of return in the retirement
account.
[return to top]
LET’S TALK ABOUT IT
1. Economic Growth. How do federal government efforts help stimulate economic growth? How do
these efforts affect consumers?
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 5
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
Answer: Answers will vary depending on the student’s own financial situation. Efforts to
revive the economy like lowering interest rates and issuing stimulus payments will help
students keep or obtain jobs. Education-related credits will help college students. Efforts to
help people buy their first home will help students who might be so interested.
2. The Business Cycle. Where do you think the United States is in the economic cycle now, and
where does it seem to be heading? List some indicators that suggest in which direction it may
move.
Answer: Responses will vary based on current economic conditions. Students should access
and summarize information from a source like the Conference Board at:
https://www.conference-board.org/topics/us-leading-indicators
3. Personal Finance Mistakes. What are some common mistakes that people make in personal
finance? Name two that might be the worst, and why?
Answer: Some mistakes that people make in personal finance are failing to: (1) engage in
long-term personal financial planning, (2) engage in budgeting, (3) establish a cash reserve in
case of emergencies, (4) save at a rate that is sufficiently high, (5) establish adequate
insurance protection, (6) manage income tax liabilities advantageously, (7) limit credit card
debt, (8) manage expenditures so as to prevent unexpected expenditures on a credit card,
(9) engage in investment planning, and (10) engage in retirement and estate planning. All of
these mistakes can be avoided by applying the principles shared in this course and textbook.
The three most costly mistakes are likely saving at a rate that is too low, inadequate
retirement planning, and inadequate estate planning.
4. Federal Reserve. Describe some economic circumstances that might persuade the Federal
Reserve to lower short-term interest rates.
Answer: This is a potential “Class Activity” exercise related to page 15 in the text. Have
students discuss how the economy is currently performing and where they think things are
headed. Ask if there is need for stimulus (lower interest rates) or cooling (higher interest
rates). Ask students to back their response with evidence from some leading indicators
mentioned in the text.
The Federal Reserve Board might be persuaded to lower interest rates if the economy is in a
downturn, a trough, or even in the early stages of recovery. The goal would be to make
borrowing easier and provide a boost to the economy.
5. Opportunity Costs. People regularly make decisions in personal finance that have opportunity
costs. Share financial decisions you have made recently and identify the opportunity cost for
each.
Answer: Students’ examples of decisions in personal finance that have opportunity costs will
vary. Each should focus not only on the direct cost of the decision but also on the lost
opportunity that results from that decision. Why did they have to give up in order to get the
thing or service attained?
6. Inherited Money. What would you do if you inherited $30,000 from a distant relative? Identify
three options.
Answer: Students’ options will vary by their financial circumstances. Common options might
include paying off debt, paying future schooling costs, or beginning a retirement savings
program.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 6
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
[return to top]
DO THE MATH
1. Real Income. After his first year on the job, Joshua Vermier of Topeka, Kansas, received a raise
to $45,800 from his initial salary of $44,000 (LO2 and LO3). What was Joshua’s raise, stated as a
percentage? If inflation averaged 2.8 percent for the year, what was his real income after the
raise? What was his real raise, stated as a percentage?
Solution: This is a potential “Class Activity” exercise related to page 13 in the text.
Joshua received a $1,800 raise. As a percentage of his pre-raise income, this was a raise of 4.1
percent ($1,800/$44,000 × 100). His real inflation-adjusted income after the raise is $44,553
($45,800/1.028). As a percentage, his real raise was 1.3 percent (4.1% − 2.8%).
2. Future Value. As a graduating senior, Chun Kumora of Charleston, West Virginia, is eager to
enter the job market at an anticipated annual salary of $54,000 (LO3 and LO4). Assuming an
average inflation rate of 3 percent and an equal cost-of-living raise, what will his salary possibly
become in 10 years? In 20 years? (Hint: Use Appendix A-1.) To make real economic progress,
how much of a raise (in dollars) does Chun need to receive next year and the year after?
Solution: This is a potential “Class Activity” exercise related to page 21 in the text.
Assuming an average inflation rate of 3 percent and an equal cost-of-living raise, Chun’s salary in
10 years will be $72,571 ($54,000 × 1.3439). In 20 years, his income will be $97,529 ($54,000 ×
1.8061). To make real economic progress, Chun must receive raises greater than each year’s
rate of inflation. Otherwise he is standing still, because his raises must compensate for the
inflationary increase in the cost of living. In dollars, he needs a raise of more than $1,620 after
one year, with a new salary of 55,620 ($54,000 × 1.03), to make progress in real terms. After two
years his salary would need to be above $57,289 to make real progress. This is a $1,669 raise
after the second year.
3. Present and Future Values. Megan Berry, a freshman horticulture major at the University of
Minnesota, has some financial questions for the next three years of school and beyond (LO4).
Answers to these questions can be obtained by using Appendix A or the financial calculator
linked in the text digital resources.
a. If Megan’s out-of-pocket tuition, fees, and expenditures for books this year total $22,000,
what will they be during her senior year (three years from now), assuming costs rise 4
percent annually? (Hint: Use Appendix A-1.)
b. Megan is applying for a scholarship currently valued at $5,000. If she is awarded it at the end
of next year, how much is the scholarship worth in today’s dollars, assuming inflation of 3
percent? (Hint: Use Appendix A-2.)
c. Megan is already anticipating graduation and a job, and she wants to buy a new car not long
after her graduation. If after graduation she begins an investment program of $2,400 per year
in an investment yielding 4 percent, what will be the value of the fund after three years? (Hint:
Use Appendix A-3.)
d. Megan’s Aunt Karroll, from Austin, Texas, told her that she would give Megan $1,000 at the
end of each year for the next three years to help with her college expenses. Assuming an
annual interest rate of 2 percent, what is the present value of that stream of payments? (Hint:
Use Appendix A-4.)
Solution:
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 7
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
a. Assuming a 4 percent increase over the next three years, Megan’s tuition, fees, and
books will cost $24,748 ($22,000 × 1.1249).
b. Assuming an inflation rate of 3 percent, the scholarship is worth $4,855 in today’s dollars
($5,000 × 0.9709).
c. With an annual contribution of $2,400 and an expected return of 4 percent, in three years
Megan’s savings will total $7,492 ($2,400 × 3.1216).
d. Assuming a 2 percent interest rate, the stream of payments from Megan’s aunt is
presently worth $2,884 ($1,000 × 2.8839).
4. Present and Future Values. Using the tables in Appendix A, calculate the following (LO4):
a. The future value of a lump-sum investment of $4,000 in four years that earns 5 percent.
b. The future value of $1,500 saved each year for three years that earns 6 percent.
c. The difference in return of the following investments made annually for four years: $1,200 at
3 percent, and $1,200 at 4 percent.
d. The amount a person would need to deposit today with a 5 percent interest rate to have
$2,000 in three years.
Solution:
This is a potential “Class Activity” exercise related to page 23 in the text.
a. The future value of $4,000 in four years, assuming a 5 percent rate of return, would be
$4,862 ($4,000 × 1.2155). The factor comes from Appendix A-1.
b. Assuming a 6 percent return, $1,500 saved each year for three years would be $4,775
($1,500 × 3.1836). The factor comes from Appendix A-3.
c. The $1,200 would grow to $5,020 ($1,200 × 4.1836) after four years at 3 percent and
$5,096 ($1,200 × 4.2465) at 4 percent. The difference is $76. The factors are found in
Appendix A-3.
d. One would need to invest $1,728 now to have $2,000 in three years, assuming a 5
percent return ($2,000 × 0.8638). The factor comes from Appendix A-2.
5. Using the present value and future value tables in Appendix A, or an alternate financial
calculator, calculate the following (LO4):
a. The amount a person would need to deposit today to be able to withdraw $6,000 each
year for 10 years from an account earning 6 percent.
b. A person is offered a gift of $5,000 now or $8,000 five years from now. If such funds
could be expected to earn 8 percent over the next five years, which is the better choice?
c. A person wants to have $3,000 available to spend on an overseas trip four years from
now. If such funds could be expected to earn 6 percent, how much should be invested in
a lump sum to realize the $3,000 when needed?
d. A person invests $50,000 in an investment that earns 6 percent. If $6,000 is withdrawn
each year, how many years will it take for the fund to run out?
Solution:
a. One would need to invest $44,160 now to withdraw $6,000 per year for 10 years,
assuming a 6 percent return ($6,000 × 7.3601). This is a present value of an annuity
problem, so we use Appendix A-4.
b. $8,000 in five years is the better choice because the future value of $5,000 in five years,
assuming an 8 percent return, is $7,347 ($5,000 × 1.4693). This is a future value of a
single amount, so Appendix A-1 is the right table to use.
c. One would need to invest $2,376 now to have $3,000 in four years, assuming a 7 percent
return ($3,000 × 0.7921). The factor comes from Appendix A-2, as this is a present value
of a single amount.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 8
website, in whole or in part.
Important Notes
The file includes the complete test bank, organized chapter by chapter.
A sample of selected pages has been provided for preview.
All available appendices and Excel files (if included in the original resources) are
provided.
We continuously update our files to ensure you receive the latest and most accurate
editions.
New editions are added regularly – stay connected for updates!
✅ Why Buy From Us?
📚 Complete & organized chapter-by-chapter – no missing content, no guessing.
⚡ Instant digital delivery – get your file the moment you pay, no waiting.
📅 Always up to date – we track new editions so you always get the latest version.
💬 Friendly support – real humans ready to help, anytime you need us.
🔒 Safe & secure – thousands of satisfied students trust us every semester.
🛡️Our Guarantees
💰 Money-Back Guarantee: Not satisfied? We offer a full refund – no questions asked.
🔄 Wrong File? No Problem: Contact us and we will replace it immediately with the
correct version, free of charge.
⏰ 24/7 Support: We are always here – reach out anytime and expect a fast response.
Contact Email:
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
Solution and Answer Guide
GARMAN/FOX, PERSONAL FINANCE 15E, CHAPTER 1: THINKING LIKE A FINANCIAL PLANNER
TABLE OF CONTENTS
Answers to Chapter Concept Checks ....................................................................................... 2
What Do You Recommend Now?...............................................................................................5
Let’s Talk About It ....................................................................................................................... 6
Do the Math..................................................................................................................................7
Financial Planning Cases.........................................................................................................10
Extended Learning....................................................................................................................13
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
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 financial health relative to education and career choice; (2) define financial goals; (3)
develop a plan of action to achieve goals; (4) implement spending and saving plans to
monitor and control progress toward goals; and (5) review 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 our financial resources will be adequate to fulfill our
needs as well as our wants. Financial happiness is the experience we have when we are
satisfied with money matters. People who are happy about their finances will experience a
spillover into positive feelings about life in general.
3. Summarize what is accomplished by studying personal finance.
Answer: Several things can be accomplished by studying personal finance. We recognize
how to manage unexpected and expected financial events. We pay as little as legally
possible in income taxes. We understand how to effectively comparison shop for vehicles and
homes. We protect what we own and invest wisely. We accumulate and protect the wealth
that we may choose to spend during our nonworking 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 -our lifestyle and save for our 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 involves 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.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
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
in advance what will happen. 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, because 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, which
averages ten components of economic growth).
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; in real terms, it will be lowered by inflation. Because items cost more, we
will have to consume less and may cut back on some expenditures in order to be able to
afford those with a higher priority.
LO1.3 APPLY ECONOMIC CONCEPTS IN MAKING FINANCIAL DECISIONS.
1. Define opportunity cost and give an example of how opportunity costs might affect
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, later we will not be able to live as well,
save as much for the down payment on a home, or save for retirement once we graduate,
because our student loan payments will be higher.
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 (utility) 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 one
unit. When marginal utility exceeds marginal cost, and we compare the two, we can make
better financial decisions. To maximize utility, we seek options where the added utility per last
dollar spent is maximized. As an example, if one must fly to some destination, is the marginal
cost of checking a bag versus using a carry-on worth the marginal utility? We continually ask,
Is this the best way to spend those last few dollars now?
3. Describe and give an example of how the 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. Because 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 22 percent marginal tax bracket, we will get to keep 78 percent (100 percent minus
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, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
22 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 time value of money questions?
Answer: The two common questions about money are its future value and its present value.
Future value is what lump-sum investments 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 for long-term financial planning.
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. Compound interest is interest paid on interest and principal.
For example, if we leave the $1,000 on deposit and do not withdraw the $50 interest at the
end of the year, we will earn interest on both the deposit and the interest earned during the
first year. This difference in the types of interest paid is important; compound interest is one
of the most basic principles of accumulating wealth. If we invest regularly over time, our
money will grow due to the power of compound interest.
3. Use Table 1-1 to calculate the future value of (a) $2,000 at 5 percent for four years, (b)
$4,500 at 9 percent for eight years, and (c) $10,000 at 6 percent for ten years.
Answer:
a. $2,000 at 5 percent for four years would equal $2,431 ($2,000 × 1.2155).
b. $4,500 at 9 percent for eight years would equal $8,966.70 ($4,500 × 1.9926).
c. $10,000 at 6 percent for 10 years would equal $17,908 ($10,000 × 1.7908).
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WHAT DO YOU RECOMMEND NOW?
After reading the chapter on thinking like a financial planner, what do you recommend to Jing Wáng in the
case at the beginning of the chapter?
1. Participating in her employer’s 401(k) retirement plan?
Answer: Jing should participate in her employer’s plan because her contributions reduce her
taxable income and will grow tax-sheltered until withdrawn at retirement. By doing so, she will
qualify for her employer match, thereby receiving additional tax-sheltered income that will go
directly into her retirement account. If Jing contributed 8 percent of her salary, her employer
would match it with 4 percent for a total of 12 percent. Her total contribution would be $9,600
based on her salary of $80,000.
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2. Understanding the effects of her marginal tax rate on her financial decisions?
Answer: Jing should use her marginal tax rate to assess how changes in her income and the
financial decisions she will make would be affected by taxes. For every extra dollar that she
contributes to her retirement plan, for example, she will save $0.25 in taxes if she is in the
combined state and federal 25 percent tax bracket. Also, if she earns an extra dollar investing
it will be taxed at her marginal rate. The higher the tax rate paid, the more appealing it is to
avoid these taxes with tax-exempt investments like municipal bonds.
3. Considering the current state of the economy in her personal financial planning?
Answer: Jing should stay informed about economic trends as indicated in changes in the
gross domestic product, index of leading economic indicators, and consumer price index. She
should also keep track of the federal funds rate as an indicator of interest rates in the
economy. She should be able to make her own estimate for economic growth, inflation, and
interest rates over the next couple of years.
4. Using time value of money considerations to project what her Roth-IRA might be worth at
age 63?
Answer: Jing could use Appendix A-1 to calculate how much her IRA fund (currently $2,000)
would grow in 40 years. She would need to assume a rate of return on the funds. An 8 to 10
percent rate would be appropriate given the investment opportunities available to her in her
IRA. At 8 percent, her account would be worth about $43,449 (21.7245 × $2,000).
5. Using time value of money considerations to project what her 401(k) plan might be worth
at age 63 if she were to participate fully?
Answer: Jing could use Appendix A-3 to calculate how much her contributions would grow in
40 years. She would need to assume a rate of return on the funds. An 8 percent rate would
be appropriate given the investment opportunities available to her in her 401(k). At 8 percent,
her account would be worth about $2,486,942 (259.0565 × $9,600; $6,400 of Jing’s money
and $3,200 from her employer).
6. Saving for retirement versus paying off student loans?
Answer: At a minimum Jing should contribute 8 percent of her salary to her retirement
savings to take advantage of her employer’s match. Jing’s retirement savings capitalizes on
compounding and the time value of money. Employer matching for retirement is free money
and should not be left on the table. Jing is paying off $35,000 in student loans, and paying off
any loan does provide a guaranteed rate of return. However, it is unlikely that the return from
paying off the student loan will exceed the value of the retirement savings when it is
combined with the employer match. Of course, this decision depends on the interest rate paid
on the student loan and how it compares to the expected rate of return in the retirement
account.
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LET’S TALK ABOUT IT
1. Economic Growth. How do federal government efforts help stimulate economic growth? How do
these efforts affect consumers?
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website, in whole or in part.
, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
Answer: Answers will vary depending on the student’s own financial situation. Efforts to
revive the economy like lowering interest rates and issuing stimulus payments will help
students keep or obtain jobs. Education-related credits will help college students. Efforts to
help people buy their first home will help students who might be so interested.
2. The Business Cycle. Where do you think the United States is in the economic cycle now, and
where does it seem to be heading? List some indicators that suggest in which direction it may
move.
Answer: Responses will vary based on current economic conditions. Students should access
and summarize information from a source like the Conference Board at:
https://www.conference-board.org/topics/us-leading-indicators
3. Personal Finance Mistakes. What are some common mistakes that people make in personal
finance? Name two that might be the worst, and why?
Answer: Some mistakes that people make in personal finance are failing to: (1) engage in
long-term personal financial planning, (2) engage in budgeting, (3) establish a cash reserve in
case of emergencies, (4) save at a rate that is sufficiently high, (5) establish adequate
insurance protection, (6) manage income tax liabilities advantageously, (7) limit credit card
debt, (8) manage expenditures so as to prevent unexpected expenditures on a credit card,
(9) engage in investment planning, and (10) engage in retirement and estate planning. All of
these mistakes can be avoided by applying the principles shared in this course and textbook.
The three most costly mistakes are likely saving at a rate that is too low, inadequate
retirement planning, and inadequate estate planning.
4. Federal Reserve. Describe some economic circumstances that might persuade the Federal
Reserve to lower short-term interest rates.
Answer: This is a potential “Class Activity” exercise related to page 15 in the text. Have
students discuss how the economy is currently performing and where they think things are
headed. Ask if there is need for stimulus (lower interest rates) or cooling (higher interest
rates). Ask students to back their response with evidence from some leading indicators
mentioned in the text.
The Federal Reserve Board might be persuaded to lower interest rates if the economy is in a
downturn, a trough, or even in the early stages of recovery. The goal would be to make
borrowing easier and provide a boost to the economy.
5. Opportunity Costs. People regularly make decisions in personal finance that have opportunity
costs. Share financial decisions you have made recently and identify the opportunity cost for
each.
Answer: Students’ examples of decisions in personal finance that have opportunity costs will
vary. Each should focus not only on the direct cost of the decision but also on the lost
opportunity that results from that decision. Why did they have to give up in order to get the
thing or service attained?
6. Inherited Money. What would you do if you inherited $30,000 from a distant relative? Identify
three options.
Answer: Students’ options will vary by their financial circumstances. Common options might
include paying off debt, paying future schooling costs, or beginning a retirement savings
program.
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website, in whole or in part.
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[return to top]
DO THE MATH
1. Real Income. After his first year on the job, Joshua Vermier of Topeka, Kansas, received a raise
to $45,800 from his initial salary of $44,000 (LO2 and LO3). What was Joshua’s raise, stated as a
percentage? If inflation averaged 2.8 percent for the year, what was his real income after the
raise? What was his real raise, stated as a percentage?
Solution: This is a potential “Class Activity” exercise related to page 13 in the text.
Joshua received a $1,800 raise. As a percentage of his pre-raise income, this was a raise of 4.1
percent ($1,800/$44,000 × 100). His real inflation-adjusted income after the raise is $44,553
($45,800/1.028). As a percentage, his real raise was 1.3 percent (4.1% − 2.8%).
2. Future Value. As a graduating senior, Chun Kumora of Charleston, West Virginia, is eager to
enter the job market at an anticipated annual salary of $54,000 (LO3 and LO4). Assuming an
average inflation rate of 3 percent and an equal cost-of-living raise, what will his salary possibly
become in 10 years? In 20 years? (Hint: Use Appendix A-1.) To make real economic progress,
how much of a raise (in dollars) does Chun need to receive next year and the year after?
Solution: This is a potential “Class Activity” exercise related to page 21 in the text.
Assuming an average inflation rate of 3 percent and an equal cost-of-living raise, Chun’s salary in
10 years will be $72,571 ($54,000 × 1.3439). In 20 years, his income will be $97,529 ($54,000 ×
1.8061). To make real economic progress, Chun must receive raises greater than each year’s
rate of inflation. Otherwise he is standing still, because his raises must compensate for the
inflationary increase in the cost of living. In dollars, he needs a raise of more than $1,620 after
one year, with a new salary of 55,620 ($54,000 × 1.03), to make progress in real terms. After two
years his salary would need to be above $57,289 to make real progress. This is a $1,669 raise
after the second year.
3. Present and Future Values. Megan Berry, a freshman horticulture major at the University of
Minnesota, has some financial questions for the next three years of school and beyond (LO4).
Answers to these questions can be obtained by using Appendix A or the financial calculator
linked in the text digital resources.
a. If Megan’s out-of-pocket tuition, fees, and expenditures for books this year total $22,000,
what will they be during her senior year (three years from now), assuming costs rise 4
percent annually? (Hint: Use Appendix A-1.)
b. Megan is applying for a scholarship currently valued at $5,000. If she is awarded it at the end
of next year, how much is the scholarship worth in today’s dollars, assuming inflation of 3
percent? (Hint: Use Appendix A-2.)
c. Megan is already anticipating graduation and a job, and she wants to buy a new car not long
after her graduation. If after graduation she begins an investment program of $2,400 per year
in an investment yielding 4 percent, what will be the value of the fund after three years? (Hint:
Use Appendix A-3.)
d. Megan’s Aunt Karroll, from Austin, Texas, told her that she would give Megan $1,000 at the
end of each year for the next three years to help with her college expenses. Assuming an
annual interest rate of 2 percent, what is the present value of that stream of payments? (Hint:
Use Appendix A-4.)
Solution:
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, Solution and Answer Guide: Garman/Fox, Personal Finance 15e, Chapter 1: Thinking Like a Financial Planner
a. Assuming a 4 percent increase over the next three years, Megan’s tuition, fees, and
books will cost $24,748 ($22,000 × 1.1249).
b. Assuming an inflation rate of 3 percent, the scholarship is worth $4,855 in today’s dollars
($5,000 × 0.9709).
c. With an annual contribution of $2,400 and an expected return of 4 percent, in three years
Megan’s savings will total $7,492 ($2,400 × 3.1216).
d. Assuming a 2 percent interest rate, the stream of payments from Megan’s aunt is
presently worth $2,884 ($1,000 × 2.8839).
4. Present and Future Values. Using the tables in Appendix A, calculate the following (LO4):
a. The future value of a lump-sum investment of $4,000 in four years that earns 5 percent.
b. The future value of $1,500 saved each year for three years that earns 6 percent.
c. The difference in return of the following investments made annually for four years: $1,200 at
3 percent, and $1,200 at 4 percent.
d. The amount a person would need to deposit today with a 5 percent interest rate to have
$2,000 in three years.
Solution:
This is a potential “Class Activity” exercise related to page 23 in the text.
a. The future value of $4,000 in four years, assuming a 5 percent rate of return, would be
$4,862 ($4,000 × 1.2155). The factor comes from Appendix A-1.
b. Assuming a 6 percent return, $1,500 saved each year for three years would be $4,775
($1,500 × 3.1836). The factor comes from Appendix A-3.
c. The $1,200 would grow to $5,020 ($1,200 × 4.1836) after four years at 3 percent and
$5,096 ($1,200 × 4.2465) at 4 percent. The difference is $76. The factors are found in
Appendix A-3.
d. One would need to invest $1,728 now to have $2,000 in three years, assuming a 5
percent return ($2,000 × 0.8638). The factor comes from Appendix A-2.
5. Using the present value and future value tables in Appendix A, or an alternate financial
calculator, calculate the following (LO4):
a. The amount a person would need to deposit today to be able to withdraw $6,000 each
year for 10 years from an account earning 6 percent.
b. A person is offered a gift of $5,000 now or $8,000 five years from now. If such funds
could be expected to earn 8 percent over the next five years, which is the better choice?
c. A person wants to have $3,000 available to spend on an overseas trip four years from
now. If such funds could be expected to earn 6 percent, how much should be invested in
a lump sum to realize the $3,000 when needed?
d. A person invests $50,000 in an investment that earns 6 percent. If $6,000 is withdrawn
each year, how many years will it take for the fund to run out?
Solution:
a. One would need to invest $44,160 now to withdraw $6,000 per year for 10 years,
assuming a 6 percent return ($6,000 × 7.3601). This is a present value of an annuity
problem, so we use Appendix A-4.
b. $8,000 in five years is the better choice because the future value of $5,000 in five years,
assuming an 8 percent return, is $7,347 ($5,000 × 1.4693). This is a future value of a
single amount, so Appendix A-1 is the right table to use.
c. One would need to invest $2,376 now to have $3,000 in four years, assuming a 7 percent
return ($3,000 × 0.7921). The factor comes from Appendix A-2, as this is a present value
of a single amount.
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