(Solution Manual) Personal Finance, Canadian Edition

Kapoor,Dlabay,Hughes,Ahmad, 7

Business

Solution Manual

7th Edition

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Solution Manual for Personal Finance, Canadian Edition, The downloadable file consists of 337 pages, and the total size of the file is 3.77 MB. Purchase now only for highly discounted price.

Author(s): Kapoor, Dlabay, Hughes, Ahmad

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1-1 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. 1 FINANCIAL PLANNING: AN INTRODUCTION CHAPTER OVERVIEW This chapter provides the foundation for Personal Finance and the study of financial planning. The chapter starts with a discussion of an overview of the fi nancial planning process. This is followed by coverage of the person’s life situation, personal values, and economic factors that make up the financial planning environment. Next, the opportunity costs, or trade -offs, of decisions are considered in relatio n to personal and financial resources. Subsequently, the main components of financial planning (obtaining, planning, saving, borrowing, spending, managing risk, investing, and retirement and estate planning) are discussed. Finally, strategies for creating and using a financial plan are introduced. LEARNING OBJECTIVES CHAPTER SUMMARY After studying this chapter, students will be able to: Obj. 1 Analyze the process for making personal financial decisions. Personal financial planning involves the following p rocess: (1) determine your current financial situation; (2) develop financial goals; (3) identify alternative courses of action; (4) evaluate alternatives; (5) create and implement a financial action plan; and (6) re -evaluate and revise the financial plan. Obj. 2 Develop personal financial goals. Financial goals should (1) be realistic; (2) be stated in specific, measurable terms; (3) have a time frame; (4) indicate the type of action to be taken. Obj. 3 Assess personal and economic factors that influence personal financial planning. Financial decisions are affected by a person’s life situation (income, age, household size, health), personal values, and economic factors (prices, interest rates, and employment opportunities). Obj. 4 Determine personal and financial opportunity costs associated with personal financial decisions. Financial opportunity costs are based on the time value of money. Future value and present value calculations enable you to measure the increased value (or lost interest) that resul ts from a saving, investing, borrowing, or purchasing decision. Obj. 5 Identify strategies for achieving personal financial goals for different life situation. Successful financial planning requires specific goals combined with spending, savings, investin g, and borrowing strategies based on your personal situation and various social and economic factors. 1-2 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. INTRODUCTORY ACTIVITIES • Ask students to comment on the opening case for the chapter. • Point out the learning objectives in an effort to highlight the key points in the chapter. • Ask students to provide examples of social and economic factors that have increased the importance of personal financial planning today. • Have students answer these three questions as individuals or in small discussion groups: 1. Wha t do you currently know about personal financial planning? 2. What questions do you need answers for about personal finance? 3. How and where might you obtain answers to the questions you have about personal finance? CHAPTER 1 OUTLINE I. The Financial Planning Process Step 1: Determine Your Current Financial Situation Step 2: Develop Financial Goals Step 3: Identify Alternative Courses of Action Step 4: Evaluate Alternatives Step 5: Create and Implement a Financial Action Plan Step 6: Re -evaluate and Revise You r Plan II. Developing Personal Financial Goals A. Factors that Influence Your Financial Goals B. Life Situation C. Goal -Setting Guidelines III. The Influence of Economic Factors A. Market Forces B. Financial Institutions C. Global Influences D. Economic Conditions IV. Time Value of Money A. Interest Calculations B. Future Value C. Present Value V. Achieving Financial Goals A. Components of Personal Financial Planning B. Developing a Flexible Financial Plan C. Implementing Your Financial Plan VI. Appendix 1A: Financial P lanners and Other Financial Planning Information Sources 1-3 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. VII. Appendix 1B: The Time Value of Money: Future Value and Present Value Computations. CHAPTER 1 LECTURE OUTLINE Instructional Suggestions THE FINANCIAL PLANNING PROCESS • Personal financial planni ng is the process of managing your money to achieve personal economic satisfaction. Step 1. Determine Your Current Financial Situation • Determine your current financial situation with regard to income, savings, living expenses, and debts. Step 2. Develop Financial Goals • Analyze your financial values and goals to set a course for action. • Discussion Question: Why do some decisions require more time and effort than others? Step 3. Identify Alternative Courses of Action • Various alternatives associated with financial decision making are usually based on deciding to:  Continue the same course of action ; for example, you may determine that the amount saved each month is still appropriate.  Expand the current situation ; you may choose to save a greater amount eac h month.  Change the current situation ; you may decide to buy Canadian savings bonds instead of using a regular savings account.  Take a new course of action ; you conclude to use your monthly saving budget to pay off credit card debts. • Creativity in decision making is vital to making effective choices. The more alternatives that are considered, the more likely a person or household will make wise financial choices. • Class Exercise: Select a situation (such as obtaining funds to start a business or getting work -related experience without a job) and have students create a list of alternatives for this problem. Step 4. Evaluate Alternatives • Every decision closes off alternatives. The opportunity cost is what a person gives up by making a choice. This cost, commo nly referred to as the trade -off of a decision, sometimes cannot always be measured in dollars. • Decision making will be an ongoing part of your personal and financial existence. Thus, you will need to consider the lost opportunities that result from your decisions. • Text Highlight: Exhibit 1 - 2 provides information on four types of risks faced in many financial decisions. • Text Reference: The Appendix provides expanded discussion of financial planning information sources and using a financial planner. 1-4 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. • Unce rtainty is a par of every decision. In many financial decisions, identifying and evaluating risk is a difficult task. The best way to consider risk in such decisions is to gather information based on your experiences and those of others and refer to the research of financial planning sources. • Relevant information is required at each stage of the financial planning process. Step 5. Create and Implement A Financial Action Plan • Develop a plan of action to achieve your goals. Step 6. Re -evaluate and Revise Yo ur Plan • Decision making is a circular, ongoing process in which current decisions influence future choices. DEVELOPING PERSONAL FINANCIAL GOALS • Many Canadians have money problems due to:  poor planning  weak financial habits  extensive numbers of marketp lace influences in the form of advertising, selling efforts, and product availability. Types of Financial Goals • Short -term goals are those to be achieved within the next year or so, such as saving for an annual vacation or paying off small debts. • Intermed iate goals have a time frame of two to five years. • Long -term goals involve financial plans that may be more than five years off, such as retirement and college savings. • Consumable -product goals usually occur on a periodic basis involving items used up rela tively quickly, such as food, clothing, or entertainment spending. • Durable -product goals usually involve infrequent, expensive items, such as appliances, motor vehicles, and sporting equipment. Most durable goals consist of tangible items. • In contrast, ho wever, many people overlook intangible goals . These goals may relate to personal relationships, health, education, and leisure. Goal setting for these life circumstances is also necessary for a person’s overall well -being. • Concept Check 1 -1 1-5 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. CHAPTER 1 LECTURE OUTLINE Instructional Suggestions Life Situation • The personal factors include your age, income, size of household, and your attitudes and beliefs. Your life situation is affected by various personal events. • Values are personal beliefs and ideas t hat a person considers correct, desirable, and important. Goal -Setting Guidelines • Goal setting is at the center of financial decision making. Financial goals should: 1. be realistic 2. be stated in specific, measurable terms 3. have a time frame 4. indicate the type of action to be taken Economic Factors • Economic conditions (supply and demand, prices, and interest rates) and economic institutions (business, labor, and government) also affect personal finance. • Economics is the study of how wealth is created and distri buted. • The price of a specific good or service is determined by supply and demand. Just as high demand for a consumer product forces its price up, a high demand for money forces interest rates up. This price of money reflects both the limited supply of money and the demand for it. • Banks, trust companies, credit unions, insurance companies, and investment companies facilitate financial activities in our society. • The Bank of Canada is our central banking system. It influences the money supply by borrowing funds, changing interest rates, and buying or selling government securities. • The level of exports and imports, and the investment in our country by foreign companies affect the interest rates and prices in our society. • Consumer prices, consumer spending, and interest rates affect the financial planning environment. • Inflation is a rise in the general level of prices. In times of inflation, the buying power of the dollar decreases. • The main cause of inflation is an increase in demand without a comparable increas e in supply. Inflation is most harmful to people who live on fixed incomes. • Text Highlight: Exhibit 1 - 4 provides an overview of common financial goals and activities for different life situations. • Concept Check 1 -2 • Discussion Question: How would various personal events affect personal financial decisions? • Text Highlight: Use Exhibit 1-6 to point out how various economic factors affect financial decisions. • Assignment: Have students use old newspapers and information from friends and relatives to com pare current prices with those of five or ten years ago. • Discussion Question: What types of attitudes in our society contribute to higher inflation? 1-6 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. • Consumer spending is the total demand for goods and services in the economy; this influenc es employment opportunities and potential for income. • Interest rates represent the cost of money. Like everything else, money has a price. The forces of supply and demand influence interest rates. As the amount saved and invested by consumers increases the supply of money, interests rates tend to decrease. • Discussion Question: Interest rates influence most aspects of our economic existence. Why are changing interest rates a significant component of personal financial planning? But as consumer, business, g overnment, and foreign borrowing increases the demand for money, interest rates also tend to increase. • Concept Check 1 -3 OPPORTUNITY COSTS & THE TIME VALUE OF MONEY • Distinguish between personal and financial opportunity costs. • Personal opportunity cost involves time that, when used for one activity, cannot be used for other activities. Other personal opportunity costs relate to health. • The time value of money refers to the increase of an amount of money as a result of interest earned. • Computation of inte rest is based on:  the amount of the savings  the annual interest rate  the length of time the money remains deposited. • Future value , also referred to as compounding , is the amount to which current savings will increase based on a certain interest rate and a certain time period. Future value calculations may be used for both a single amount and equal deposits. (See Exhibit 1 -8.) • Present value , also referred to as discounting , is the current value for a future sum based on a certain interest rate and a certa in time period. Present value calculations may also be used for both a single amount and a series of amounts. (See Exhibit 1 -8.) • Concept Check 1 -4 ACHIEVING FINANCIAL GOALS • Throughout life, each individual has needs that the intelligent use of availabl e financial resources can satisfy. Financial planning involves deciding how to obtain, protect, and use those resources. Components of Personal Financial Planning • The eight major components of personal financial • Text Highlight: Exhibit 1 -9 offers an overview of the course. 1-7 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. planning are: 1. obtaining financial resourc es 2. planning for current living expenses and future financial security 3. saving for emergencies, unexpected bills, replacement of major items, and special purchases 4. borrowing in a responsible manner 5. spending to meet daily living needs 6. managing risk through in surance decisions 7. investing for long -term financial security 8. retirement and estate planning Developing a Flexible Financial Plan • A financial plan is a formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities. • Financial activities may be organized on the basis of spending, saving, investing, and borrowing decisions. Impleme nting Your Financial Pl an • The most important strategy for success is the development of financial habits that will contribute to both short -term satisfaction and long -term financial security. • Text Highlight: Exhibit 1 - 10 presents an overview of a financial plan which includes examples of goals, short -term strategies, and long -term strategies. • Using a set spending plan will help you stay within your income while you save and invest for the future. • Concept Check 1 -5 1-8 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. CONCLUDING ACTIVITIES • Point out the chapter summary and key terms in the text margin. • Discuss selected end -of-chapter Financial Planning Problems, Financial Planning Activities, and Life Situation Case. • Use the Chapter Quiz in the Instructor’s Manual . • Have students start a journal of personal finance inform ation and readings that they encounter in the daily newspaper, news magazines, personal business periodicals , and on the World Wide Web. • Have students create a case problem for class use based on a personal financial experience they have experienced or obs erved. CHAPTER 1 QUIZ ANSWERS True -False Multiple Choice 1. T 8. B 2. F 9. D 3. T 10. C 4. T 11. A 5. T 12. D 6. F 13. A 7. F 14. B 1-9 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. Name ________________________________ ________ Date ____________________________ CHAPTER 1 QUIZ TRUE -FALSE _____1. A major purpose of personal financial planning is future e conomic security. _____2. 2 Personal financial planning starts by creating a plan of action. _____3. Interest rate risk and inflation risk can affect any financial decision. _____4. Inflation reduces the buying power of a dollar. _____5. Changes in interest rates affect your cost of borrowing and your return on investments, thus it is one of the risks you face when making financial decisions. _____6. Intermediate goals have a time frame of two to seven years. _____7. The life cycle approach is the idea that an average person goes through three basic stages in personal financial management. MULTIPLE CHOICE _____8. _ Opportunity cost refers to a. your personal values. b. trade -offs when a decision is made. c. current economic conditions. d. commonly accepted financial goals. _____9. _ The first step in the financial plann ing process is to a. create a financial plan of action. b. develop financial goals. c. evaluate and revise your actions. d. determine your current financial situation. _____10. You need a place to live. You have determined that you can continue to rent an apartment, move in with your parents, look at buying a condominium or look at buying a house. This is an example of which step in the financial planning process? a. Determining your current financial position b. Developing financial goals c. Identifying alternative courses of a ction d. Evaluating alternatives _____11. You want to budget your money so that you can see a movie once a month. This is an example of: a. A consumable products financial goal b. A durable goods financial goal c. An intangible goal d. A long term financial goal 1-10 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. _____12. Economics refers to a. setting personal financial goals. b. planning future financial security. c. changes in prices due to supply and demand. d. the study of wealth. _____13. Career planning is the part of the __________ component of financial planning. a. obtaining b. sharing c. saving d. planning _____14. Financial strategies refer to a. the process of predicting your future financial situation. b. courses of action to achieve financial goals. c. resources an individual has available for investing. d. ideas or principles that are considered correct, desirable, o r important. SUPPLEMENTARY LECTURE Financial Planning Through the Ages People in their 20s -30s should  • start saving regularly and invest for the long haul for retirement, children’s education, or a down payment on a house. • make contributions to tax -dedu ctible retirement plans. • create a diversified portfolio of common stock. • have adequate health and property insurance, however, consider going without life insurance if they have no dependents. People in their 40s -50s should  • maximize contributions to tax -advantaged retirement plans. • plan for adequate funds for children’s college education. • use stocks and stock funds for the largest share of long -term investments. • review life, health, and home insurance for adequate coverage. People 50 -plus should  • not feel they have to preserve all their wealth for others. 1-11 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. • be careful about retiring too young and not have adequate funds for what may be 30 more years. • maintain earnings potential with a part -time job after retirement. • not put all funds in fixed -income securitie s such as bank accounts and bonds. • consider a long -term care insurance policy. ANSWERS TO CONCEPT QUESTIONS, OPENING CASE QUESTIONS, FINANCIAL PLANNING PROBLEMS, FINANCIAL PLANNING ACTIVITIES, AND LIFE SITUATION CASE CONCEPT QUESTIONS Concept Chec k 1-1 1. What steps should we take in developing our financial plan? Every decision involves identification of the basic problem, generation of alternative courses of action, consideration of personal, social, and economic factors that influence the decis ion, evaluation of alternative courses of action, selection of the most appropriate one, and implementation of the course of action selected. 2. What are some risks are associated with financial decisions? Common risks associated with financial decisions include inflation risk, interest -rate risk, economic risk, and personal risk (Exhibit 1 -2). 3. What are some common sources of financial planning information? The common sources of personal financial planning information are financial specialists, printed materials, school courses and seminars, financial institutions, and computer software. Refer students to Appendix 1 of the textbook for additional information. The most helpful information sources will depend on a person’s need and situation. Magazine arti cles may be helpful to some, while others may require a computerized information system to gather investment data. 4. Why should you re -evaluate your actions after making personal financial decisions? Too often people think that once a plan is implemented, the work is over. However, we must continually re -evaluate our decisions since many factors (our life situation, the economy, AND personal goals) can change. In addition, we reassess the situation since the alternative selected may not turn out exactly as planned.) 5. What Web site feature of www.cafp.org or www.canadianfinance.com would provide assistance with your financial decisions? Answers will vary. Students might re fer to investment advice, money management tips, or buying on credit warnings. Concept Check 1 -2 1. What are examples of long -term goals? Long -term goals are financial objectives more than just a few years off (usually more than five years), 1-12 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. such as retir ement savings, money for children’s college education, or other long -term savings goals. 2. What are the four main characteristics of useful financial goals? Useful financial goals should (1) be realistic; (2) be stated in specific, measurable terms; (3) h ave a time orientation; and (4) imply the type of action to be taken. 3. How does your life situation affect your financial goals? The financial goals we set for ourselves, ultimately the way we spend and save our money vary greatly depending on our life sit uation . For example, an unmarried 25 -year-old with no children may be willing to take a few more risks and spend a larger amount of money since he/she only has him/herself to support. The opposite is true for a married, 45 -year-old with two children. He /she will likely spend money more wisely and take great consideration when presented with a risky situation. Concept Check 1 -3 1. How might the uncertainty of inflation make personal financial planning difficult? Inflation can affect financial planning w ith unexpected higher prices for which a budget was not planned. Or, expected inflation will mean higher interest rates as a lender is concerned about being paid back in dollars with less buying power. 2. What factors influence the level of interest rates? Interest rates are affected by the supply and demand for money, along with the risk of lending and borrowing money. Concept Check 1 -4 1. How can you use future value and present value computations to measure the opportunity cost of a financial decision? Time value of money calculations (future value and present value) are used to compute interest earned and the value of a sum of money at a later date. (See Appendix 1B and the “Financial Planning Calculations” feature ). 2. Use the time value of money table s in Exhibit 1 -8 to calculate the following: a. The future value of $100 at 7 percent in 10 years. $100  1.967 = $196.70 b. The future value of $100 a year for 6 years earning 6 percent. $100  6.975 = $697.50 c. The present value of $500 received in 8 years with an interest rate of 8 percent. $500  0.54 = $270 Concept Check 1 -5 1. What are the main components of personal financial planning? The main components of financial planning are obtaining, planning, saving, borrowing, spending, managing risk, investing, and retireme nt and estate planning. 1-13 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. 2. What is the purpose of a financial plan? A financial plan provides a person with an overall summary of current and desired financial situations along with planned actions to reach those goals. 3. Identify some common actions taken to achieve financial goals. Common financial planning strategies include developing a savings plan, investing in stocks and bonds, purchasing real estate for investment purposes, planning investment and other financial decisions w ith taxes in mind, limit the use of credit, and investing in a variety of investment vehicles. OPENING CASE QUESTIONS 1. How did Karen benefit from her parents’ advice and her own financial planning? Following advice from her parents, Karen consulted a f inancial planner to help her invest her money. By doing this, Karen is taking her first steps in personal financial planning which will help her get full satisfaction from each available dollar. 2. What decisions does Karen need to make regarding her fut ure? Karen has already determined her current financial situation and financial goals. Her next step is to identify alternative courses of action and evaluate these alternatives so that she is able to create and implement a financial action plan. 3. How co uld various personal and economic factors influence Karen’s financial planning? Many factors can influence Karen’s financial planning, for example, graduation, engagement or a change in health can influence her spending and saving patterns and financial n eeds. In addition, economic factors such as inflation and interest rates can have a large effect on the value of her investments and her borrowing power. 4. What would be the value of Karen’s $15,000 in three years if it earned an annual interest rate o f 7 percent? The value of Karen’s $15,000 in three years at an annual interest rate of 7 percent would be $18,375 according to the time value of money table Exhibit A -1 in Appendix A (15,000 x 1.225). 5. Conduct a Web search to obtain information that Karen may find useful. Recommend a Web site that they might consult when making financial planning decisions. Student answers will vary. Some possibilities are www.cafp.org and www.canadianfinance.com . FINANCIAL PLANNING PROBLEMS (Note: Some of these problems require the use of the time value of money tables in Appendix 1B) 1. Ben Collins plans to buy a house for $65,000. If that real estate property is expected to increa se in value by 5 percent each year, what will its approximate value be seven years from now? $65,000  1.407 = $91,455 2. Using the rule of 72, approximate the following amounts: 1-14 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. a. If land in an area is increasing 6 percent a year, how long will it take for property values to double? About 12 years (72 / 6) b. If you earn 10 percent on your investments, how long will it take for your money to double? About 7.2 years (72 / 10) c. At an annual interest rate of 5 percent, how long will it take for your sav ings to double? About 14.4 years (72 / 5) 3. In 1998 , selected automobiles had an average cost of $12,000. The average cost of those same motor vehicles 10 years later is $16,000. What was the rate of increase for these items between the two time periods? ($16,000 - $12,000) / $12,000 = .3333 (33.33 percent) 4. How much should you deposit today to have $7,000 in five years if your investment earns a rate of 3% per annum ? 7000/(1.03)5 = $6,038.26 5. The B enevolent Company has agreed to lend you funds to complet e the last year of your degree. The Company will lend you $2,400 today, if you agree to repay a lump sum of $4,000 four years from now. What is the approximate annual rate of interest that Benevolent is charging you? (Obj. 3) $2400 = 400 0 (DF i%, 4 ); Solution: I% = 14% 6. How long will it take to double your money with a growth rate of 5 percent and 12 percent respectively? (Obj. 3) 1) 72/5 = 14.4 Years. 2) 72/12 = 6 Years. 7. You discover $40,000 under your pillow, which can be invested at a rate of 18% per year . If you spend $11,435 per year, how long will the money last? (Obj. 3) $40,000 = $11,435 (PVAF 18%, n) or $40,000 = $11,435 x ((1 -1/1.18n)/.18) and solve for n Solution n= 6 years. 8. What annual p ayment would be require d to pay off a four year, $20,000 loan if the interest rate be ing charged is 7%? (Obj. 3) Payments = [$20,000 / (PVAF 4, 7%)] = $20,000 / 3 .387 = $5905 9. You have $100,000 to purchase a 20 -year annuity at 5 percent. What will be the annual paymen t from the annuity? $100,000 = Payment x PVA factor (Exhibit 1B -4) and Payment = $100,000 ÷ 12.462 = $8,024. 1-15 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. 10. Using time value of money tables, calculate the following: a. The future value of $450 six years from now at 7 percent. $450  1.501 = $675 .45 b. The future value of $800 saved each year for 10 years at 8 percent. $800  14.487 = $11,589.60 c. The amount that a person would have to deposit today (present value) at a 6 percent interest rate in order to have $1,000 five years from now. $1,000  .747 = $747 d. The amount that a person would have to deposit today in order to be able to take out $500 a year for 10 years from an account earning 8 percent. $500  6.710 = $3,355 11. Elaine Romberg prepares her own income tax return each year. A tax preparer would charge her $60 for this service. Over a period of 10 years, how much does Elaine save from preparing her own tax return (assume that she earn s 6 percent on a savings account)? $60  13.181 = $790.86 12. You have $800 in a savings account w hich earns 6% interest compounded annually. How much additional interest would you earn in 2 years if you moved the $800 to an account which earns 6% compounded semi -annually? Annual compounding $800 (1.06)2 = $898.88 Semi -annual compounding $800 (1 + .06 /2)2X2 = $900.41 Diff erence = $1.53 13. What is the future value of $20,000 received in 10 years if it is invested at 6% compounded annually for the next six years and at 5% compounded semi -annually for the remaining four years? FV = $20,000 (FV 6, 6%)(FV 4, 5%) = $34, 566.56 14. Your parents have promised to give you a graduation present of $5,000 when you graduate in four years . If interest rates stay at 6% compounded annually for the next four years, how much is this money wor th in today’s dollars? PV = $5,000 ( 0.792) = $3,960 FINA NCIAL PLANNING ACTIVITIES 1. Using Web sites such as www.canadianfinance.com , www.advocis .ca, www.quickent.ca, and search engines, obt ain information about commonly suggested actions related to various personal financial planning decisions. What are some of the best sources of information on the Internet to assist you with financial planning? An extensive amount of personal finance infor mation is available on the Internet. Students should also be referred to the end of each chapter for some of the most useful Web sites. 1-16 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. 2. Survey friends, relatives, and others to determine the process they use when making financial decisions. How do these people measure risk when making financial decisions? This activity can be beneficial to both students and to whom they talk. Be sure students do not ask questions that are too personal. It can be helpful to have students ask questions such as “What do you believe are the main financial problems faced by individuals and families?” or “How should risk be considered when selecting an investment?” With this format, the people being interviewed do not feel pressured into talking about their personal situations. 3. Prepare a list of financial planning specialists (investment advisors, credit counsellors, insurance agents, real estate brokers, tax preparers) in your community who can assist people with personal financial planning. Prepare a list of questions that might be asked of these financial planning professionals by (a) a young person just starting out on his or her own, (b) a young couple planning for their children’s education and for their own retirement, and (c) a person nearing retirement. Refer students to page 7 in the text as well as Appendix 1B. These references provide an extensive basis for obta ining information regarding many aspects of financial planning. Point out to students the impo rtance of being able to find that answer to a question rather t han trying to learn everything since various factors (laws, economic conditions, and personal situations) change quite frequently. 4. Create one short -term goal and one long -term goal for people in these life situations: (a) a young single person, (b) a single parent with an eight -year-old child, (c) a married person with no children, and (d) a retired person. Be sure students consider life situation, opportunity costs, and other factors. Differences among the groups mentioned will relate to their values, f inancial needs, and goals. These factors will influence how money is spent, saved, borrowed, and invested as well as the trade -offs that are present with every financial decision. Financial needs are different for people with children than people without children, and the risk associated with a decision investment is different for a young person with few financial responsibilities than a retired person with no other income source. 5. Ask friends, relatives, and others how their spending, saving, and borrowi ng activities changed when they decided to continue their education, change careers, or have children. This activity will provide students with an opportunity to better understand the impact of changing life situations on personal financial planning. 6. Use library resources or Web sites to determine recent trends in interest rates, inflation, and other economic indicators. Information about the Consumer Price Index (measuring changes in the cost of living) may be obtained at www.statcan.com. Report how thi s economic information might affect your financial planning decisions. This activity can help students appreciate the influence of the overall economy on personal financial decisions. Exhibit 1 -6 provides specific examples for this activity. Students may a lso ask people questions such as “How do higher consumer prices and interest rates affect the financial situation and decisions of people in our society?” 7. What actions would be necessary to compare a financial planner that advertises “One Low Fee Is Charged to Develop Your Personal Financial Plan” and one that advertises “You Are Not Charged A Fee, My Services Are Covered By The Inves tment Company for Which I Work”? Students should consider the reputation of the organizations for which the financial plan ners work. In addition, students should consider the questions listed in Appendix 1A of this chapter. 8. What is the relationship between current interest rates and financial opportunity costs? Using time 1-17 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. value of money calculations, state one or more goal s in terms of an annual savings amount and the future value of this savings fund. This activity can help students to start to apply the skills associated with goal setting and time value of money. Students should be encouraged to develop specific goals tha t can be measured using future value and present value calculations. 9. Visit software retailers to obtain information about the features and costs of various personal financial planning activities. Information about programs such as Microsoft Money and Qu icken may be obtained on the Internet. This assignment can assist students with developing an understanding of using the Internet and software for planning and implementing personal financial goals. LIFE SITUATION CASE Triple Trouble for the “Sandwich Gen eration” 1. What actions have Fran & Ed s taken that would be considered to be wise financial planning choices? Wise financial actions by the Blakes include funds set aside for the education of their children and deposits to a retirement fund. 2. What area s of financial concern do Fran & Ed face? What actions might be appropriate to address these concerns? The financial burdens of raising children and paying for their education, the care of aging parents, and setting aside funds for retirement. 3. Using tim e value of money calculations (tables in Appendix 1B), compute the following: a. At 9 percent, what would be the value of the $ 52,000 education funds in three years? $52,000  1.295 = $67,340 or use the formula $52,000 ( 1.09)3 = $67,341.51 b. If the cost of long term care is increasing at 6 percent a year, what will be the approximate monthly cost for Fran’s mother eight years from now? $4,050  1.594 = $6,455.70 or use the formula $4,050(1.06 )8 = $6,455.09 c. Fran and Ed plan to deposit $ 2,500 a year t o their RRSPs for 35 years. If they earn an average annual return of 7 percent, what would be the value of their RRSPs after 35 years? $2,500  ( (1.0735 – 1) / .07) = $345,592,20 Continuous Case 1. Jamie Lee’s short term financial goal is to pay off the credit card in the year. The intermediate goals Jamie has are to save enough for her cupcake café in 5 years a nd having her own apartment. The short -term goal is specific in the amount paid but the time horizon is dependent on her not using the card anymo re. The intermediate goal is measurable (saving for business) since it has a specific savings amount of $1,800 a year and time horizon for 1-18 Copy right © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instructor’s Manual for Kapoor et al. Personal Finance 7CE. achievement. The other intermediate goal is dependent on a lot of factors such as her ability to save and market of the real estate industry and finding an affordable place. 2. Jamie should investigate the market around the business of her interest . Creat ing a business plan would be wise as it would give her something to work on. Having an idea of the costs associa ted wi th running a business is pretty important to understand. Failing in business is usually caused by a lack of planning. A simple solution for her would be to use the emergency funds to pay off the credit card immediately and save on the high interest charg es. The interest earned in the emergency fund is likely taxable and low whereas the interest paid on the credit card is not deductible and high. After pay ing it off, add the $50 monthly to the emergency fund. 3. Jamie has already understood that by tryin g to achieve her goal of her business and school she will have to forego a social life. Another thing she is foregoing is her own apartment in the short term in order to achieve her intermediate goal. 4. If Jamie is depositing $1,800 annually (assuming no rmal annuity) for 5 years and earning 1% annually she would have $1,800 x ( (1.015 – 1) /.01) = $9,181.81. If the money were deposited equally in monthly amounts of $150 (assume at end of 1st month) then she would have: $1800/12 = $150 a month and we now have to use an effective monthly rate in our formula so EMR = (1.01)1./12 – 1= 0.000829538 and the number of payments (n) now is 12x5 =60 FV = $150 ((1.00082953860 -1 ) / 0/000829538) =$9,223.82 2-1 Copyright © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instruct or’s Manual for Kapoor et al. Personal Finance 7CE. CHAPTER 2 MONEY MANAGEMENT STRATEGY: FINANCIAL STATEMENTS AND BUDGETING CHAPTER OVERVIEW Successful money management is based on organized financial records, accurate personal financial statements, and effective budgeting. This chapter offers a discussion of the importance and type of financial documents. This is followed by an explanation of the components and procedures for preparing personal financial statements —the balance sheet and the cash flow statement. Next, the chapter covers the basics of develo ping, implementing, and evaluating a budget. Finally, savings techniques for achieving financial goals are discussed. LEARNING OBJECTIVES CHAPTER SUMMARY After studying this chapter, students will be able to: Obj. 1 Recognize the relationships among finan cial documents and money management activities. Successful money management requires effective coordination of personal financial records, personal financial statements, and budgeting activities. Obj. 2 Create a system for maintaining personal financial r ecords. An organized system of financial records and documents is the foundation of effective money management. This system should provide ease of access as well as security for financial documents that may be impossible to replace. Obj. 3 Develop a perso nal balance sheet and cash flow statement. A personal balance sheet, also known as a net worth statement, is prepared by listing all items of value (assets) and all amounts owed to others (liabilities). The difference between your total assets and your tot al liabilities is your net worth. A cash flow statement, also called a personal income and expenditure statement, is a summary of cash receipts and payments for a given period, such as a month or a year. This report provides data on your income and spendin g patterns. Obj. 4 Create and implement a budget. The budgeting process involves four phases: (1) assessing your current personal and financial situation; (2) planning your financial direction by setting financial goals and creating budget allowances; (3) implementing your budget; and (4) evaluating your budgeting program. Obj. 5 Calculate savings needed to achiev e financial goals. Future value and present value calculations may be used to compute the increased value of savings for achieving financial goals. 2-2 Copyright © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instruct or’s Manual for Kapoor et al. Personal Finance 7CE. INTRODUCTORY ACTIVITIES • Ask students to comment on the ope ning case for the chapter. • Point out the learning objectives in an effort to highlight the key points in the chapter. • Ask students to provide examples of problems that could result from not h aving a definite system for storing personal financial records and documents. • Point out common methods of budgeting that help a household achieve financial goals and prevent money problems. CHAPTER 2 OUTLINE I. Planning for Successful Money Management A. Opportunity Cost and Money Management B. Components of Money Management II. A System for Personal Financial Records III. Personal Financial Statements for Measuring Financial Progress A. The Personal Balance Sheet: Where Are You Now? B. The Cash Flow Stat ement: Where Did Your Money Go? C. Evaluating Your Financial Position IV. Budgeting for Skilled Money Management A. Starting the Budgeting Process B. Characteristics of Successful Budgeting V. Savings Techniques to Achieve Financial Goals A. Selecting a Savings Technique B. Calculating Savings Amounts C. Two -Income Households 2-3 Copyright © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instruct or’s Manual for Kapoor et al. Personal Finance 7CE. CHAPTER 2 LECTURE OUTLINE Instructional Suggestions PLANNING FOR SUCCESSFUL MONEY MANAGEMENT • Money management refers to the day -to-day financial activities necessary to handle current personal economic resources while working toward long -term financial security. Opportunity Cost and Money Management • Trade -offs are associated with every spending, saving, borrowing, and investing decision. Opportunity costs may be viewed in terms of both personal and financial resources. Time spent studying, working, or shopping cannot be used for other activities. Money allocated for one purpose cannot be used for another. • Text Highlight: A list points out trade -offs associated with money management activities and decisions. Compo nents of Money Management • Personal financial records, financial statements, and spending plans (budget) are the foundation for planning and implementing money management activities. • Concept Check 2 -1 A SYSTEM FOR P ERSONAL FINANCIAL RECORDS • Organized money management requires a system of financial records including the following categories: 1. personal and employment records 2. money management records 3. tax records 4. financial services records 5. credit records 6. consumer purchase and automobile records 7. housing records 8. insurance records 9. investment records 10. estate planning and retirement records • Exercise: Have students suggest methods that could be used to organize and quickly access personal financial documents and r ecords. • Concept Check 2 -2 2-4 Copyright © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instruct or’s Manual for Kapoor et al. Personal Finance 7CE. PERSONAL FINANCIAL STATEMENTS FOR MEA SURING FINANCIAL PROGRESS • A personal balance sheet and cash flow statement provide information about a person’s or household’s current financial position and a summary of current incom e and spending. The Personal Balance S heet: Where Are You Now? • A balance sheet , also known as a net worth statement or statement of financial position , specifies what you own and what you owe. • Items of value minus amounts owed equals net worth. • Assets , the first item on the balance sheet, are cash and other property that has a monetary value. • Discussion Question: How accurate is a balance sheet for measuring the financial progress of an individual or household? • Liquid assets are cash and items of va lue that can easily be converted into cash. • Real estate includes a home, condominium, vacation property, or other land that a person or family owns. • Personal possessions are the major portion of assets for most families. • Investment assets consist of money set aside for long - term financial needs. • Liabilities are amounts owed to others but do not include items not yet due, such as next month’s rent. • Current liabilities are debts that must be paid within a short time, usually less than a year. • Long -term liabil ities are debts that are not required to be paid in full until more than a year from now. • Your net worth is the difference between your total assets and your total liabilities: Assets - Liabilities = Net worth • The balance sheet of a business is usually exp ressed as: Assets = Liabilities + Net worth • Insolvency is the inability to pay debts when they are due; it occurs when a person’s liabilities far exceed his or her available assets. The Cash Flow Statement: Where Did Yo ur Money Go? • Cash flow is the actual inflow and outflow of cash during a given time period. • A cash flow statement is a summary of cash receipts and payments for a given period, such as a month or a year. • Income is the inflows of cash to an individual or a household. For most people, the main source of income is money received from a job. 2-5 Copyright © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instruct or’s Manual for Kapoor et al. Personal Finance 7CE. • Cash payments for living expenses and other items make up the second component of a cash flow statement. • Fixed expenses are payments that do not vary from month to month. • Variable expenses are flexible paymen ts that change from month to month. • The difference between your income and your cash outflows can be either a positive ( surplus ) or negative (deficit ) cash flow. A deficit exists if more cash goes out than comes in during a month. This amount must be made up by withdrawals from savings or borrowing. • Take -home pay or disposable income is a person’s earnings after deductions for taxes and other items. • Discretionary income is money left over after payment for necessities such as housing and food has been made . Analyzing Your Cu rrent Financial Situation • A person or household experiences financial improvement if net worth increases over time. • Debt ratio —liabilities divided by net worth —may be used to indicate a person’s financial situation; a low debt ratio i s desired. • Current ratio —liquid assets divided by current liabilities —how well a person will be able to pay upcoming debts. • Liquidity ratio —liquid assets divided by monthly expenses —indicates the number of months that expenses can be paid if an emergency a rises. • Debt -payment ratio —monthly credit payments divided by take -home pay —provides an indication of how much of a person’s earnings goes for debt payments (excluding a home mortgage). • Savings ratio —amount saved each month divided by gross income —financia l experts recommend a savings rate of about 10 percent. • Discussion Question: What information does a cash flow statement provide that is not available on a personal balance sheet? • Exercise: Have students list all the sour ces of income (cash inflows available for spending) for people in our society. • Discussion Question: What relationship exists between the balance sheet and cash flow statement? • Concept Check 2 -3 BUDGETING FOR SKILLED MONEY MANAGEMEN T • A budget, or spending plan , is necessary for successful financial planning. The main purposes of a 2-6 Copyright © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instruct or’s Manual for Kapoor et al. Personal Finance 7CE. budget are to help you 1. live within your income 2. spend your money wisely 3. reach your financial goals 4. prepare for financial emergencies 5. develop wise financial management habits Start ing the Budgeting Process • A personal balance sheet is an effective scorecard for assessing personal economic progress. • Your lifestyle is how you spend your time and money and is strongly influenced by your career, family, and perso nal values. • Discussion Question: Is every individual and household forced to budget, with some more organized and planned than others? • Exercise : Have students suggest common financial goals. • Text Highlight: Exhibit 2 -6 provides budget share of major spending category by income quintile • Exercise: Have students allocate budget categories (using percentages) for different household situations. Step 1. Setting Financial G oals • Financial goals are plans for future activities that require you to plan spe nding, savings, and investing. • How much you budget for various items will depend on current needs and plans for the future. Sources that can assist with planning your spending include:  your cash flow statement  sample budgets from government reports  article s in personal financial planning magazines  estimates of future income and expected inflation Step 2. Estimating Income • Available money should be estimated for a given time period —such as a month. • Income variations (due to seasonal work or sales commissi ons) should be based on the recent past and realistic expectations. Step 3. Budgeting E mergency Fund and Savings • An emergency fund and savings for irregular payments should be first set aside to avoid not having anything left for savings. Step 4. Budgetin g Fixed Expenses • Definite obligations (rent, mortgage, and credit payments) should be allocated first. • Assigning amounts to spending categories can be based on your cash flow statement, government data, current magazine articles, and estimates of future income and expenses. 2-7 Copyright © 2018 McGraw -Hill Education Ltd. All Rights Reserved. Instruct or’s Manual for Kapoor et al. Personal Finance 7CE. • A “spending diary” of past expenses can also assist with this task. Step 5. Bu dgeting Variable Expenses • Planning for variable expenses is more difficult than fixed expenses. • These expenses will fluctuate based on household situation, time of the year, health, economic conditions, and other factors. Step 6. R ecording Spending Amounts • A budget variance is the difference between amount budgeted and the actual amount received or spent. A deficit exists when actual spending exceeds plann ed spending. A surplus is when actual spending is less than planned spending. Step 7. Reviewing Spending and Saving Patterns • The results of your budget may be obvious —having extra cash, falling behind in payments. Or the results may need to be reviewe d in detail to determine areas of needed changes. The most common overspending areas are entertainment and food, especially away - from -home meals. • At this point of the budgeting process, you should also evaluate, reassess, and revise your financial goals. Characteristic s of Successful Budgeting • A successful budget should be:  well-planned  realistic  flexible  clearly communicated • Discussion Question: What factors can contribute to unsuccessful budgeting? How can these situations be avoided? • Concept Check 2 -4 SAVING T O ACHIEVE FINANCIAL GOALS • Common reasons for saving include:  to set aside money for irregular or unexpected expenses  to replace expensive items  to buy special items  to provide for long -term expenses  to earn interest for additional income Selecting a Savings Technique • Since most people find saving difficult, financial advisers suggest several methods:  write a check each payday and deposit it in a distant financial institution  use payroll deduction • Current Example: People unable to save regularly are usually:  individuals without specific savings goals  people who always seem to use up savings for unexpected expenses  those who overuse credit  people who buy to have the same things as others