Personal Finance, 10th Edition
Content:
1 Planning Your Personal Finances
1 Personal Finance Basics and the Time Value of Money 1
The Financial Planning Process 2
Step 1: Determine Your Current Financial Situation 3
Step 2: Develop Your Financial Goals 4
Step 3: Identify Alternative Courses of Action 4
Step 4: Evaluate Your Alternatives 5
Step 5: Create and Implement Your Financial Action Plan 6
Step 6: Review and Revise Your Plan 7
Developing Personal Financial Goals 8
Types of Financial Goals 8
Goal-Setting Guidelines 9
Influences on Personal Financial Planning 11
Life Situation and Personal Values 11
Economic Factors 12
Opportunity Costs and the
Time Value of Money 16
Personal Opportunity Costs 17
Financial Opportunity Costs 17
Achieving Financial Goals 21
Components of Personal Financial
Planning 21
Developing a Flexible Financial Plan 24
Implementing Your Financial Plan 24
Studying Personal Finance 25
Appendix: The Time Value of Money 31
2 Financial Aspects of Career
Planning 41
Career Choice Factors 42
Trade-Offs of Career Decisions 42
Career Training and Skill Development 42
Personal Factors 43
Career Decision Making 44
Career Opportunities:
Now and in the Future 46
Social Influences 46
Economic Conditions 46
Industry Trends 47
Employment Search Strategies 49
Obtaining Employment Experience 49
Using Career Information Sources 49
Identifying Job Opportunities 52
Career Strategies in a Weak Job Market 53
Applying for Employment 54
Financial and Legal Aspects of Employment 54
Accepting an Employment Position 54
Evaluating Employee Benefits 55
Your Employment Rights 57
Long-Term Career Development 58
Training Opportunities 59
Career Paths and Advancement 59
Changing Careers 59
Appendix: Résumés, Cover Letters,
and Interviews 67
3 Money Management Strategy: Financial
Statements and Budgeting 77
Successful Money Management 78
Opportunity Cost and Money
Management 78
Components of Money Management 79
A System for Personal Financial Records 80
Personal Financial Statements 82
The Personal Balance Sheet: Where Are You Now? 82
Evaluating Your Financial Position 85
The Cash Flow Statement:
Where Did Your Money Go? 85
Budgeting for Skilled Money Management 88
The Budgeting Process 89
Characteristics of Successful Budgeting 95
Money Management and Achieving
Financial Goals 96
Identifying Saving Goals 97
Selecting a Saving Technique 97
Calculating Savings Amounts 98
4 Planning Your Tax Strategy 105
Taxes and Financial Planning 106
Taxes on Purchases 106
Taxes on Property 106
Taxes on Wealth 106
Taxes on Earnings 107
Income Tax Fundamentals 107
Step 1: Determining Adjusted Gross
Income 108
Step 2: Computing Taxable Income 109
Step 3: Calculating Taxes Owed 112
Making Tax Payments 114
Deadlines and Penalties 116
Filing Your Federal Income Tax Return 116
Who Must File? 116
Which Tax Form Should You Use? 117
Completing the Federal Income
Tax Return 117
Filing State Income Tax Returns 119
Tax Assistance and the Audit Process 121
Tax Information Sources 121
Tax Preparation Software 124
Tax Preparation Services 124
What If Your Return Is Audited? 127
Tax Planning Strategies 128
Consumer Purchasing 129
Investment Decisions 130
Retirement Plans 131
Tax-Saving Strategies: A Summary 133
2 Managing Your Personal Finances
5 Financial Services: Savings Plans and
Payment Accounts 139
A Cash Management Strategy 140
Meeting Daily Money Needs 140
Types of Financial Services 141
Online Banking 142
Opportunity Costs of Financial Services 143
Financial Services and Economic
Conditions 144
Financial Institutions 144
Deposit Institutions 145
Other Financial Institutions 148
Comparing Financial Institutions 148
Savings Plans 150
Regular Savings Accounts 150
Certificates of Deposit 150
Money Market Accounts and Funds 152
U.S. Savings Bonds 152
Evaluating Savings Plans 154
Rate of Return 154
Inflation 156
Tax Considerations 156
Liquidity 156
Safety 157
FDIC Coverage 157
Restrictions and Fees 158
Payment Methods 158
Electronic Payments 158
Types of Checking Accounts 159
Evaluating Checking Accounts 160
Managing Your Checking Account 162
Other Payment Methods 164
6 Introduction to Consumer Credit 170
What Is Consumer Credit? 171
The Importance of Consumer Credit in Our
Economy 172
Uses and Misuses of Credit 172
Advantages of Credit 173
Disadvantages of Credit 174
Summary: Advantages and Disadvantages
of Credit 174
Types of Credit 175
Closed-End Credit 175
Open-End Credit 176
Measuring Your Credit Capacity 183
Can You Afford a Loan? 183
General Rules of Credit Capacity 183
Cosigning a Loan 185
Building and Maintaining Your Credit
Rating 185
Applying for Credit 189
A Scenario from the Past 189
What Creditors Look for: The Five Cs of Credit
Management 191
What If Your Application Is Denied? 194
Avoiding and Correcting Credit Mistakes 194
In Case of a Billing Error 196
Your Credit Rating during the Dispute 196
Defective Goods or Services 197
Identity Crisis: What to Do
If Your Identity Is Stolen 198
Complaining about Consumer Credit 200
Complaints about Banks 200
Protection under Consumer
Credit Laws 200
Your Rights under Consumer
Credit Laws 202
7 Choosing a Source of Credit: The
Costs of Credit Alternatives 212
Sources of Consumer Credit 213
What Kind of Loan Should You Seek? 213
Student Loans: Impact of the Financial Crisis 215
The Cost of Credit 218
Finance Charge and Annual
Percentage Rate (APR) 219
Tackling the Trade-Offs 220
Calculating the Cost of Credit 222
When the Repayment Is Early:
The Rule of 78s 228
Credit Insurance 231
Cost of Credit and the Credit Card Accountability,
Responsibility, and Disclosure Act of 2009
(the Credit Card Act) 231
Managing Your Debts 232
Debt Collection Practices 232
Warning Signs of Debt Problems 233
The Serious Consequences of Debt 235
Consumer Credit Counseling
Services 237
What the CCCS Does 237
Alternative Counseling Services 238
Declaring Personal Bankruptcy 239
The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 241
Effect of Bankruptcy on Your Job
and Your Future Credit 242
Should a Lawyer Represent You in a
Bankruptcy Case? 243
3 Making Your Purchasing Decisions
8 Consumer Purchasing Strategies and Legal Protection 252
Consumer Buying Activities 253
Financial Implications of Consumer
Decisions 253
Practical Purchasing Strategies 254
Warranties 258
Major Consumer Purchases:
Buying Motor Vehicles 260
Phase 1—Preshopping Activities 260
Phase 2—Evaluating Alternatives 261
Phase 3—Determining Purchase Price 264
Phase 4—Postpurchase Activities 266
Resolving Consumer Complaints 269
Step 1: Return to Place of Purchase 270
Step 2: Contact Company Headquarters 271
Step 3: Obtain Consumer Agency
Assistance 272
Step 4: Take Legal Action 272
Legal Options for Consumers 273
Small Claims Court 273
Class-Action Suits 273
Using a Lawyer 273
Other Legal Alternatives 274
Personal Consumer Protection 275
9 The Housing Decision: Factors
and Finances 282
Housing Alternatives 283
Your Lifestyle and Your Choice of
Housing 283
Opportunity Costs of Housing Choices 283
Renting versus Buying Housing 284
Housing Information Sources 286
Renting Your Residence 286
Selecting a Rental Unit 287
Advantages of Renting 288
Disadvantages of Renting 289
Costs of Renting 290
The Home-Buying Process 291
Step 1: Determine Home Ownership
Needs 291
Step 2: Find and Evaluate a
Property to Purchase 295
Step 3: Price the Property 296
The Finances of Home Buying 298
Step 4: Obtain Financing 298
Step 5: Close the Purchase Transaction 306
Home Buying: A Summary 307
Selling Your Home 309
Preparing Your Home for Selling 309
Determining the Selling Price 309
Sale by Owner 309
Listing with a Real Estate Agent 310
4 Insuring Your Resources
10 Property and Motor Vehicle
Insurance 316
Insurance and Risk Management:
An Introduction 317
What Is Insurance? 317
Types of Risks 317
Risk Management Methods 318
Planning an Insurance Program 319
Property and Liability Insurance 322
Potential Property Losses 323
Liability Protection 323
Home and Property Insurance 324
Homeowner’s Insurance Coverages 324
Renter’s Insurance 327
Home Insurance Policy Forms 328
Home Insurance Cost Factors 330
How Much Coverage Do You Need? 330
Factors That Affect Home Insurance
Costs 331
Reducing Home Insurance Costs 331
Automobile Insurance Coverages 332
Motor Vehicle Bodily Injury Coverages 333
Motor Vehicle Property Damage
Coverages 335
Other Automobile Insurance Coverages 336
Automobile Insurance Costs 337
Amount of Coverage 337
Automobile Insurance Premium Factors 338
Reducing Automobile Insurance
Premiums 339
11 Health, Disability, and
Long-Term Care Insurance 346
Health Care Costs 347
High Medical Costs 348
Why Does Health Care Cost So Much? 350
What Is Being Done about the
High Costs of Health Care? 351
What Can You Do to Reduce
Personal Health Care Costs? 351
Health Insurance and Financial Planning 353
What Is Health Insurance? 353
Medical Coverage and Divorce 355
Types of Health Insurance Coverage 355
Types of Medical Coverage 356
Long-Term Care Insurance 358
Major Provisions in a
Health Insurance Policy 359
Which Coverage Should You Choose? 361
Health Insurance Trade-Offs 361
Health Information Online 363
Private Sources of Health Insurance
and Health Care 364
Private Insurance Companies 364
Hospital and Medical Service Plans 364
Health Maintenance Organizations
(HMOs) 364
Preferred Provider Organizations
(PPOs) 365
Home Health Care Agencies 367
Employer Self-Funded Health Plans 367
New Health Care Accounts 367
Government Health Care Programs 368
Medicare 369
Medicaid 372
Health Insurance and the Patient Protection
and Affordable Care Act of 2010 374
Fight against Medicare/Medicaid
Fraud and Abuse 374
Government Consumer Health Information
Web Sites 375
Disability Income Insurance 376
Definition of Disability 377
Disability Insurance Trade-Offs 377
Sources of Disability Income 378
Determining Your Disability Income
Insurance Requirements 379
12 Life Insurance 387
Life Insurance: An Introduction 388
What Is Life Insurance? 388
The Purpose of Life Insurance 389
The Principle of Life Insurance 389
How Long Will You Live? 389
Determining Your Life Insurance Needs 392
Do You Need Life Insurance? 392
Determining Your Life Insurance
Objectives 392
Estimating Your Life Insurance
Requirements 393
Types of Life Insurance Companies
and Policies 395
Types of Life Insurance Companies 395
Types of Life Insurance Policies 396
Term Life Insurance 396
Whole Life Insurance 398
Other Types of Life Insurance
Policies 401
Important Provisions in a Life Insurance
Contract 404
Naming Your Beneficiary 404
The Grace Period 404
Policy Reinstatement 404
Nonforfeiture Clause 404
Incontestability Clause 405
Suicide Clause 405
Automatic Premium Loans 405
Misstatement of Age Provision 405
Policy Loan Provision 405
Riders to Life Insurance Policies 406
Buying Life Insurance 407
From Whom to Buy? 407
Comparing Policy Costs 409
Obtaining a Policy 411
Examining a Policy 412
Choosing Settlement Options 412
Switching Policies 413
Financial Planning with Annuities 414
Why Buy Annuities? 415
Tax Considerations 415
5 Investing Your Financial Resources
13 Investing Fundamentals 423
Preparing for an Investment Program 424
Establishing Investment Goals 424
Performing a Financial Checkup 425
Managing a Financial Crisis 426
Getting the Money Needed to Start an
Investment Program 427
The Value of Long-Term Investment
Programs 428
Factors Affecting the Choice of Investments 430
Safety and Risk 430
The Risk–Return Trade-Off 431
Components of the Risk Factor 433
Investment Income 436
Investment Growth 436
Investment Liquidity 436
Asset Allocation and Investment
Alternatives 437
Asset Allocation and Diversification 437
An Overview of Investment
Alternatives 440
Stock or Equity Financing 440
Corporate and Government Bonds 441
Mutual Funds 441
Real Estate 442
Other Investment Alternatives 442
A Personal Plan for Investing 443
Factors That Reduce Investment Risk 444
Your Role in the Investment Process 444
Other Factors That Improve Investment
Decisions 445
Sources of Investment Information 447
The Internet 447
Newspapers and News Programs 447
Business Periodicals and Government
Publications 448
Corporate Reports 449
Investor Services and Newsletters 449
14 Investing in Stocks 460
Common and Preferred Stocks 461
Why Corporations Issue Common
Stock 461
Why Investors Purchase Common
Stock 462
Preferred Stock 466
Evaluating a Stock Issue 467
Classification of Stock Investments 468
The Internet 468
Stock Advisory Services 469
How to Read the Financial Section
of the Newspaper 472
Corporate News 472
Numerical Measures That Influence Investment
Decisions 473
Why Corporate Earnings Are
Important 473
Other Factors That Influence
the Price of a Stock 475
Investment Theories 479
Buying and Selling Stocks 480
Secondary Markets for Stocks 480
Brokerage Firms and Account
Executives 481
Should You Use a Full-Service or a
Discount Brokerage Firm? 482
Commission Charges 483
Completing Stock Transactions 483
Long-Term and Short-Term Investment
Strategies 484
Long-Term Techniques 485
Short-Term Techniques 486
15 Investing in Bonds 499
Characteristics of Corporate Bonds 500
Why Corporations Sell
Corporate Bonds 502
Types of Bonds 502
Provisions for Repayment 504
Why Investors Purchase
Corporate Bonds 506
Interest Income 506
Dollar Appreciation of Bond Value 508
Bond Repayment at Maturity 508
A Typical Bond Transaction 509
The Mechanics of a Bond Transaction 510
Government Bonds and Debt Securities 511
Treasury Bills, Notes, and Bonds 511
Federal Agency Debt Issues 514
State and Local Government Securities 514
The Decision to Buy or Sell Bonds 516
The Internet 517
Financial Coverage for Bond Transactions 518
Annual Reports 519
Bond Ratings 520
Bond Yield Calculations 522
Other Sources of Information 524
16 Investing in Mutual Funds 535
Why Investors Purchase Mutual Funds 536
Characteristics of Mutual Funds 537
Classifications of Mutual Funds 545
Stock Funds 545
Bond Funds 546
Other Funds 546
How to Decide to Buy or Sell
Mutual Funds 548
Managed Funds versus Indexed Funds 548
The Internet 550
Professional Advisory Services 552
How to Read the Mutual Funds Section
of the Newspaper 552
Mutual Fund Prospectus 552
Mutual Fund Annual Report 554
Financial Publications 555
The Mechanics of a Mutual Fund
Transaction 556
Return on Investment 557
Taxes and Mutual Funds 558
Purchase Options 559
Withdrawal Options 561
17 Investing in Real Estate and Other
Investment Alternatives 570
Investing in Real Estate 571
Direct Real Estate Investments 571
Indirect Real Estate Investments 575
Advantages of Real Estate Investments 577
A Possible Hedge against Inflation 577
Easy Entry 578
Limited Financial Liability 578
No Management Concerns 579
Financial Leverage 579
Disadvantages of Real Estate Investments 579
Illiquidity 579
Declining Property Values 579
Lack of Diversification 579
Lack of a Tax Shelter 580
Long Depreciation Period 580
Management Problems 580
Investing in Precious Metals, Gems,
and Collectibles 580
Gold 581
Silver, Platinum, Palladium,
and Rhodium 582
Precious Stones 583
Collectibles 583
6 Controlling Your Financial Future
18 Starting Early: Retirement Planning 593
Why Retirement Planning? 594
Tackling the Trade-Offs 594
The Importance of Starting Early 595
The Basics of Retirement Planning 596
Conducting a Financial Analysis 597
Review Your Assets 597
Your Assets after Divorce 599
Retirement Living Expenses 600
Adjust Your Expenses for Inflation 602
Planning Your Retirement Housing 604
Type of Housing 604
Avoiding Retirement Housing Traps 605
Planning Your Retirement Income 606
Social Security 606
Other Public Pension Plans 610
Employer Pension Plans 610
Personal Retirement Plans 615
Annuities 620
Will You Have Enough Money during
Retirement? 622
Living on Your Retirement Income 623
Tax Advantages 624
Working during Retirement 624
Investing for Retirement 624
Dipping into Your Nest Egg 624
19 Estate Planning 634
Why Estate Planning? 635
What Is Estate Planning? 635
If You Are Married 636
If You Never Married 637
New Lifestyles 637
The Opportunity Cost of Rationalizing 637
Legal Aspects of Estate Planning 639
Wills 639
Types and Formats of Wills 642
Types of Wills 642
Formats of Wills 643
Writing Your Will 643
Altering or Rewriting Your Will 645
Living Will and Advance Directives 646
Ethical Will 648
Power of Attorney 648
Letter of Last Instruction 648
Types of Trusts and Estates 649
Benefits of Establishing Trusts 649
Types of Trusts 649
Estates 653
Settling Your Estate 656
Federal and State Estate Taxes 656
Types of Taxes 657
Tax Avoidance and Tax Evasion 659
Calculating the Tax 660
Paying the Tax 660
Appendixes
A Financial Planners and Other Information
Sources A-1
B Consumer Agencies and Organizations B-1
C Daily Spending Diary C-1
Endnotes N-1
Photo Credits PC-1
Index I-1
Personal Financial Planner