How can using personal financial planning tools help you improve your financial situation?

Finance 101



1.How can using personal financial planning tools help you improve your financial situation? Describe changes you can make in at least three areas.

2. Recommend three financial goals and related activities for someone in each of the follow- ing circumstances:
a. A Junior in college
b. A 30-year-old computer programmer who plans to earn an MBA degree

c. A couple in their 30s with two children, ages 5 and 9
d. A divorced 42-year-old man with a 16-year-old child and a 72-year-old father who is ill

3. Explain the life cycle of financial plans and their role in achieving your financial goals.

4. Summarize current and projected trends in the economy with regard to GDP growth, unemployment, and inflation. How should you use this information to make personal financial and career planning decisions?

5. Evaluate the impact of age, education, and geographic location on personal income.

6. Assume that you graduated from college with a major in marketing and took a job with a large consumer products company. After three years, you are laid off when the company downsizes. Describe the steps you’d take to “repackage” yourself for another field.


1. Scott Bennett is preparing his balance sheet and income and expense statement for the year ending June 30, 2016. He is having difficulty classifying six items and asks for your help. Which, if any, of the following transactions are assets, liabilities, income, or expense items?

a.Scott rents a house for $1,350 a month. 

b.On June 21, 2016, Scott bought diamond earrings for his wife and charged them using 
his MasterCard. The earrings cost $900, but he hasn’t yet received the bill. 

c.  Scott borrowed $3,500 from his parents last fall, but so far, he has made no payments to 

d.Scott makes monthly payments of $225 on an installment loan; about half of it is interest, 
and the balance is repayment of principal. He has 20 payments left, totaling $4,500. 

e.  Scott paid $3,800 in taxes during the year and is due a tax refund of $650, which he 
hasn’t yet received. 

f.   Scott invested $2,300 in some common stock. 


2. Stan and Elizabeth Carpenter are preparing their 2016 cash budget. Help the Carpenters reconcile the following differences, giving reasons to support your answers.

a.Their only source of income is Stan’s salary, which amounts to $5,000 a month before 
taxes. Elizabeth wants to show the $5,000 as their monthly income, whereas Stan argues 
that his take-home pay of $3,917 is the correct value to show. 

b.Elizabeth wants to make a provision for fun money, an idea that Stan cannot understand. 
He asks, “Why do we need fun money when everything is provided for in the budget?” 

3. Use future or present value techniques to solve the following problems.

a.If you inherited $45,000 today and invested all of it in a security that paid a 7 percent rate 
of return, how much would you have in 25 years? 

b.If the average new home costs $275,000 today, how much will it cost in 10 years if the 
price increases by 5 percent each year? 

c.  You think that in 15 years, it will cost $214,000 to provide your child with a 4-year college 
education. Will you have enough if you take $75,000 today and invest it for the next 
15 years at 4 percent? 

d.If you can earn 4 percent, how much will you have to save each year if you want to retire 
in 35 years with $1 million? 


4. Greg Fredericks wishes to have $800,000 in a retirement fund 20 years from now. He can create the retirement fund by making a single lump-sum deposit today.

a.If upon retirement in 20 years, Greg plans to invest $800,000 in a fund that earns 4 per- 
cent, what is the maximum annual withdrawal he can make over the following 15 years? 

b.How much would Greg need to have on deposit at retirement in order to withdraw 
$35,000 annually over the 15 years if the retirement fund earns 4 percent? 

c.  To achieve his annual withdrawal goal of $35,000 calculated in part b, how much more 
than the amount calculated in part a must Greg deposit today in an investment earning 4 percent annual interest? 


Mary Watson is 24 years old and single, lives in an apartment, and has no dependents. Last year she earned $45,000 as a sales assistant for Focused Business Analytics: $3,910 of her wages was withheld for federal income taxes. In addition, she had interest income of $142. Estimate her taxable income, tax liability, and tax refund or tax owed.

2. Debra Ferguson received the items and amounts of income shown in the chart to the right during 2011. Help her calculate (a) her gross income and (b) that portion (dollar amount) of her income that is tax exempt.

Salary $33,500 Dividends 800 Gift from mother 500 Child support from ex-husband 3,600 Interest on savings account 250 Rent 900 Loan from bank 2,000 Interest on state government bonds 300


3. If Amy Phillips is single and in the 28 percent tax bracket, calculate the tax associated with each of the following transactions. (Use the IRS regulations for capital gains in effect in 2011.) Treat each of the following cases as independent of the others.
a. She sold stock for $1,200 that she purchased for $1,000 5 months earlier.

b. She sold bonds for $4,000 that she purchased for $3,000 3 years earlier.
c. She sold stock for $1,000 that she purchased for $1,500 15 months earlier.


4. Use Worksheets 3.1 and 3.2.
QiangGao graduated from col-
lege in 2011 and began work as
a systems analyst in July of that
year. He is preparing to file his
income tax return for 2011 and
has collected the financial infor-
mation shown in the table to
the right for that calendar year.
a. Prepare Qiang’s 2011 tax return, using a $5,700 standard deduction, a personal exemption

Tuition, scholarships, and grants
Scholarship, room, and board
Salary 30,250

185 3,000 2,600

of $3,650, and the tax rates given in Exhibit 3.3. Which tax form should Qiang use, and why? b. Prepare Qiang’s 2011 tax return using the data in part a along with the following information:

IRA contribution $5,000 Cash dividends received 150

Which tax form should he use in this case? Why?

g.Demonstrate the differences resulting from a $1,000 tax credit versus a $1,000 tax deduc- tion for a single taxpayer in the 25 percent tax bracket with $40,000 of pre-tax income. 

h.Steve and Beth Compton have been notified that they are being audited. What should they do to prepare for the audit?


i.   Your parents are retired and have expressed concern about the really low interest rates they’re earning on their savings. They’ve been approached by an advisor who says he has a “sure-fire” way to get them higher returns. What would you tell your parents about the low-interest-rate environment, and how would you advise them to view the advisor’s new prospective investments? 

j.   Suppose that someone stole your ATM card and withdrew $950 from your checking account. How much money could you lose (according to federal legislation) if you reported the stolen card to the bank: (a) the day the card was stolen, (b) 6 days after the theft,
(c) 65 days after receiving your periodic statement? 

k.You’re getting married and are unhappy with your present bank. Discuss how you should go about choosing a new bank and opening an account. Consider the factors that are important to you in selecting a bank—such as the type and ownership of new accounts and bank fees and charges. 

l.   Determine the annual net cost of these checking accounts:
a. Monthly fee $4, check-processing fee of 20 cents, average of 23 checks written per month b. Annual interest of 2.5 percent paid if balance exceeds $750, $8 monthly fee if account 
falls below minimum balance, average monthly balance $815, account falls below $750 during four months 

m.               If you put $6,000 in a savings account that pays interest at the rate of 4 percent, compounded annually, how much will you have in five years? (Hint: Use the future value formula.) How much interest will you earn during the five years? If you put $6,000 each year into a savings account that pays interest at the rate of 4 percent a year, how much would you have after five years? 

n.Describe some of the short-term investment vehicles that can be used to manage your cash resources. What factors would you focus on if you were concerned that the government deficits associated with the recent financial crisis will lead to a significant increase in future inflation? 


o.After graduating from college last fall, Jessica Stevens took a job as a consumer credit analyst at a local bank. From her work reviewing credit applications, she realizes that she should begin establishing her own credit history. Describe for Jessica several steps that she could take to begin building a strong credit record. Does the fact that she took out a student loan for her college education help or hurt her credit record? 

p.Robert Denby has a monthly take-home pay of $1,685; he makes payments of $410 a month on his outstanding consumer credit (excluding the mortgage on his home). How would you characterize Robert’s debt burden? What if his take-home pay were $850 a month and he had monthly credit payments of $150? 

q.Use Worksheet 6.1. Rebecca Collins is evaluating her debt safety ratio. Her monthly take- home pay is $3,320. Each month, she pays $380 for an auto loan, $120 on a personal line of credit, $60 on a department store charge card, and $85 on her bank credit card. Complete Worksheet 6.1 by listing Rebecca’s outstanding debts, and then calculate her debt safety ratio. Given her current take-home pay, what is the maximum amount of monthly debt payments that Rebecca can have if she wants her debt safety ratio to be 12.5 percent? Given her current monthly debt payment load, what would Rebecca’s take-home pay have to be if she wanted a 12.5 percent debt safety ratio? 

r.  David and Joan Mead have a home with an appraised value of $180,000 and a mortgage balance of only $90,000. Given that an S&L is willing to lend money at a loan-to-value ratio of 75 percent, how big a home equity credit line can David and Joan obtain? How much,
if any, of this line would qualify as tax-deductible interest if their house originally cost $200,000? 

s.  Isaac Primack recently graduated from college and is evaluating two credit cards. Card A has an annual fee of $75 and an interest rate of 9 percent. Card B has no annual fee and an interest rate of 16 percent. Assuming that Isaac intends to carry no balance and pay off his charges in full each month, which card represents the better deal? If Isaac expected to carry a significant balance from one month to the next, which card would be better? Explain. 

t.   Janine Waite has several credit cards, on which she is carrying a total current balance
of $14,500. She is considering transferring this balance to a new card issued by a local bank. The bank advertises that, for a 2 percent fee, she can transfer her balance to a card that charges a 0 percent interest rate on transferred balances for the first nine months. Calculate the fee that Janine would pay to transfer the balance, and describe the benefits and drawbacks of balance transfer cards. 

u.Lei Sung was reviewing her credit card statement and noticed several charges that didn’t look familiar to her. Lei is unsure whether she should “make some noise,” or simply pay the bill in full and forget about the unfamiliar charges. If some of these charges aren’t hers, is she still liable for the full amount? Is she liable for any part of these charges—even if they’re fraudulent? 


v.Bridget Morrow is a sophomore at State College and is running out of money. Wanting to continue her education, Bridget is considering a student loan. Explain her options. How can she best minimize her borrowing costs and maximize her flexibility? 

w.                Assume that you’ve been shopping for a new car and intend to finance part of it through an installment loan. The car you’re looking for has a sticker price of $18,000. Auto Boss has offered to sell it to you for $3,000 down and finance the balance with a loan that will require 48 monthly payments of $333.67 Four Wheel Specialists will sell you the exact same vehicle for $3,500 down, plus a 60-month loan for the balance, with monthly pay- ments of $265.02. Which of these two finance packages is the better deal? 

x.Using the simple interest method, find the monthly payments on a $3,000 installment loan if the funds are borrowed for 24 months at an annual interest rate of 6 percent. 

y.Find the finance charges on a 6.5 percent, 18-month, single-payment loan when interest is computed using the simple interest method. Find the finance charges on the same loan when interest is computed using the discount method. Determine the APR in each case. 

z.  Assuming that interest is the only finance charge, how much interest would be paid on a $5,000 installment loan to be repaid in 36 monthly installments of $166.10? What is the APR on this loan? 

aa.             Todd Kowalski is borrowing $10,000 for five years at 7 percent. Payments, which are made on a monthly basis, are determined using the add-on method.
a. How much total interest will Todd pay on the loan if it is held for the full five-year term? b. What are Todd’s monthly payments? 
c. How much higher are the monthly payments under the add-on method than under the simple interest method? 


bb.             Cliff Arthur has equally attractive job offers in Miami and Los Angeles. The rent ratios in the cities are 8 and 20, respectively. Cliff would really like to buy rather than rent a home after he moves. Explain how to interpret the rent ratio and what it tells Cliff about the rela- tive attractiveness of moving to Miami rather than Los Angeles, given his stated goal. 

cc.              Using the maximum ratios for a conventional mortgage, how big a monthly payment could the Taylor family afford if their gross (before-tax) monthly income amounted to $3,500? Would it make any difference if they were already making monthly installment loan pay- ments totaling $750 on two car loans? 

dd.             Find the monthly mortgage payments on the following mortgage loans using either your calculator or the table in Exhibit 5.5:
a. $90,000 at 6.5 percent for 30 years
b. $125,000 at 5.5 percent for 20 years 
c. $97,500 at 5 percent for 15 years 

ee.              Use Worksheet 5.2. Aurelia Montenegro is currently renting an apartment for $725 per month and paying $275 annually for renter’s insurance. She just found a small townhouse she can buy for $185,000. She has enough cash for a $10,000 down payment and $4,000
in closing costs. Aurelia estimated the following costs as a percentage of the home’s
price: property taxes, 2.5 percent; homeowner’s insurance, 0.5 percent; and maintenance, 0.7 percent. She is in the 25 percent tax bracket. Using Worksheet 5.2, calculate the cost of each alternative and recommend the least costly option—rent or buy—for Aurelia. 
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