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Personal Finance Seventh Edition Jeff Madura Solutions Manual for Personal Finance Mike Casey 1 / 4
Contents
Overview .................................................................................................................................... iv Chapter 1 Overview of a Financial Plan ..................................................................................... 1 Chapter 2 Planning with Personal Financial Statements ............................................................. 10 Chapter 3 Applying Time Value Concepts ................................................................................. 19 Chapter 4 Using Tax Concepts for Planning ............................................................................... 26 Chapter 5 Banking and Interest Rates ......................................................................................... 38 Chapter 6 Managing Your Money .............................................................................................. 47 Chapter 7 Assessing and Securing Your Credit .......................................................................... 54 Chapter 8 Managing Your Credit ................................................................................................ 60 Chapter 9 Personal Loans ............................................................................................................ 70 Chapter 10 Purchasing and Financing a Home ............................................................................. 80 Chapter 11 Auto and Homeowner’s Insurance ............................................................................. 94 Chapter 12 Health and Disability Insurance ................................................................................. 103 Chapter 13 Life Insurance ............................................................................................................. 111 Chapter 14 Investing Fundamentals .............................................................................................. 121 Chapter 15 Investing in Stocks ..................................................................................................... 133 Chapter 16 Investing in Bonds ...................................................................................................... 141 Chapter 17 Investing in Mutual Funds .......................................................................................... 152 Chapter 18 Asset Allocation ......................................................................................................... 164 Chapter 19 Retirement Planning ................................................................................................... 172 Chapter 20 Estate Planning ........................................................................................................... 184 Chapter 21 Integrating the Components of a Financial Plan......................................................... 193
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Copyright © 2020 Pearson Education, Inc.
Chapter 1 Overview of a Financial Plan
Chapter Overview
Every individual and family needs to develop a financial plan to make the best use of resources to achieve financial goals. Financial planning will help them clarify their goals and ensure that spending, financing, and investing decisions are aligned with those goals.Chapter 1 discusses the benefits of financial planning. Sound financial planning enables you to create greater wealth over time and it also helps you make career decisions that have a lasting impact on your finances. Several types of financial decisions are listed with two individuals making different decisions about choice of major and college. Students will understand how to make their own financial planning decisions, judge the advice of financial advisers, and evaluate the career of financial adviser.This chapter also focuses on how the choice of career and skills you develop on the job impact your income level. Organizations pay workers based on their qualifications and how those qualifications fit the organization’s needs. Personal finance skills transfer well to the job market. Discipline, initiative, and self- management skills developed through sound financial planning are all skills that employers demand.In addition, this chapter briefly discusses the six component plans that makeup the overall financial plan.These components are budgeting and tax planning, managing liquidity, planning and financing large purchases, protecting wealth and income through various types of insurance plans, investing money, and retirement and estate planning. Different life events quite often necessitate a change in the financial plan and goals.Each component of a financial plan impacts cash inflows and outflows, and all the components are interrelated. Understanding these relationships is the key to creating and following a personal financial plan. Your budget identifies cash inflows and outflows and helps determine liquidity needs. Your financing decisions determine monthly payments and protecting your wealth requires cash outflows, both of which feed back into your budget. Investments and retirement planning require living today on less than you earn in order to have funds for future consumption (i.e., to invest today).Creating a financial plan requires six steps. First, an individual must establish financial goals. Once these are established, the individual must consider his or her current financial position. Next, alternative plans that could help achieve the goals should be identified and evaluated. At this point, one plan should be chosen and implemented. In the final two steps, the individual evaluates his or her financial plan and revises it as needed.
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- Madura • Personal Finance, Seventh Edition
Copyright © 2020 Pearson Education, Inc. Chapter Objectives
The objectives of this chapter are to:
Explain how personal finance enhances your wealth. Explain how personal finance enhances your job marketability. Identify the key components of a financial plan. Explain how financial planning affects your cash flows. Outline the steps involved in developing your financial plan. Teaching Tips
- Discuss this quote with students: “Most people don’t plan to fail; they fail to plan.” Ask students
- Compare financial planning to planning a trip.
- Many younger students have difficulty in recognizing the benefits of devising a financial plan now
for examples of situations (financial or otherwise) where they have seen this happen. Guide the discussion toward financial matters.
Steps in Financial Planning Steps in Planning a Trip Set goals Decide where you are going Determine your current financial position Locate your home on the map Identify and evaluate alternative plans Identify and evaluate alternate routes Choose and implement a plan Pick a route and start the journey Evaluate plan Is the trip going smoothly?Revise plan as needed Road construction causes major delays, so you pick an alternate route A financial plan is just a financial road map.
and saving for the future at a young age. The compounding of money can be easily demonstrated using the “Rule of 72.” The Rule of 72 can be used as an indicator of how long it will take a single sum of money to double in value at a given interest rate or rate of return percentage. The length of time is calculated by dividing 72 by the interest rate. For instance, at 8% a sum of money would
double every nine years. Provide this example for students:
What if your parents had been able to invest $1,000 at 8% the day you were born?Age Value of Investment Age Value of Investment
0 $ 1,000 45 $ 32,000
9 2,000 54 64,000
18 4,000 63 128,000
27 8,000 72 256,000
36 16,000 81 312,000
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