SOLUTION MANUAL Personal Finance, 14th Edition By E. Thomas Garman, Chapter 1 - 17

SOLUTION MANUAL Personal Finance, 14th Edition By E. Thomas Garman, Chapter 1 - 17 LO1.1 Recognize the keys to achieving financial success. 1. Explain the five steps in the financial planning process. Answer: There are f ...

SOLUTION MANUAL Personal Finance, 14th Edition By E. Thomas Garman, Chapter 1 - 17 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) evalua te your financial health to your education and career choice; (2) define your financial goals; (3) develop a plan ofBaction to achieve your goals; (4) implement spending and saving plans to mo nitor 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 byBthe 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 tha t comfortable feeling that your financial resources will be adequate to fulfill any needs you hav e 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 positiv e 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 ma nage unexpected and expected financial events. PayBas little as possible in income taxes. Understa nd how to effectivelyBcomparison shop for vehicles and homes. Protect what we own. Invest wisely . Accumulate and protect the wealth that we may choose to spend during our nonworking years (e.g., retirement) orBdonate. 4. What are the building blocks to achieving financial success? Answer: The building blocks for achieving financial success include a foundation of regular inc ome that provides the means to support your lifestyle and save forBdesired goals in the future. The foundation supports a base ofBvarious banking accounts, insurance protection, and employ ee 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. F inally, we invest in various investment alternatives such as mutual funds, stocks, and bonds, oft en 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 entails 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. 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 w hat will happen in advance. We need to be able to forecast the state ofBthe economy, inflation, and interest rates so thatBwe have advance warning of the directions and strength of changes i n economic trends since they will affect our personal finances. Two statistics we could watch ar e the consumer confidence index (how consumers feel about the economy and theirBpersonal fi nances) and the index of leading economic indicators (composite index, averages ten compone nts of economic growth). 3. Give Fwan Fwexample F wof F whow F winflation Fwaffects F wincome F wand F wconsumption. Answer: FwInflationFwreduces FwtheFwpurchasingFwpowerBof FwtheFwdollar. FwThis Fwmeans Fwthat Fwour FwincomeFwwill Fwnot FwgoFwas Fwfar Fwand, Fwthus, FwinFwreal Fwterms Fwwill FwbeFwloweredFwbyBinflation. FwBecauseFwitems Fwcost Fwmore, FwweFwwill FwhaveFwtoFwconsumeFwless FwandFwmay Fwcut FwbackFwonFwsome Fwexpenditures FwtoFwbeFwableFwtoFwaffordFwthoseFwwithFwaFwhigher Fwpriority. LO1.3FwThinkFwlike FwanFweconomist FwwhenFwmakingFwfinancial F w decisions. 1. DefineFwopportunityBcostBandFwgiveFwanFwexampleFwof FwhowFwopportunityFwcosts Fwmight Fwaffect Fwyour Fwfinancial FwdecisionFwmaking. Answer: F w The Fwopportunity Fwcost Fwof Fwa FwdecisionFwis Fwmeasured Fwas Fwthe Fwvalue FwofBthe Fwnextbest Fwalternative Fwthat F wmust F w be Fwforgone. F w If F wwe, Fw for F w example, F w put Fwour F w retirement F w savings Fwin Fw a F wregulaFwr Fwsavings Fwaccount FwinsteadFwofBinFwaFwtaxshelteredFwretirement Fwaccount, FwweFwmay FwbeFwforgoingFwtheFwtax Fwbenefits FwassociatedFwwith FwinvestingFwinFwretirement F w accounts F w such F w as F w IRAs F w or F w 401(k) F w plans. F w In F w another F w example, F w if F w weFwdecide F w to F w borrowFwt FwheFwmaximumFwstudent FwloanFwamount Fwfor FwwhichFwweFwqualify Fwto FwliveFwaFwbitBmoreFwcomfortably FwwhileFwinFwcollege, FwweFwwill Fwnot FwbeFwableFwtoFwliveFwas Fwnicely, Fwsave Fwas FwmuchFwfor FwtheFwdownFwpayment F w onFwaFwhomeFwor F w saveFwfor Fwretirement FwonceFwweFwgraduate FwbecauseFwof FwtheFwhigherBloanFwpayments. 2. ExplainFwandFwgiveFwanFwexampleFwofBhowFwmarginal FwutilityFwandFwmarginal Fwcost FwmakeFwsoFwmeFwfinancial Fwdecisions Fweasier. Answer: FwMarginal Fwanalysis Fwfocuses FwonFwtheFwnext Fwincrement Fwof Fwusefulness Fwor Fwcost Fwwhen FwmakingFwfi Fwnancial Fwdecisions. FwMarginal FwutilityFwis FwtheFwextraFwsatisfactionFwderivedFwfrom FwhavingFwoneFwmoreFwincreFwmental Fwunit Fwof FwaFwproduct Fwor Fwservice. FwMarginal F w cost Fwis Fwthe Fwadditional Fwcost Fwof Fwthat Fwunit. FwWhenFwmar Fwginal Fwutility Fwexceeds F w marginal Fwcost, FwandFwwe FwcompareFwtheFwtwo, FwweFwcanFwmakeFwbetterBfinancial Fwdecis Fwions. FwAs FwanFwexample, Fwif FwyouFwmust Fwfly FwtoFwsomeFwdestination, Fwis FwtheFwmarginal Fwcost FwofBcheckingFwaFwbagFwusingFwaFwcarry-onFwworth FwtheFwmarginal Fwutility? 3. DescribeFwandFwgiveFwanFwexampleFwof FwhowFwyour Fwmarginal FwincomeFwtaxFwrateFwcan Fwaffect Fwfinan F w cial FwdecisionFwmaking. Answer: F w As Fwour FwincomeFwrises, FwweFwwill FwfindFwourselves FwinFwhigher FwandFwhigher Fwtax Fwbrackets. FwOneFwtype F w of FwdecisionFwthat Fwis FwaffectedFwby FwincomeFwtaxes Fwis FwhowFwweFwshould Fwinvest Fwfor Fwretirement. FwWeFwmight Fwwant FwtoFwinvest FwthroughFwaFw401(k) FwplanFwinsteadFwof FwkeepingFwour Fwretirement Fwmoney FwinFwaFwsavings Fwacc Fwount, FwwhichFwis Fwtaxable. Since F wmost F w types F w of Fwincome F w are F w taxable, F w it F w is F w important F w that F w we F w understand F w the F w impact F w of FwincomFweFwtaxes FwonFwfinancial Fwdecisions. FwOfBparticular FwimportanceFwis Fwthe Fwmarginal Fwtax FwrateFw(theFwtax FwrateFwat FwwhichFwour Fwlast Fwdollar FwearnedFwis Fwtaxed). FwIfBweFwareFwin FwtheFw25Fwpercent Fwmarginal FwtaxBbracket, FwweFwwill Fwg F w et FwtoFwkeepFw75Fwpercent Fw(100Fwpercent Fwminus Fw25Fwpercent) FwofBour Fwlast FwtaxableFwdollarBearned. FwIf FwtheFwinFwcomeFwis Fwtaxfree Fwincome, Fwon Fwthe FwotherBhand, Fwwe Fwwould Fwget Fwto Fwkeep Fw100 Fwpercent Fwof Fwit. FwTherefore, Fwit Fwis Fwimporta F w nt Fwto Fwknow Fwour Fwmarginal Fwtax Fwrate Fwas Fwwell Fwas Fwwhat Fwtypes FwofBincome Fware Fwsubject Fwto Fwfederal Fwincome Fwtaxes. FwIt Fwis Fwalso Fwimportant Fwto Fwremember Fwthe Fwimpact Fwof Fwstate FwincomeFwtaxes FwandFwSocial FwSecurityBtax F w es. LO1.4FwPerformFwtimeFwvalue F wof FwmoneyFwcalculations FwinFwpersonal Fwfinancial Fwdecision F wmaking. 1. WhatBare Fwthe Fwtwo F wcommon F wquestions F wabout F wmoney? Answer: F w The Fwtwo Fwcommon Fwquestions Fwabout Fwmoney Fware Fwits Fwfuture Fwvalue Fwand Fwpresent Fwvalue. FwFutur F w e Fwvalue Fwis Fwwhat Fwinvestment Fwor Fwseries Fwof Fwinvestments Fwwill Fwbe Fwat Fwa Fwpoint Fwin Fwthe Fwfuture. FwPresent F w val F w ue Fwis Fwhow Fwmuch Fwwe Fwwould Fwneed Fwto Fwinvest Fwtoday Fwand/or FwinFwaFwseries FwofBfutureFwinvestments FwtoFwproFwvideFwsomeFwamountBinFwtheFwfuture. 2. ExplainFwtheFwdifferenceFwbetweenFwsimpleFwinterest FwandFwcompoundFwinterest, Fwand Fwdescri FwbeFwwhyFwthat FwdifferenceFwis Fwcritical. Answer: F w Simple F w interest F w is F wmoney Fwpaid F w on F w a F w principal F w amount Fw for F w a F w given FwnumberBof F w years. F w Th Fwe Fwinterest Fwis Fwpaid FwonlyBon Fwthe Fwprincipal Fw(the Fworiginal F w amount Fwinvested). FwFor Fwexample, FwweFwmight Fwp F w ut Fw$1,000FwinFwa FwbankFwsavings Fwaccount Fwat Fw5 Fwpercent Fwinterest Fwfor FwoneFwyear. FwWeFwwouldFwhaveFwaccumul FwatedFw$50FwinFwthat Fwyear