Personal Finance

by Bajtelsmit, Vickie L.

• ISBN13: 9781119592471
• ISBN10: 111959247X
• Edition: 2nd
• Format: Loose-leaf
• Copyright: 2019-10-22
• Publisher: Wiley

Summary

Personal Finance, 2nd Edition offers essential skills and knowledge that will set students on the road to lifelong financial wellness. By focusing on real-world decision making, Bajtlesmit engages a diverse student population by helping them make personal connections that can immediately impact their current financial situations. Using a conversational writing style, relatable examples and up-to-date coverage on important topics like student debt, students gain the knowledge they need to avoid early financial mistakes. By the end of the course, students have identified their goals and developed the problem-solving skills they need to build on as they progress to the next stages of life.

Table of Contents

1 The Financial Planning Process 1-1

Feature Story 1-1

1.1 What is Personal Financial Planning? 1-2

Why Study Personal Financial Planning? 1-3

The Personal Financial Planning Process 1-5

Case Study 1.1: The Naughtons Revise Their Financial Plan after Job Loss 1-7

Elements of a Comprehensive Financial Plan 1-7

1.2 Factors That Influence Financial Planning Decisions 1-8

Individual Characteristics and Your Financial Plan 1-8

Economic Factors and Your Financial Plan 1-11

1.3 Setting Short-Term and Long-Term Financial Goals 1-16

Why Goals are Important 1-16

The Goal-Setting Process 1-16

Case Study 1.2: The Riveras Develop Prioritized Goals 1-19

1.4 Selecting Qualified Financial Planning Professionals 1-21

When Do You Need a Financial Planner? 1-21

Factors to Consider in Choosing a Planner 1-22

How are Planners Paid? 1-22

1.5 Making Effective Decisions 1-24

Make Reasonable Assumptions 1-24

Apply Marginal Reasoning 1-25

Consider Opportunity Costs 1-26

Use Sensitivity Analysis 1-26

Decision-Making Styles 1-27

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

2 Financial Planning Tools: Personal Financial Statements and the Time Value of Money 2-1

Feature Story 2-1

2.1 Organizing Your Financial Information 2-2

What Financial Records Do You Need to Keep? 2-2

Summarizing Your Financial Condition 2-5

Case Study 2.1: Danelle Washington Develops a Balance Sheet 2-7

2.2 Evaluating Your Personal Financial Situation 2-9

The Personal Cash Flow Statement 2-9

Net Cash Flow 2-11

Case Study 2.2: Danelle Washington’s Personal Cash Flow Statement 2-11

Using Financial Ratios 2-13

2.3 The Time Value of Money 2-16

The Power of Compound Interest 2-16

Time Value of Money Calculation Methods 2-18

Future Value: How Much Will My Money Grow? 2-19

2.4 Present Value: How Much Do I Need Today to Reach a Future Goal? 2-24

Present Value of a Lump Sum 2-25

Present Value of an Annuity 2-27

Loan Payments 2-30

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

3 Budgeting and Cash Management 3-1

Feature Story 3-1

3.1 Developing, Implementing, and Monitoring a Household Budget 3-2

Factors Affecting Household Budgets 3-3

The Budgeting Process 3-4

Case Study 3.1: The Riveras Develop a Budget 3-5

Case Study 3.2: The Riveras Track Their Budget Variances 3-8

Money Attitudes and Household Budgeting 3-11

Ethics in Action: Financial Infidelity 3-11

3.2 The Role of Cash in Your Financial Plan 3-13

Costs and Benefits of Holding Cash 3-14

How Much Should You Hold in Cash? 3-15

Rules of Effective Cash Management 3-15

3.3 Providers of Cash Management Services 3-17

Depository Institutions 3-17

Nondepository Institutions 3-19

Evaluating Financial Institutions 3-20

3.4 Evaluating Cash Management Products and Services 3-21

Criteria for Evaluating Cash Management Accounts 3-21

Checking Accounts 3-23

Savings Accounts 3-25

The Rule of 72 3-28

3.5 Resolving Cash Management Problems and Avoiding Identify Theft 3-29

Cash Management Problems and Solutions 3-29

Identity Theft 3-31

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

4 Tax Planning 4-1

Feature Story 4-1

4.1 The Federal Income Tax System 4-2

The Progressive Nature of the U.S. Tax System 4-2

Marginal Tax Rates 4-3

4.2 Filing Requirements 4-8

Filing Status 4-9

Adjusted Gross Income and Taxable Income 4-9

IRS Forms 4-10

4.3 Federal Income Tax Calculation 4-11

Reporting Income 4-12

Deductions 4-15

Calculation of Taxes Owed 4-18

Determining Taxes Due or Refund to Be Received 4-20

4.4 Tax Planning Strategies 4-21

Maximize Pretax Contributions to Qualified Benefit Plans 4-22

Reduce the Applicable Tax Rate on Certain Income 4-22

Make Use of Available Deductions and Credits 4-23

Avoid Audits and Penalties 4-25

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

5 Managing Credit: Credit Cards and Consumer Loans 5-1

Feature Story 5-1

5.1 What is Consumer Credit? 5-2

Types and Sources of Consumer Credit 5-3

Ethics in Action: What’s the Harm in Payday Loans? 5-5

The Advantages and Disadvantages of Consumer Credit 5-5

Applying for Consumer Credit 5-7

5.2 Your Consumer Credit Plan 5-8

Measuring Your Credit Capacity 5-8

When and How to Use Consumer Credit 5-12

Strategies for Reducing Debt 5-12

Your Consumer Credit Rights 5-15

Bankruptcy 5-18

5.3 Credit Cards 5-20

Types of Cards 5-20

Common Credit Card Contract Terms 5-22

5.4 Consumer Loans 5-25

Common Types of Consumer Loans 5-25

Comparing Consumer Loan Alternatives 5-27

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

6 Making Automobile and Housing Decisions 6-1

Feature Story 6-1

6.1 Making Auto Decisions on a Budget 6-2

Making Smart Purchase Decisions 6-3

Assessing Needs and Affordability 6-4

Case Study 6.1: The Walkers Estimate the Costs of an Additional Vehicle 6-5

Evaluating Vehicle Choices 6-6

6.2 Should You Lease or Buy a Car? 6-10

Leasing versus Buying 6-10

Negotiating the Auto Purchase Price 6-12

Making Consumer Complaints 6-14

6.3 Making Housing Decisions on a Budget 6-14

Housing Needs over the Life Cycle 6-15

The Rent-versus-Buy Decision 6-15

How Much House Can You Afford? 6-18

6.4 Mortgage Financing 6-22

What is a Mortgage? 6-22

Ethics in Action: Who is to Blame for Mortgage Loan Defaults? 6-25

Factors That Affect Mortgage Payments 6-26

When to Refinance 6-31

Case Study 6.2: The Nguyens Consider Refinancing Their Mortgage 6-32

6.5 Completing a Real Estate Transaction 6-33

Determinants of Real Estate Value 6-33

The Home-Buying Process 6-35

The Closing 6-37

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

7 Insuring Cars and Homes 7-1

Feature Story 7-1

7.1 Managing Personal Risks 7-2

The Risk Management Process 7-3

Identify and Evaluate Property and Liability Risks 7-3

Risk Management Methods 7-6

7.2 How Insurance Works 7-7

Risk Pooling and Insurance 7-7

Insurance Premiums 7-8

Insurance Policy Terminology 7-9

7.3 Managing Homeowner’s and Renter’s Risk 7-9

What Risks Do Homeowners and Renters Face? 7-10

Ethics in Action: Dog Owner’s Dilemma 7-12

Insuring Your Home 7-12

Pricing of Homeowner’s Insurance 7-14

Case Study 7.1: How Does a Bad Credit History Affect Insurance Premiums? 7-16

Umbrella Liability Insurance 7-16

7.4 Auto Insurance 7-17

State Auto Insurance Laws 7-18

Policy Coverage 7-19

Case Study 7.2: Which Auto Policy Will Cover the Loss? 7-19

Auto Insurance Pricing 7-20

7.5 Buying Insurance and Making Claims 7-23

Steps to Buying Property and Liability Insurance 7-23

The Role of Agents and Brokers 7-23

Comparing Insurance Policies 7-24

Using Online Resources to Evaluate Your Insurance Options 7-24

Making a Claim on Your Insurance 7-25

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

8 Life Insurance and Long-Term Care Planning 8-1

Feature Story 8-1

8.1 Life Insurance and Your Financial Plan 8-2

Life Insurance Compared with Auto and Homeowner’s Insurance 8-2

Case Study 8.1: When Will Carson Die? 8-5

Life Insurance Needs Analysis 8-6

Case Study 8.2: How Much Life Insurance Do Arjun and Tanya Chopra Need? 8-7

Factors Affecting Your Life Insurance Needs 8-9

8.2 Buying Life Insurance 8-10

Choosing the Type of Policy 8-10

Choosing an Insurer 8-15

Choosing an Agent 8-17

8.3 Reading Your Policy 8-17

Policy Declarations 8-18

Key Provisions in a Life Insurance Policy 8-18

Ethics in Action: The Ethics of Viatical Settlements 8-21

Settlement Options 8-21

8.4 Planning for Long-Term Care Costs 8-22

Long-Term Care Needs Analysis 8-23

Sources of Funds for Long-Term Care 8-24

Long-Term Care Insurance 8-26

Summary / Excel Worksheet / Key Terms / Concept Review Questions / Application Problems / Case Applications

9 Employee Benefits: Health, Disability, and Retirement Plans 9-1

Feature Story 9-1

9.1 The Value of Employee Benefits 9-2

Why Benefits are Preferable to Cash Compensation 9-4

Case Study 9.1: Lori Evaluates Tax Savings from Employer-Provided Health Insurance 9-6

Comparing Job Offers Based on Salary and Benefit Packages 9-8

Case Study 9.2: Lori Compares Salary Offers Based on Cost of Living 9-8

Case Study 9.3: Lori Compares Job Offers Based on Salary and Benefits 9-9

9.2 Health Insurance and Your Financial Plan 9-10

Health Insurance Needs Analysis 9-11

What Happened to Health-Care Reform? 9-13

Types of Health Insurance Plans 9-14

Government-Sponsored Health Insurance Plans 9-18

9.3 Planning for Disability Income 9-20

Disability Income Needs Analysis 9-20

Sources of Disability Income 9-20

Case Study 9.4: Mateo Rivera Estimates His Disability Income Needs 9-23

9.4 Employer-Sponsored Retirement Plans 9-24

Tax Advantages of Qualified Plans 9-24

Defined-Benefit versus Defined-Contribution Plans 9-25

Features of Defined-Benefit Plans 9-26

Features of Defined-Contribution Plans 9-28

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

10 Saving for Distant Goals: Retirement and Education Funding 10-1

Feature Story 10-1

10.1 Developing a Retirement Plan 10-2

What are Your Retirement Goals? 10-3

How Much Will You Need to Save for Retirement? 10-4

Case Study 10.1: Camilla Hardin Develops a Plan for Retirement Saving 10-9

Why Do So Many People Avoid Retirement Planning? 10-10

10.2 Retirement Income from Employer Plans and Social Security 10-11

Income from Employer-Sponsored Plans 10-13

Income from Social Security 10-14

10.3 Individual Retirement Savings Alternatives 10-18

Individual Retirement Accounts 10-18

Taxable Accounts 10-20

Annuities 10-20

Not on Track to Retire? 10-22

10.4 Planning for Education Costs 10-22

How Much Will Future Education Cost? 10-23

How Much Will You Need to Save? 10-24

Financing Higher Education with Student Loans 10-24

Case Study 10.2: Funding Jake Johnson’s College Education 10-24

Government Programs to Help Fund Education Expenses 10-29

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

11 The Fundamentals of Investing 11-1

Feature Story 11-1

11.1 Developing a Realistic Investment Plan 11-2

First Things First: Establishing a Firm Foundation 11-2

Establishing Investment Goals 11-4

Case Study 11.1: Newlyweds Set Their Investment Goals 11-4

Key Strategies for Investment Success 11-6

11.2 Understanding Your Investment Choices 11-9

Investing by Lending and by Owning 11-10

Major Asset Classes 11-11

11.3 The Risk–Return Trade-off 11-13

Rate of Return 11-14

Risk 11-15

How Risk-Averse are You? 11-16

Factors Affecting Risk Attitudes 11-17

Types of Investment Risk 11-18

11.4 Diversification and Performance Evaluation 11-20

How Diversification Works 11-21

Asset Allocation 11-22

Evaluating Performance Against a Benchmark 11-23

Active versus Passive Investing 11-25

Summary / Excel Worksheet / Key Terms / Concept Review Questions / Application Problems / Case Applications

12 Investing in Stocks and Bonds 12-1

Feature Story 12-1

12.1 Investing in Common Stock 12-2

What is Common Stock? 12-2

Advantages of Stock Investing 12-5

Disadvantages of Stock Investing 12-8

Classification of Common Stock 12-9

Measures of Common Stock Performance 12-12

12.2 Investing in Bonds 12-13

What is a Bond? 12-14

Types of Bonds 12-15

Ethics in Action: Mortgage-Backed Securities 12-16

Bond Terminology 12-18

Bond Valuation 12-21

Why Do Investors Buy Bonds? 12-23

12.3 Investing in Preferred Stock 12-25

What is Preferred Stock? 12-25

Preferred Stock Valuation 12-26

Contract Terms Affecting Preferred Stock Cash Flows 12-27

The Benefits and Risks of Preferred Stock 12-28

12.4 Securities Markets 12-28

Primary versus Secondary Market 12-29

Securities Exchanges 12-30

Buying and Selling Stocks and Bonds 12-30

Regulation of the Securities Markets 12-34

Summary / Excel Worksheet / Key Terms / Concept Review Questions / Application Problems / Case Applications

13 Investing in Mutual Funds and Real Estate 13-1

Feature Story 13-1

13.1 What is a Mutual Fund? 13-2

What Does a Mutual Fund Investor Actually Own? 13-3

Types of Investment Companies 13-4

Growth in the Market 13-6

Fund Classifications 13-7

13.2 Mutual Fund Investing 13-10

The Advantages of Mutual Fund Investing 13-10

The Costs of Mutual Fund Investing 13-13

Selecting and Evaluating Mutual Funds 13-15

13.3 Real Estate Investment 13-17

Your Home as an Investment 13-18

Direct Real Estate Investment 13-18

Indirect Real Estate Investment 13-21

13.4 Speculative Investments 13-22

Precious Metals and Gems 13-22

Collectibles and Art 13-23

Cryptocurrencies 13-24

Financial Derivatives 13-25

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

14 Estate Planning 14-1

Feature Story 14-1

14.1 What is Estate Planning? 14-2

The Estate-Planning Process 14-3

Who Needs an Estate Plan? 14-3

Case Study 14.1: Estate Planning Changes over the Life Cycle 14-4

Key Components of an Estate Plan 14-5

Ethics in Action: Terri Schiavo’s Life-or-Death Experience 14-6

Organizing Financial and Legal Documents 14-7

14.2 Methods of Transferring Property 14-8

Preparing a Valid Will 14-8

Passing Property Outside a Will 14-12

14.3 Estate and Gift Taxes 14-13

Federal Gift Taxes 14-13

Federal Estate Taxes 14-13

Case Study 14.2: Lisa Calculates Her Taxable Estate 14-14

State Death Taxes 14-16

14.4 Reducing Taxes Through Trusts and Gifts 14-17

When are Trusts Useful? 14-17

Types of Trusts 14-17

Gifting Alternatives 14-18

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

Glossary G-1

Index I-1