Lawrence J. Gitman, Ph.D., CFP® – San Diego State … Content... · For your course and learning...

Lawrence J. Gitman, Ph.D., CFP® – San Diego State University

Michael D. Joehnk, Ph.D., CFA – Arizona State University

Randall S. Billingsley, Ph.D., FRM, CFA – Virginia Tech

PERSONAL FINANCIAL PLANNING

12th Edit ion

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Personal Financial Planning, Twelfth Edition

Lawrence J. Gitman, Michael D. Joehnk, Randall S. Billingsley

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iv Brief Contents

Preface, ixAbout the Authors, xx

PART 1 FOUNDATIONS OF FINANCIAL PLANNING, 1Chapter 1 Understanding the Financial Planning Process, 2Chapter 2 Developing Your Financial Statements and Plans, 39Chapter 3 Preparing Your Taxes, 75

PART 2 MANAGING BASIC ASSETS, 108Chapter 4 Managing Your Cash and Savings, 109Chapter 5 Making Automobile and Housing Decisions, 141

PART 3 MANAGING CREDIT, 186Chapter 6 Using Credit, 187Chapter 7 Using Consumer Loans, 224

PART 4 MANAGING INSURANCE NEEDS, 254Chapter 8 Insuring Your Life, 255Chapter 9 Insuring Your Health, 289Chapter 10 Protecting Your Property, 320

PART 5 MANAGING INVESTMENTS, 349Chapter 11 Investment Planning, 350Chapter 12 Investing in Stocks and Bonds, 394Chapter 13 Investing in Mutual Funds and Real Estate, 433

PART 6 RETIREMENT AND ESTATE PLANNING, 472Chapter 14 Planning for Retirement, 472Chapter 15 Preserving Your Estate, 509

Appendix A Table of Future Value Factors, 533Appendix B Table of Future Value Annuity Factors, 533Appendix C Table of Present Value Factors, 544Appendix D Table of Present Value Annuity Factors, 544Appendix E Using a Financial Calculator, 545

Index, 547

Brief Contents


Contents v

Preface, ixAbout the Authors, xx

PART 1 FOUNDATIONS OF FINANCIAL PLANNING, 1

CHAPTER 1 Understanding the Financial Planning Process, 2The Rewards of Sound Financial Planning, 2

The Personal Financial Planning Process, 7

WORKSHEET 1.1 Summary of Personal Financial Goals, 14

From Goals to Plans: A Lifetime of Planning, 14

WORKSHEET 1.2 Analyzing the Benefit of a Second Income, 20

The Planning Environment, 27

What Determines Your Personal Income?, 31

CHAPTER 2 Developing Your Financial Statements and Plans, 39Mapping Out Your Financial Future, 39

The Balance Sheet: How Much Are You Worth Today?, 41

WORKSHEET 2.1 Balance Sheet for Bob and Cathy Case, 43

The Income and Expense Statement: What We Earn and Where It Goes, 46

WORKSHEET 2.2 Income and Expense Statement for Bob and Cathy Case, 48

Using Your Personal Financial Statements, 52

Cash In and Cash Out: Preparing and Using Budgets, 56

WORKSHEET 2.3 The Cases’ Annual Cash Budget by Month, 58

WORKSHEET 2.4 The Cases’ Budget Control Schedule for January, February, and March 2011, 63

The Time Value of Money: Putting a Dollar Value on Financial Goals, 63

CHAPTER 3 Preparing Your Taxes, 75Understanding Federal Income Tax Principles, 75

It’s Taxable Income That Matters, 79

Calculating and Filing Your Taxes, 85

WORKSHEET 3.1 2008 Tax Return (Form 1040EZ) for Akira Takyama, 90

WORKSHEET 3.2 2008 Tax Return (Form 1040) for the Trimbles, 92

Other Filing Considerations, 96

Effective Tax Planning, 101

PART 2 MANAGING BASIC ASSETS, 108

CHAPTER 4 Managing Your Cash and Savings, 109The Role of Cash Management in Personal Financial Planning, 109

Today’s Financial Services Marketplace, 111

A Full Menu of Cash Management Products, 114

Maintaining a Checking Account, 122

WORKSHEET 4.1 An Account Reconciliation Form: William Torgeson’s May 2010 Statement, 128

Establishing a Savings Program, 129

Contents


vi Contents

CHAPTER 5 Making Automobile and Housing Decisions, 141Buying an Automobile, 141

Leasing a Car, 150

WORKSHEET 5.1 Comparing Elaine Hodges’ Automobile Lease versus Purchase Costs, 153

Meeting Housing Needs: Buy or Rent?, 154

WORKSHEET 5.2 Rent-or-Buy Cost Comparison, 158

How Much Housing Can You Afford?, 159

WORKSHEET 5.3 Home Affordability Analysis for the Ursula and Ernest Schmidt Family, 166

The Home-Buying Process, 168

Financing the Transaction, 173

WORKSHEET 5.4 Mortgage Refinancing Analysis for the D’Angelo Family, 180

PART 3 MANAGING CREDIT, 186

CHAPTER 6 Using Credit, 187The Basic Concepts of Credit, 187

WORKSHEET 6.1 How’s My Credit?, 194

Credit Cards and Other Types of Open Account Credit, 195

Obtaining and Managing Open Forms of Credit, 205

Using Credit Wisely, 214

CHAPTER 7 Using Consumer Loans, 224Basic Features of Consumer Loans, 224

Managing Your Credit, 232

WORKSHEET 7.1 Tracking Your Consumer Debt, 235

Single-Payment Loans, 236

Installment Loans, 241

WORKSHEET 7.2 To Borrow or Not to Borrow, 247

PART 4 MANAGING INSURANCE NEEDS, 254

CHAPTER 8 Insuring Your Life, 255Basic Insurance Concepts, 255

Why Buy Life Insurance?, 257

How Much Life Insurance Is Right for You?, 259

WORKSHEET 8.1 Determining the Klauders' Need for Life Insurance, 263

What Kind of Policy Is Right for You?, 265

Buying Life Insurance, 275

Key Features of Life Insurance Policies, 279

CHAPTER 9 Insuring Your Health, 289The Importance of Health Insurance Coverage, 289

Health Insurance Plans, 291

Health Insurance Decisions, 297

Medical Expense Coverage and Policy Provisions, 301

WORKSHEET 9.1 Health Insurance Checklist, 302

Long-Term Care Insurance, 308

Disability Income Insurance, 312

WORKSHEET 9.2 Estimating Disability Income Insurance Needs, 313


Contents vii

CHAPTER 10 Protecting Your Property, 320Basic Principles of Property Insurance, 320

Homeowner’s Insurance, 324

Automobile Insurance, 333

Other Property and Liability Insurance, 342

Buying Insurance and Settling Claims, 343

PART 5 MANAGING INVESTMENTS, 349

CHAPTER 11 Investment Planning, 350The Objectives and Rewards of Investing, 350

WORKSHEET 11.1 Determining the Amount of Investment Capital, 354

Securities Markets, 358

Making Transactions in the Securities Markets, 365

Becoming an Informed Investor, 371

Online Investing 376

Managing Your Investment Holdings, 381

WORKSHEET 11.2 Keeping Tabs on Your Investment Holdings, 387

CHAPTER 12 Investing in Stocks and Bonds, 394The Risks and Rewards of Investing, 394

Investing in Common Stock, 401

Investing in Bonds, 415

CHAPTER 13 Investing in Mutual Funds and Real Estate, 433Mutual Funds: Some Basics, 433

Types of Funds and Fund Services, 445

Making Mutual Fund Investments, 453

Investing in Real Estate, 461

PART 6 RETIREMENT AND ESTATE PLANNING, 472

CHAPTER 14 Planning for Retirement, 473An Overview of Retirement Planning, 473

WORKSHEET 14.1 Estimating Future Retirement Needs, 477

Social Security, 481

Pension Plans and Retirement Programs, 485

Annuities, 498

CHAPTER 15 Preserving Your Estate, 509Principles of Estate Planning, 509

Thy Will Be Done . . . , 516

WORKSHEET 15.1 A Checklist of Items to Keep in a Safe-Deposit Box, 523

Trusts, 527

Federal Unified Transfer Taxes, 531

Calculating Estate Taxes, 534

WORKSHEET 15.2 Computing Federal Estate Tax Due, 536

Estate Planning Techniques, 537


viii Contents

Appendix A Table of Future Value Factors, 543Appendix B Table of Future Value Annuity Factors, 543Appendix C Table of Present Value Factors, 544Appendix D Table of Present Value Annuity Factors, 544Appendix E Using a Financial Calculator, 545

Index, 547


Preface ix

“Economic Confidence Rebounds”“Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash”“Rally Spurs Stocks to ’09 Highs”“US Agrees to Rescue Struggling Citigroup”“Bonds Are Looking Better”“Manufacturing Tumbles Globally”“Rethinking Stocks’ Starring Role”“There’s No Such Thing as a ‘Safe’ Investment”“Small Stocks Hit 11-Month High”“Household Wealth Advances by 3.9%”

We’ve all seen these kinds of headlines. They highlight the ever-changing nature of the financial environment in which we live. And could there be a more dramatic example of this dynamic environment than the recent global financial crisis? The crisis offers a potent reminder that personal financial planning is as necessary as it is challenging. Careful planning allows us to adapt to and even thrive in response to changes in the financial environment and the associated changes in our own lives. This book, Personal Financial Planning, Twelfth Edition, provides the framework and tools for preparing personal financial plans that serve as road maps for goal achievement. Personal Financial Planning emphasizes the dynamics of the financial planning process by considering the impact of life changes—birth, marriage, divorce, job and career, and death.

Personal Financial Planning addresses all of the major financial planning issues and problems that individuals and families encounter. It is built around a model that links together all of the major elements of effective money management. All of the latest financial planning tools and techniques are discussed. This comprehensive text is written in a personal style that uses state-of-the-art pedagogy to present the key concepts and procedures used in sound personal financial planning and effective money management. The roles of various financial decisions in the overall personal financial planning process are clearly delineated.

The book serves individuals who are, or will be, actively developing their own personal financial plans. It meets the needs of instructors and students in a first course in personal financial planning (often called “personal finance”) offered at colleges and universities, junior and community colleges, professional certification programs, and continuing education courses. The experiences of individuals and families are used to demonstrate successes and failures in various aspects of personal financial planning. A conversational style and liberal use of examples and worksheets guide students through the material and emphasize important points. The benefits of the book’s readability accrue not only to students but also to their instructors.

MAJOR CHANGES IN THE TWELFTH EDITIONThe twelfth edition has been thoroughly updated to consider the lessons of the recent global financial crisis in terms of the most up-to-date techniques of contemporary personal financial planning. We emphasize that the key principles of personal finan-cial planning remain valid: save, diversify your investments, watch your expenditures, and borrow carefully. The twelfth edition reflects feedback from past users as well as

Preface


x Preface

nonusers, practicing financial planners, students, and our own research. It provides helpful new approaches, expanded coverage in certain areas, streamlined coverage in others, and enhanced pedagogy anchored by a state-of-the-art integrated learning system. The basic organizational structure, topical coverage, superior readability, and useful instructional aids that marked the success of the first 11 editions have been retained and extended. Important changes in this edition are described below, first as general changes and then as specific chapter-by-chapter changes.

Readers will note an obvious key change to the twelfth edition, which is the addition of Professor Randy Billingsley as an author. Randy is a finance professor at Virginia Tech. His research, consulting, and teaching deal with many personal finance topics. We welcome Randy to the author team and appreciate the fresh perspective he brings to it. Continuing users will recognize the positive impact that Randy had on this twelfth edition.

General Changes• The highly regarded Worksheets continue in this edition and, as with the previ-

ous edition, are also available online as part of the Gitman/Joehnk/Billingsley FinanceCentral product. Students have the option of using the Worksheets mul-tiple times and having some of the calculations within the Worksheets completed electronically. All end-of-chapter problems that can be solved using a given work-sheet have an identifying icon and provide the worksheet reference, which directs the student to its application.

• In addition to the Worksheets, Personal Financial Planning Software is available with each new text as part of FinanceCentral. Students will find that the chapter concepts, Worksheets, problems, and cases can be solved with the use of the soft-ware. The Personal Financial Planning Software should help students begin and continue their own financial planning.

• Web-based part-ending cases are included in the package, one for each of the six major parts of the textbook. These cases are provided online as part of FinanceCentral. They have been developed to challenge readers to integrate and develop plans with regard to the major topics covered in the corresponding part of the book.

• The book has been completely updated and redesigned to allow improved presen-tation of each of the text’s pedagogical features.

• The twelfth edition continues to place emphasis on using the Internet. Included are a number of features that either link students to relevant Internet sites or describe how the Internet can be incorporated into the personal financial planning process. The Money Online Internet feature can now be found on the text Web site at www.cengage.com/finance/gitman. Money Online exercises include eight to ten Web addresses followed by a brief paragraph that challenges the reader to go to the site and either research specific information or review the resources available there. All of the Web topics presented within the chapter are intended to reinforce—as well as expand—the reader’s practical grasp of the key concepts, tools, and techniques presented in the chapter. Some Money Online exercises incorporate “Just for Fun!” features, which include one to three Web addresses followed by brief paragraphs that direct the reader to interesting and often entertaining sites to obtain informa-tion, perform an activity, or answer specific questions.

Each chapter also includes a number of Smart Sites, marginal notes that direct students to the companion Web site (www.cengage.com/finance/gitman) for link-ing to the Internet listings that correspond to related topics discussed in the text.


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This element helps keep readers in touch with the Web as they read and study the chapter. In addition, many Web addresses are embedded in the text and exhibits. These Web links are included when referencing a specific company, information provider, or organization, and they provide the reader with a convenient way to learn more about the topic, obtain information, or make inquiries or transactions.

Another source of additional Internet insights is the Money in Action boxes (described in detail below); some of these features focus on technology and include descriptions and links to useful sites on the Internet. This edition’s empha-sis on the Internet is significant and widely present both in the chapter and in the end-of-chapter materials.

• Step-by-step use of a handheld financial calculator to make time value calcu-lations continues to be integrated into relevant discussions in this edition. To improve understanding, relevant keystrokes are highlighted in these demonstra-tions. Basics of the time value of money are introduced in Chapter 2, Developing Your Financial Statements and Plans, and Appendix E now explains how finan-cial calculators can be used to make time value calculations. The use of a finan-cial calculator is reinforced in later chapters, where the time value techniques are applied. For example, using a calculator to find the future value of a deposit given various compounding periods is shown in Chapter 4, Managing Your Cash and Savings, and calculating estimates of future retirement needs is demonstrated in Chapter 14, Planning for Retirement. The inclusion of calculator keystrokes should help the reader learn how to develop financial plans more effectively by using this important tool of the trade.

• The twelfth edition also includes one Money in Action feature for each chapter. Most of these features are new to this edition, some have been revised and updated from the previous edition, and all are drawn from recent articles in the popular press—providing both relevant and timely information. The Money in Action features address a variety of informative topics to help link the text discussions to actual financial planning ideas, experiences, practices, and events—all intended to fully engage readers in the personal financial planning process. The Money in Action features include Money and Happiness (Chapter 1), Small Ways to Save Big (Chapter 2), Finding the Right Tax Preparer for You (Chapter 3), Pros and Cons of Online Banking (Chapter 4), Online Ways to Save Money Buying Cars (Chapter 5), Choosing between a Credit and a Debit Card (Chapter 6), Watch Out for Predatory Lenders (Chapter 7), Filing a Life Insurance Claim (Chapter 8), Health Care Reform and You (Chapter 9), Keeping Your Homeowner’s Insurance Affordable (Chapter 10), How to Build a Portfolio When You’re Just Starting Out (Chapter 11), Investing Lessons from the Financial Crisis (Chapter 12), Choosing Mutual Funds for Your 401(k) Plan: Stars or Dogs? (Chapter 13), Is Your Pension Plan at Risk? (Chapter 14), and Having “The Talk” with Parents—About Estate Planning, That Is (Chapter 15). Each feature contains Critical Thinking Questionsthat can be used to improve reader understanding.

• The integrated learning system has been refined even more in this edition to help students better anchor their study to a set of chapter learning goals. Each chapter begins with a list of six numbered learning goals, LG1 through LG6. The learning goal numbers are tied to major chapter headings and restated and reviewed point by point in the end-of-chapter summary, financial planning exercises, and Critical Thinking Cases. Another element of this system is the Concept Check questions that appear at the end of each section of the chapter. As students read through the chapters, they can test their understanding of the material in each section. The most effective advanced pedagogical features


xii Preface

from the previous edition— marginal glossary, Exhibits and Worksheets, and end-of-chapter Financial Planning Exercises and Critical Thinking Cases—have been retained and improved as part of the integrated learning system. Also included at the end of each chapter is Applying Personal Finance—a feature that presents a challenging out-of-class exercise dealing with at least one of the main topics presented in the chapter.

Specific Chapter-by-Chapter ChangesBecause users often like to know where new material appears, the significant changes that have been made in the twelfth edition are summarized next.

Chapter 1 on understanding the financial planning process has been carefully revised to focus on the most important themes in the book. A new section on manag-ing your finances in tough economic times has been added in light of the recent finan-cial crisis. Special planning concerns have been moved from Chapter 2 to Chapter 1 to allow for a more integrated treatment of the topic. Thus, new emphasis is placed on special planning concerns such as job changes or loss, getting married, having children, the loss of a parent, and taking responsibility for dependent parents. All discussions—including Exhibits and the Go to Smart Sites and Financial Road Signsidebars—have been refreshed and updated. Sidebar material focuses on assessing current wealth and monitoring it in the future, how to start saving now, getting your financial act together, planning to repay student debt, planning for critical life events, and calculating the cost of a move.

Chapter 2 on developing your financial statements has been restructured, stream-lined, and updated. Calculator keystrokes and time lines continue to appear in dis-cussions of the time value of money. Sidebar discussions include tips for eliminating documents that you don’t need and developing a budget.

Chapter 3 on preparing your taxes has been completely updated to reflect the changes in tax laws, rates, procedures, and forms in effect at the time we revised the chapter. The material emphasizes current tax practices and explains the nature of progressive tax rates, average tax rates, itemized deductions, IRAs, and other types of taxes. The chapter continues to provide readers with sidebar advice on finding commonly missed tax deductions, avoiding common tax-form errors, tax tips, and audit triggers.

Chapter 4 on managing your cash and savings has been revised and updated to consider additional financial instruments as well as issues related to the recent global financial crisis. For example, the change in FDIC deposit insurance during the financial crisis is discussed, and the potential of using I savings bonds to manage inflation risk is considered. The chapter includes the latest return and institutional data, accurately reflecting current market rates and structure. Calculator keystrokes continue to be shown in the discussion of earning interest on your money. Practical sidebar discussions of protecting your personal financial information, tips for safe online banking, making the best use of a safe-deposit box, choosing a new bank, and determining interest on deposits are included in the chapter.

Chapter 5 on making automobile and housing decisions considers new market developments and sources of information. The automobile affordability section includes a discussion of hybrid cars. The information on using the Internet to shop for and buy a car has been updated. The discussion of how to meet housing needs


Preface xiii

considers the recent crisis in real estate markets. An explanation of the nature of real estate short sales has been added in light of their increased use during the financial crisis. Sidebar discussions focus on tips for saving money on a new car purchase, a checklist for negotiating an auto lease, how to decide whether you should buy or lease your next car, questions to answer before buying a home, and top home remodeling project paybacks.

Chapter 6 on consumer credit and credit cards focuses on the positive aspects of using credit and what it takes to build and maintain a strong credit history. New material explores the implications of the Credit Card Act of 2009 for consumers. Emphasis is placed on how FICO scores are used, what goes into them, and steps you can take to build up your own FICO score. Sidebar discussions consider the key determinants of a borrower’s ability to repay a loan, questions to answer before choosing a credit card, effective uses of debit cards, how to keep up your FICO score, how to decide if you should switch credit cards, and key sources of identity theft.

Chapter 7 on using consumer loans analyzes the benefits and uses of consumer credit for both single-payment and installment loans. The discussion concentrates on the key issues surrounding loan provisions, finance charges, and other credit consid-erations. The discussion of student loans has been updated to provide more detail about the terms and provisions of federally sponsored student loans. Sidebars exam-ine how to shop for an auto loan, pitfalls of lending to family or friends, potentially misleading “no interest, no payments” deals, and what lenders look for in reviewing loan applications.

Chapter 8 on insuring your life has been updated. Practical sidebar material appear-ing in this chapter includes questions to ask before buying insurance, the effect of insurance company ownership on premiums, expectations for a life insurance medi-cal exam, unethical insurance sales practices, and how to understand an insurance illustration. Descriptions of Internet resources and advice on buying life insurance online have been updated.

Chapter 9 on insuring your health has been updated to include a discussion of how health care reform could affect the growing cost of health insurance and your insur-ance options. Practical sidebar material includes sources of student health insurance, data on workers taking health care benefits offered by employers, how to save on health insurance, how to choose a health insurance plan, tips for buying long-term care insurance, and tips for reducing the cost of disability income insurance.

Chapter 10 on protecting your property has added a discussion of the challenge of keeping up your insurance in a recession. Practical sidebar discussions offer data on commonly stolen cars, and strategies for avoiding liability as well as advice on what to do when a claim is denied. We continue to emphasize practical advice for reducing homeowner’s insurance premiums, filing auto insurance claims, preventing auto theft, strategies to avoid liability, and obtaining discounts for auto safety and good driving.

Chapter 11 on investment planning is thoroughly revised and updated to consider the impact of the recent financial crisis and key ongoing developments in this area. The material on securities markets reflects recent mergers between the New York Stock Exchange, Euronext, and the American Stock Exchange as well as the merger of NASDAQ and OMX AB. The chapter also now includes exchange traded funds (ETFs) in the list of popular investment vehicles and examines the performance of real estate


xiv Preface

during the recent financial crisis. Updated information is also provided on the perfor-mance of major U.S. stock and bond indices. Sidebars consider the relationship between equity risk premiums and the business cycle, trade execution using electronic commu-nications networks (ECNs), high-frequency (flash) trading, types of limit orders, char-acteristics of successful online investing, and common portfolio management mistakes.

Chapter 12 on investing in stocks and bonds continues to emphasize the risk–return characteristics of these securities. As part of the revision process, all the return behav-ior and security performance material for both stocks and bonds has been updated to reflect the financial crisis. Indeed, a new Money in Action box examines the les-sons of the crisis for investing. The material on agency and mortgage bonds has been expanded in light of their prominent role in the financial crisis. Similarly, the potential role of the bond rating agencies in the financial crisis is noted. Sidebars provide guide-lines for effective investing, data on the largest market value companies, investing myths, how to use equity analyst forecasts, and the use of bonds in a portfolio.

Chapter 13 on investing in mutual funds has expanded the coverage of exchange traded funds and provides updated data on the performance of real estate investment trusts (REITs). All market statistics and performance data have been updated. Sidebars discuss how to choose between exchange traded funds and mutual funds, key rules for mutual fund investors, the use of life-cycle funds, and what to look for in a REIT.

Chapter 14 on planning for retirement is thoroughly updated, and discussion of each of the various retirement/pension programs (including Social Security, company-sponsored plans, and self-directed programs) reflects the latest guidelines, limitations, and requirements, including those contained in the Pension Protection Act of 2006. Also, new material has been added on Section 529 education savings plans. Sidebars discuss tips for making the most of retirement planning, retirement plan reviews, determining whether you are in an integrated pension plan, the nature of the Pension Benefit Guaranty Corporation, the proper care and feeding of your 401(k) plan, and how to determine if an annuity fits your needs.

Chapter 15 on preserving your estate has been updated to reflect the most recent estate tax laws and tax rates. The impact of the uncertainy introduced by the pos-sible elimination of the estate tax exclusion in 2010 is considered. The Worksheet for computing federal estate tax due has been changed to reflect current rules. Valuable links include a comprehensive guide on what to do when a loved one dies and addi-tional information on ethical wills and trusts. Useful sidebar material covers common (incorrect) excuses for not writing a will, tips for choosing a guardian for children, will-writing pointers, and how to use trusts effectively.

ORGANIZATION OF THE BOOKPersonal Financial Planning is divided into six parts. Part 1 presents the foundations of personal financial planning, beginning with the financial planning process and then covering financial statements and plans and also taxes. Part 2 concerns the management of basic assets, including cash and savings instruments, automobiles, and housing. Part 3 covers credit management, including the various types of open account borrowing and consumer loans. Part 4 deals with managing insurance needs and considers life insurance, health care insurance, and property insurance. Part 5 covers investments—including stocks, bonds, mutual funds, exchange traded funds, and real estate—and how to make transactions in securities markets. Part 6 is devoted


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to retirement and estate planning. Web-based part cases and CFP® exam questions are available online as part of the Gitman/Joehnk/Billingsley CengageNOW product.

PEDAGOGYEach chapter opens with six learning goals that link the material covered to specific learn-ing outcomes and, as noted earlier, anchor the text’s integrated learning system. Then, at the end of each of the major sections are Concept Check questions that allow readers to confirm their understanding of the material before moving on to the next section.

Each chapter contains a Money in Action feature that consists of brief discus-sions of relevant personal financial planning material that serve to enrich the topical coverage. At the end of each of these features are Critical Thinking Questions. Also in each chapter are several Financial Road Signs, which provide important hints or suggestions to consider when implementing certain parts of a financial plan, such as “Developing a Budget,” “Tips for Safe Online Banking,” “Tips for Saving Money on Your Next New Car Purchase,” “Should You Buy or Lease Your Next Car?,” “Is It Time to Buy a Home?,” “Top 10 Home Remodeling Project Paybacks,” “Using a Debit Card Signature Transaction: The Best of Both Worlds,” “Shopping for an Auto Loan,” “Buying Life Insurance,” “Unethical Insurance Sales Practices,” “Student Health Insurance: Don’t Leave Home without It,” “How to Choose a Health Insurance Plan,” “Tips for Buying Long-Term Care Insurance,” “7 Tips for Reducing the Cost of Disability Income Insurance,” “Keeping Up Your Insurance in a Recession,” “Strategies to Avoid Liability,” “Equity Risk Premiums and the Business Cycle,” “High-Frequency Trading,” “Successful Online Trading,” “On the Road to Effective Investing,” “Equity Analyst Forecasts—Use with Caution,” “ETFs or Mutual Funds?,” “Key Rules for Mutual Fund Investors,” “Life-Cycle Funds: The One-Stop Shopping Solution?,” “What to Look for in a REIT,” “Proper Care and Feeding of Your 401(k),” “Does an Annuity Fit Your Needs?,” “Writing a Will—No Excuses,” and “Choosing a Guardian for Children.”

Worksheets, which are typically filled in and discussed, are included to simplify demonstration of various calculations and procedures and to provide students with helpful materials they can use in managing their own personal finances. The work-sheets are numbered for convenient reference in end-of-chapter problems, and they include descriptive captions. Numerous exhibits, each including a descriptive caption, are used throughout to more fully illustrate key points in the text. Also included in each chapter is a running glossary that appears in the margin and provides brief defi-nitions of all highlighted terms in the accompanying text.

Most chapters contain discussions and illustrations of how both the Internet and the personal computer can be used in various phases of personal financial plan-ning. In addition, each chapter contains as many as eight Smart Sites, each of which describes specific Internet sites that deal with the topic(s) under discussion and enable the reader to broaden his or her understanding of key financial planning concepts. End-of-chapter material includes a Summary, which restates each learning goal and follows it with a brief paragraph that summarizes the material related to it. The next element is Financial Planning Exercises, which include questions and problems that students can use to test their grasp of the material. That’s followed by Applying Personal Finance, which generally involves some type of outside project or exercise. Two Critical Thinking Cases that highlight the important analytical topics and con-cepts are also supplied. Following the cases is the Money Online element that directs students to links to helpful Web addresses, home page descriptions, and a series of Web-related interactive exercises.


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SUPPLEMENTARY MATERIALSBecause we recognize the importance of outstanding support materials to the instructor and the student, we have continued to improve and expand our supplements package.

Instructor SupplementsCengageNOWDesigned by the instructor for the instructor, CengageNOW for Finance is a reli-able, flexible, and easy-to-use online suite of services and resources. CengageNOW for Finance takes the best of current technology tools—including online homework management, an electronic test bank, and course support materials such as online quizzing—to support your course goals and save you significant preparation and grading time!

• Plan student assignments with an easy online homework management component.• Manage your grade book with ease.• Teach today’s student using valuable course support materials.• Reinforce student comprehension with Personalized Study.• Test with an electronic test bank.• Grade automatically for seamless, immediate results.

This powerful, fully integrated online teaching and learning system provides you with the ultimate in flexibility, ease of use, and efficient paths to success, delivering the results you want—NOW!

For more information, visit http://www.cengagenow.com today.

Instructor’s Manual and Test BankA comprehensive Instructor’s Manual has been prepared to assist the instructor. For each chapter, the manual includes

• An outline• Discussion of major topics• A list of key concepts• Solutions to all Concept Check questions, end-of-chapter Financial Planning

Exercises, and Critical Thinking Cases

The Test Bank has been revised, updated, and expanded. It includes true-false and mul-tiple-choice questions, as well as four to six short problems for nearly every chapter. The Instructor’s Manual has been revised by Peggy Ward at Wichita State University, and the Test Bank has been updated by Wayne Gawlik at Joliet Junior College.

Computerized Test BankA computerized version of the printed test bank is available in Windows Microsoft Word® featuring Cengage Learning’s computerized test bank program, ExamView. This program has many features that allow the instructor to modify test questions, select items by key words, and scramble tests for multiple class sections online. There is also the option to create your own questions or instructions and print out answer sheets. You can create and administer quizzes online using the Internet, local-area networks, or wide-area networks.

PowerPoint®

For instructors who enjoy working with computerized presentations, we have a com-plete lecture presentation in PowerPoint. Available to instructors on the text Web site, each chapter’s file consists of a general outline that includes key concepts and


Preface xvii

key figures and tables from the book. Instructors can easily modify the presentations using PowerPoint’s many features.

Student SupplementsGitman/Joehnk/Billingsley CengageNOW Web site—http://www.cengagenow.comThe Gitman/Joehnk/Billingsley CengageNOW site provides a wealth of tools using some of the most advanced technology features available in the personal financial planning course area—all integrated at one location and organized by chapter. The site includes assignable end of chapter homework, testing and the eBook. Please contact your Cengage Learning/South-Western sales representative for more details.

Personal Financial Planning SoftwareThe Personal Financial Planning software, available online as part of the Gitman/Joehnk/Billingsley FinanceCentral site, performs like many of the widely used com-mercially available software packages and is completely interactive. Best of all, it streamlines the record-keeping and problem-solving activities presented in the text. Most of the worksheets used in the text correspond with the software in order to provide assistance in applying some of the complex procedures, which range from preparing financial statements and budgets to managing investments and planning for retirement. In addition to various interactive calculations performed by the software, the program also contains cutting-edge applications that differentiate it from more generic personal financial planning software. These applications include graphing capabilities (with several of the time value and asset valuation computations) that allow the user to immediately see the impact of changes to the input variables.

Interactive WorksheetsInteractive Worksheets identical to those presented in the text are on the Gitman/Joehnk/Billingsley FinanceCentral site. Each Worksheet provides a logical format for dealing with some aspect of personal financial planning, such as preparing a cash budget, assessing home affordability, or deciding whether to lease or purchase an automobile. Providing worksheets electronically allows students to complete them multiple times for mastery, and many of the worksheets can actually be used to cal-culate figures needed to make financial decisions.

Product Support Web SiteThe product support Web site at www.cengage.com/finance/gitman includes relevant Internet exercises and URLs presented in the text along with supplements available for download to qualified instructors.

ACKNOWLEDGMENTSIn addition to the many individuals who made significant contributions to this book by their expertise, classroom experience, guidance, general advice, and reassurance, we also appreciate the students and faculty who used the book and provided valuable feedback, confirming our conviction that a truly teachable personal financial plan-ning text could be developed.

Of course, we are indebted to all the academicians and practitioners who have created the body of knowledge contained in this text. We particularly wish to thank several people who gave the most significant help in developing and revising it. They


xviii Preface

include Antoine J. Asselin, CPA, for his assistance in the chapter on taxes; John C. Bost Esq., of San Diego State University, for his help in revising and updating the estate planning chapter; Thomas C. Via Jr., CLU, for his help in the chapter on life insurance; and Marlene Bellamy of Writeline Associates for her help with the real estate material.

Cengage Learning shared our objective of producing a truly teachable text and relied on the experience and advice of numerous excellent reviewers for the twelfth edition:

Robert Bartelli, Labette Community College George Bernard, Seminole Community College Patricia Bernson, County College of Morris William Blackerby, Siena Heights University David A. Bodkin, Cumberland University Karin Bonding, University of Virginia Renee E. Cabourne, Chaffey College Dean Danielson, San Joaquin Delta College Helen Davis, Jefferson Community College John D. Farlin, Ohio Dominican University Rhonda Fitchett, Buena Vista University Pat Halliday, Santa Monica College Junnae Landry, Pratt Community College Jerome Niemiec, Texas State University Susan L. Pallas, Southeast Community College Lora Reinholz, Marquette University Larry Weaver, Navarro College James Wood, University of Louisiana at Monroe

We also appreciate the many suggestions from previous reviewers, all of whom have had a significant impact on the earlier editions of this book. Our thanks go to the following: Linda Afdahl, Micheal J. Ahern III, Robert J. Angell, H. Kent Baker, Harold David Barr, Catherine L. Bertelson, Steve Blank, Kathleen K. Bromley, D. Gary Carman, Dan Casey, P. R. Chandy, Tony Cherin, Larry A. Cox, Maurice L. Crawford, Carlene Creviston, Rosa Lea Danielson, William B. Dillon, David Durst, Jeanette A. Eberle, Mary Ellen Edmundson, Ronald Ehresman, Jim Farris, Stephen Ferris, Sharon Hatten Garrison, Wayne H. Gawlick, Alan Goldfarb, Carol Zirnheld Green, Joseph D. Greene, C. R. Griffen, John L. Grimm, Chris Hajdas, James Haltman, Vickie L. Hampton, Forest Harlow, Eric W. Hayden, Henry C. Hill, Kendall B. Hill, Darrell D. Hilliker, Arlene Holyoak, Marilynn E. Hood, Frank Inciardi, Ray Jackson, Kenneth Jacques, Dixie Porter Johnson, Ted Jones, William W. Jones, Judy Kamm, Gordon Karels, Peggy Keck, Gary L. Killion, Earnest W. King, Karol Kitt, George Klander, Xymena S. Kulsrud, Carole J. Makela, Paul J. Maloney, David Manifold, Charles E. Maxwell, Charles W. McKinney, Robert W. McLeod, George Muscal, Robert Nash, Ed Nelling, Charles O’Conner, Albert Pender, Aaron L. Phillips, Armand Picou, Franklin Potts, Fred Power, Alan Raedels, Margaret P. Reed, Charles F. Richardson, Arnold M. Rieger, Vivian Rippentrop, Gayle M. Ross, Kenneth H. St. Clair, Brent T. Sjaardema, Thomas M. Springer, Frank A. Thompson, Dick Verrone, Rosemary Walker, Peggy Bergmeier Ward, Tom Warschauer, Gary Watts, Grant J. Wells, Brock Williams, Janet Bear Wolverton, Betty Wright, and R. R. Zilkowski.

Because of the wide variety of topics covered in this book, we called on many experts for whose insight on recent developments we are deeply grateful. We would like to thank them and their firms for allowing us to draw on their knowledge and resources, particularly Robert Andrews, Willis M. Allen Co. Realtors; Bill Bachrach, Bachrach & Associates; Mark D. Erwin, Commonwealth Financial Network; Robin


Preface xix

Gitman, Willis M. Allen Co. Realtors; Craig Gussin, CLU, Auerbach & Gussin; Frank Hathaway, CFA, Chief Economist, NASDAQ; John Markese, President of the American Association of Individual Investors; Mark Nussbaum, CFP®, Wells Fargo Advisors, Inc.; Sherri Tobin, Farmers Insurance Group; Fred Weaver, Underwriting Manager & VP, JP Morgan Chase; Keith Wibel, CFA, Foothills Asset Management; and Deila Mangold, Ideal Homes Realty.

The editorial staff of Cengage Learning have been most helpful in our endeav-ors. We wish to thank Joe Sabatino, Publisher; Mike Reynolds, Executive Editor; Laura Ansara, Senior Developmental Editor; Mike Guendelsberger, Developmental Editor; Emily Nesheim, Content Project Manager; Scott Fidler, Media Editor; Nathan Anderson, Marketing Manager; Adele Scholtz, Senior Editorial Assistant; and Suellen Ruttkay, Marketing Coordinator. Special thanks go to Susan Smart, Senior Developmental Editor: without her support, previous editions would not have been as lively and contemporary in approach; and her expert management of the text’s writing and reviewing proved invaluable. We are also grateful to Sreejith Govindan of Integra Software Services, who ably assured the book’s timely and accurate production.

Finally, our wives—Robin, Charlene, and Bonnie—have provided needed support and understanding during the writing of this book. We are forever grateful to them.

Lawrence J. Gitman, Ph.D., CFP®

La Jolla, California

Michael D. Joehnk, Ph.D., CFAFlagstaff, Arizona

Randall S. Billingsley, Ph.D., FRM, CFABlacksburg, Virginia


xx About the Authors

About the Authors

Lawrence J. Gitman is an emeritus professor of finance at San Diego State University. He received his bachelor’s degree from Purdue University, his M.B.A. from the University of Dayton, and his Ph.D. from the University of Cincinnati. Professor Gitman is a prolific textbook author and has more than 50 articles appearing in Financial Management, The Financial Review, the Journal of Financial Planning, the Journal of Risk and Insurance, the Financial Services Review, the Journal of Financial Research, Financial Practice and Education, the Journal of Financial Education, and other scholarly publications.

His major textbooks include The Future of Business, Sixth Edition, and The Future of Business: The Essentials, Fourth Edition, both of which are co-authored with Carl McDaniel; and Fundamentals of Investing, Eleventh Edition, which is co-authored with Michael D. Joehnk and Scott B. Smart. Gitman and Joehnk also wrote Investment Fundamentals: A Guide to Becoming a Knowledgeable Investor,which was selected as one of 1988’s ten best personal finance books by Money maga-zine; Principles of Managerial Finance, Fifth Brief Edition; Principles of Managerial Finance, Twelth Edition; Foundations of Managerial Finance, Fourth Edition; andIntroduction to Finance, co-authored with Jeff Madura.

An active member of numerous professional organizations, Professor Gitman is past president of the Academy of Financial Services, the San Diego Chapter of the Financial Executives Institute, the Midwest Finance Association, and the FMA National Honor Society. In addition, he is a Certified Financial Planner® (CFP®). Gitman formerly served as a director on the CFP® Board of Governors, as vice- president–financial education for the Financial Management Association, and as director of the San Diego MIT Enterprise Forum. He has two grown children and lives with his wife in La Jolla, California, where he is an avid bicyclist.

Michael D. Joehnk is an emeritus professor of finance at Arizona State University. In addition to his academic appointments at ASU, Professor Joehnk spent a year (1999) as a visiting professor of finance at the University of Otago in New Zealand. He received his bachelor’s and Ph.D. degrees from the University of Arizona and his M.B.A. from Arizona State University. A Chartered Financial Analyst (CFA), he has served as a member of the Candidate Curriculum Committee and of the Council of Examiners of the Institute of Chartered Financial Analysts. He has also served as a director of the Phoenix Society of Financial Analysts and as secretary-treasurer of the Western Finance Association, and he was elected to two terms as a vice-president of the Financial Management Association. Professor Joehnk is the author or co-author of some 50 articles, five books, and numerous monographs. His articles have appeared in Financial Management, the Journal of Finance, the Journal of Bank Research, the Journal of Portfolio Management, the Journal of Consumer Affairs,the Journal of Financial and Quantitative Analysis, the AAII Journal, the Journal of Financial Research, the Bell Journal of Economics, the Daily Bond Buyer, Financial Planner, and other publications.

In addition to co-authoring several books with Lawrence J. Gitman, Professor Joehnk was the author of a highly successful paperback trade book, Investing for Safety’s Sake. In addition, Dr. Joehnk was the editor of Institutional Asset Allocation,which was sponsored by the Institute of Chartered Financial Analysts and published


About the Authors xxi

by Dow Jones–Irwin. He also was a contributor to the Handbook for Fixed Income Securities and to Investing and Risk Management, volume 1 of the Library of Investment Banking. In addition, he served a six-year term as executive co-editor of the Journal of Financial Research. He and his wife live in Flagstaff, Arizona, where they enjoy hiking and other activities in the nearby mountains and canyons.

Randall S. Billingsley is a finance professor at Virginia Tech. He received his bachelor’s degree in economics from Texas Tech University and received both an M.S. in economics and a Ph.D. in finance from Texas A&M University. Professor Billingsley holds the Chartered Financial Analyst (CFA), Financial Risk Manager (FRM), and Certified Rate of Return Analyst (CRRA) professional designations. An award-winning teacher at the undergraduate and graduate levels, his research, consulting, and teaching focus on investment analysis and issues relevant to practic-ing financial advisors. Formerly a vice president at the Association for Investment Management and Research (now the CFA Institute), Professor Billingsley’s published equity valuation case study of Merck & Company was assigned reading in the CFA curriculum for several years. In 2006 the Wharton School published his book, Understanding Arbitrage: An Intuitive Approach to Financial Analysis. In addi-tion, his research has been published in refereed journals that include the Journal of Portfolio Management, the Journal of Banking and Finance, Financial Management,the Journal of Financial Research, and the Journal of Futures Markets. Professor Billingsley advises the Student-Managed Endowment for Educational Development (SEED) at Virginia Tech, which manages an equity portfolio of about $4 million on behalf of the Virginia Tech Foundation.

Professor Billingsley’s consulting to date has focused on two areas of expertise. First, he has acted extensively as an expert witness on financial issues. Second, he has taught seminars and published materials that prepare investment professionals for the CFA examinations. This has afforded him the opportunity to explore and discuss the relationships among diverse areas of investment analysis. His consulting endeavors have taken him across the United States and to Canada, Europe, and Asia. A primary goal of Professor Billingsley’s consulting is to apply the findings of academic financial research to practical investment decision making and personal financial planning.


Appendixes 543

Appendixes

APPENDIX ATable of Future Value Factors

Instructions: To use this table, find the future value factor that corresponds to both a given time period (year) and an interest rate. For example, if you want the future value factor for 6 years and 10%, move across from year 6 and down from 10% to the point at which the row and column intersect: 1.772. Other illustrations: for 3 years and 15%, the proper future value factor is 1.521; for 30 years and 8%, it is 10.062.

INTEREST RATE

Year 2% 3% 5% 6% 8% 9% 10% 12% 15% 20% 25% 30%

1 1.020 1.030 1.050 1.060 1.080 1.090 1.100 1.120 1.150 1.120 1.250 1.300 2 1.040 1.060 1.102 1.120 1.166 1.190 1.210 1.254 1.322 1.440 1.562 1.690

3 1.061 1.090 1.158 1.190 1.260 1.290 1.331 1.405 1.521 1.728 1.953 2.1974 1.082 1.130 1.216 1.260 1.360 1.410 1.464 1.574 1.749 2.074 2.441 2.8565 1.104 1.160 1.276 1.340 1.469 1.540 1.611 1.762 2.011 2.488 3.052 3.7136 1.126 1.190 1.340 1.420 1.587 1.670 1.772 1.974 2.313 2.986 3.815 4.827

8 1.172 1.260 1.477 1.590 1.851 1.990 2.144 2.476 3.059 4.300 5.960 8.15710 1.219 1.340 1.629 1.790 2.159 2.360 2.594 3.106 4.046 6.192 9.313 13.78612 1.268 1.420 1.796 2.010 2.518 2.810 3.138 3.896 5.350 8.916 14.552 23.29815 1.346 1.560 2.079 2.390 3.172 3.640 4.177 5.474 8.137 15.407 28.422 51.18520 1.486 1.810 2.653 3.210 4.661 5.600 6.727 9.646 16.366 38.337 86.736 190.04725 1.641 2.090 3.386 4.290 6.848 8.620 10.834 17.000 32.918 95.395 264.698 705.62730 1.811 2.420 4.322 5.740 10.062 13.260 17.449 29.960 66.210 237.373 807.793 2619.93635 2.000 2.810 5.516 7.690 14.785 20.410 28.102 52.799 133.172 590.657 2465.189 9727.59840 2.208 3.260 7.040 10.280 21.724 31.410 45.258 93.049 267.856 1469.740 7523.156 36117.754

Note: All factors are rounded to the nearest 1/1000 in order to agree with values used in the text.

APPENDIX BTable of Future Value Annuity Factors

Instructions: To use this table, find the future value of annuity factor that corresponds to both a given time period (year) and an interest rate. For example, if you want the future value of annuity factor for 6 years and 10%, move across from year 6 and down from 10% to the point at which the row and column intersect: 7.716. Other illustrations: for 3 years and 15%, the proper future value of annuity factor is 3.472; for 30 years and 6%, it is 79.060.

INTEREST RATE

Year 2% 3% 5% 6% 8% 9% 10% 12% 15% 20% 25% 30%

1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.0002 2.020 2.030 2.050 2.060 2.080 2.090 2.100 2.120 2.150 2.200 2.250 2.3003 3.060 3.090 3.152 3.180 3.246 3.270 3.310 3.374 3.472 3.640 3.813 3.9904 4.122 4.180 4.310 4.380 4.506 4.570 4.641 4.779 7.993 5.368 5.766 6.1875 5.204 5.310 5.526 5.630 5.867 5.980 6.105 6.353 6.742 7.442 8.207 9.0436 6.308 6.460 6.802 6.970 7.336 7.520 7.716 8.115 8.754 9.930 11.259 12.7568 8.583 8.890 9.549 9.890 10.637 11.030 11.436 12.300 13.727 16.499 19.842 23.858

10 10.950 11.460 12.578 13.180 14.487 15.190 15.937 17.549 20.304 25.959 33.253 42.61912 13.412 14.190 15.917 16.870 18.977 20.140 21.384 24.133 29.001 39.580 54.208 74.32615 17.293 18.600 21.578 23.270 27.152 29.360 31.772 37.280 47.580 72.035 109.687 167.28520 24.297 26.870 33.066 36.780 45.762 51.160 57.274 72.052 102.443 186.687 342.945 630.15725 32.030 36.460 47.726 54.860 73.105 84.700 98.346 133.333 212.790 471.976 1054.791 2348.76530 40.567 47.570 66.438 79.060 113.282 136.300 164.491 241.330 434.738 1181.865 3227.172 8729.80535 49.994 60.460 90.318 111.430 172.314 215.700 271.018 431.658 881.152 2948.294 9856.746 32422.09040 60.401 75.400 120.797 154.760 259.052 337.870 442.580 767.080 1779.048 7343.715 30088.621 120389.375



544 Appendixes

APPENDIX CTable of Present Value Factors

Instructions: To use this table, find the present value factor that corresponds to both a given time period (year) and an interest rate. For example, if you want the present value factor for 25 years and 7%, move across from year 25 and down from 7% to the point at which the row and column intersect: .184. Other illustrations: for 3 years and 15%, the proper present value factor is .658; for 30 years and 8%, it is .099.

INTEREST RATE

Year 2% 3% 5% 7% 8% 9% 10% 12% 15% 20% 25% 30%

1 .980 .971 .952 .935 .926 .917 .909 .833 .870 .893 .800 .7692 .961 .943 .907 .873 .857 .842 .826 .797 .756 .694 .640 .5923 .942 .915 .864 .816 .794 .772 .751 .712 .658 .579 .512 .4554 .924 .888 .823 .763 .735 .708 .683 .636 .572 .482 .410 .3505 .906 .863 .784 .713 .681 .650 .621 .567 .497 .402 .328 .2696 .888 .837 .746 .666 .630 .596 .564 .507 .432 .335 .262 .2078 .853 .789 .677 .582 .540 .502 .467 .404 .327 .233 .168 .123

10 .820 .744 .614 .508 .463 .422 .386 .322 .247 .162 .107 .07312 .789 .701 .557 .444 .397 .356 .319 .257 .187 .112 .069 .04315 .743 .642 .481 .362 .315 .275 .239 .183 .123 .065 .035 .02020 .673 .554 .377 .258 .215 .178 .149 .104 .061 .026 .012 .00525 .610 .478 .295 .184 .146 .116 .092 .059 .030 .010 .004 .00130 .552 .412 .231 .131 .099 .075 .057 .033 .015 .004 .001 *35 .500 .355 .181 .094 .068 .049 .036 .019 .008 .002 * *40 .453 .307 .142 .067 .046 .032 .022 .011 .004 .001 * *

*Present value factor is zero to three decimal places.


APPENDIX DTable of Present Value Annuity Factors

Instructions: To use this table, find the present value of annuity factor that corresponds to both a given time period (year) and an interest rate. For example, if you want the present value of annuity factor for 30 years and 7%, move across from year 30 and down from 7% to the point at which the row and column intersect: 12.409. Other illustrations: for 3 years and 15%, the proper present value of annuity factor is 2.283; for 30 years and 8%, it is 11.258.

INTEREST RATE

Year 2% 3% 5% 7% 8% 9% 10% 12% 15% 20% 25% 30%

1 .980 .971 .952 .935 .926 .917 .909 .893 .870 .833 .800 .7692 1.942 1.913 1.859 1.808 1.783 1.759 1.736 1.690 1.626 1.528 1.440 1.3613 2.884 2.829 2.723 2.624 2.577 2.531 2.487 2.402 2.283 2.106 1.952 1.8164 3.808 3.717 3.546 3.387 3.312 3.240 3.170 3.037 2.855 2.589 2.362 2.1665 4.713 4.580 4.329 4.100 3.993 3.890 3.791 3.605 3.352 2.991 2.689 2.4366 5.601 5.417 5.076 4.767 4.623 4.486 4.355 4.111 3.784 3.326 2.951 2.6438 7.326 7.020 6.463 5.971 5.747 5.535 5.335 4.968 4.487 3.837 3.329 2.925

10 8.983 8.530 7.722 7.024 6.710 6.418 6.145 5.650 5.019 4.192 3.570 3.09212 10.575 9.954 8.863 7.943 7.536 7.161 6.814 6.194 5.421 4.439 3.725 3.19015 12.849 11.938 10.380 9.108 8.560 8.061 7.606 6.811 5.847 4.675 3.859 3.26820 16.352 14.878 12.462 10.594 9.818 9.129 8.514 7.469 6.259 4.870 3.954 3.31625 19.524 17.413 14.094 11.654 10.675 9.823 9.077 7.843 6.464 4.948 3.985 3.32930 22.396 19.601 15.373 12.409 11.258 10.274 9.427 8.055 6.566 4.979 3.995 3.33235 24.999 21.487 16.378 12.948 11.655 10.567 9.844 8.176 6.617 4.992 3.998 3.33340 27.356 23.115 17.159 13.332 11.925 10.757 9.779 8.244 6.642 4.997 3.999 3.333



Appendixes 545

APPENDIX EUsing a Financial Calculator

Important Financial Keys on the Typical Financial CalculatorThe important financial keys on a typical financial calculator are depicted and defined below. On some calcula-

tors the keys may be labeled using lowercase characters for “N” and “I”. Also, “I/Y” may be used in place of the

“I” key.

CPT

N I PV PMT FV

CPT — Compute key; used to initiate financial calculation once all values are input

N — Number of periods

I — Interest rate per period

PV — Present value

PMT — Amount of payment; used only for annuities

FV — Future value

The handheld financial calculator makes it easy to calculate time value. Once you have mastered the time value of money concepts using tables, we suggest you use such a calculator. For one thing, it becomes cumbersome to use tables when calculating anything other than annual compounding. For another, calculators rather than tables are used almost exclusively in the business of personal financial planning.

You don’t want to become overly dependent on calculators, however, because you may not be able to recognize a nonsensical answer in the event that you acciden-tally push the wrong button. The important calculator keys are shown and labeled above. Before using your calculator to make the financial computations described in this text, be aware of the following points.

1. The keystrokes on some of the more sophisticated and expensive calcula-tors are menu-driven: after you select the appropriate routine, the calculator prompts you to input each value; a compute key (CPT) is not needed to obtain a solution.

2. Many calculators allow the user to set the number of payments per year. Most of these calculators are preset for monthly payments, or 12 payments per year. Because we work primarily with annual payments—one payment per year—it is important to make sure that your calculator is set for one payment per year. Although most calculators are preset to recognize that all payments occur at the end of the period, it is also important to make sure your calculator is actually in the END mode. Consult the reference guide that accompanies your calculator for instructions on these settings.

3. To avoid including previous data in current calculations, always clear all registers of your calculator before inputting values and making a new computation.

4. The known values can be punched into the calculator in any order; the order specified here and in the text simply reflects the authors’ personal preference.


546 Appendixes

Calculator Keystrokes. Let’s go back to the future value calculation on page 64, where we are trying to calculate the future value of $5,000 at the end of 6 years if invested at 5%. Here are the steps for solving the problem with a calculator:

1. Punch in 5000 and press PV.2. Punch in 6 and press N.3. Punch in 5 and press I.4. To calculate the future value, press CPT and then FV. The future value of 6700.48

should appear on the calculator display.

On many calculators, this value will be preceded by a minus sign, which is a way of distinguishing between cash inflows and cash outflows. For our purposes, this sign can be ignored.

To calculate the yearly savings (the amount of an annuity), let’s continue with the example on page 64. For this example, the interest rate is 5%, the number of periods is 6, and the future value is $38,300. Your task is to solve the equation for the annu-ity. The steps using the calculator are:

1. Punch in 6 and press N.2. Punch in 5 and press I.3. Punch in 38300 and press FV.4. To calculate the yearly payment or annuity, press CPT and then PMT.

The annuity of 5,630.77 should appear on the calculator display. Again, a negative sign can be ignored.

A similar procedure is used to find present value of a future sum or an annuity, except you would first input the FV or PMT before pressing CPT and then PV to calculate the desired result. To find the equal annual future withdrawals from an initial deposit, the PV would be input first; you solve for the PMT by pressing CPT and then PMT.

INPUTS FUNCTIONS

5000 PV6 N5 I CPT FV SOLUTION 6700.48

CALCULATOR

INPUTS FUNCTIONS

6 N5 I38300 FV CPT PMT SOLUTION 5630.77

CALCULATOR


Index 547

AAARP (American Association of Retired

Persons), 308abortion, 306ABS (antilock brakes) discount, 340–341accelerated benefits, 283accident policies, 303account executives. See stockbrokersaccount reconciliation, 126–127accumulation period, 498active income, 81activities of daily living (ADLs), 310actual cash value, 323, 331actuarial data, 256ADB (average daily balance)

method, 211add-on method, 245–246adjustable-rate mortgages (ARMs), 50,

176–178adjusted gross estate, 535adjusted gross income (AGI), 82adjusted taxable gifts, 534adjustment period, 176adjustments to (gross) income, 82, 94ADLs (activities of daily living), 310administrator, estate, 524adoption tax credit, 88ADRs (American Depositary

Receipts), 410advanced directive for health care, 525Advanced Micro Devices (AMD), 403adverse selection, 257advisory services, 378AEA (applicable exclusion amount),

529, 531affinity cards, 200affordability

of automobiles, 143–146of housing, 159–168

agency bonds, 419–420aggressive growth funds, 445AGI (adjusted gross income), 82alternative minimum tax (AMT), 87AMA (asset management account), 117AMD (Advanced Micro Devices), 403amended returns, 84, 97American Association of Retired Persons

(AARP), 308American Depositary Receipts (ADRs), 410amortization schedules, 243AMT (alternative minimum tax), 87annual exclusion, 532, 534annual percentage rate. See APRannual percentage yield (APY) formula, 114annual stockholders’ reports, 371–372annuities, 65–67, 498–503annuity certain, 500antilock brakes (ABS) discount, 340–341any occupation (“Any Occ”) definition, 314applicable exclusion amount (AEA),

529, 531appointment clauses, 518

apportionment statutes, 518appreciation, 462, 534approximate yield, 399–401APR (annual percentage rate), 211

installment loans, 242–247overview, 233single-payment loans, 238–241

APY (annual percentage yield) formula, 114arbitration, 368ARMs (adjustable-rate mortgages),

50, 176–178ask price, 361asset acquisition planning, 16asset allocation, 383–386asset allocation funds, 449–450asset management account (AMA), 117assets, 16, 41–42ATMs (automated teller machines), 118attitude toward money, 10audited returns, 97–98automated teller machines (ATMs), 118automatic investment plans, 450automatic reinvestment plans, 450–451automatic transfer program, 125automobile insurance

automobile insurance plans, 340financial responsibility laws, 341–342no-fault automobile insurance, 338–339overview, 255, 333premiums, 339–341types of, 334–338

automobile rebate programs, 199automobiles

leasing, 150–154purchasing, 141–150, 225

average daily balance (ADB) method, 211

average propensity to consume, 4average tax rate, 77

Bback-end load funds, 441bailout provision, 503balance sheets, 40–46, 55balance transfers, 198–199balanced budgets, 59balanced funds, 446balancing checkbooks, 126balloon-payment mortgage, 175bank credit cards, 195–201bank-by-phone accounts, 119bankruptcy, 218–219base rate, 196basic hospital insurance, 294bear markets, 363–365beneficiaries, 280, 527beneficiary clause, 280beta, 406–407bid price, 361biweekly mortgages, 178blanket PPFs, 327Block Financial Software TaxCut

program, 99–100

Blue Cross/Blue Shield plans, 294blue-chip stock, 408bodily injury liability losses, 334bond funds, 446–447bonds

characteristics of, 417–418market, 418–422overview, 357, 415–416pricing, 424–426rate of return, 352ratings, 423–424reasons to invest in, 416stocks versus, 416–417yield, 426–428

book value, 405–406bounced checks, 125brick-and-mortar banks, 112broad markets, 395broker markets, 359–361brokerage reports, 375–378budget control schedule, 62budgets, 40. See also cash budgetsbull markets, 363–365business risk, 395buydowns, 179buyer’s agents, 170buyer’s remorse, 169

Ccall feature, 418capital, 352–355capital gains, 81–82, 396capital market, 358capitalized cost, 151captive agent, 343captive finance companies, 231careers, 33–34carpool discount, 341carryover provision, 304cash advances, 196cash basis, 46cash budgets, 57

deficits, 59–60example of, 60–62overview, 56process, 57–59using, 62–63

cash deficits, 47–49, 59–60cash dividends, 404, 415cash management, 109–140

asset management accounts, 117checking accounts, 114–117, 122–129electronic banking services, 117–121role of, 109–111safety, 112–114savings, 114, 116, 129–135types of financial institutions, 111–112

cash surpluses, 46–49cash value, 231, 267cash-balance plans, 489cashier’s checks, 127CCCS (Consumer Credit Counseling

Services), 219

Index


548 Index

CDARS (Certificate of Deposit Account Registry Service), 114

CDs (certificates of deposit), 110, 133–134

CengageNOW, 24central asset accounts, 117Certificate of Deposit Account Registry

Service (CDARS), 114certificates of deposit (CDs), 110,

133–134certified checks, 129Certified Financial Planners (CFPs), 25–26,

279Certified Insurance Counselors (CICs), 344Certified Investment Management

Analysts, 25Certified Public Accountants (CPAs), 99–100Certified Trust & Financial Advisors

(CTFAs), 25certified used cars, 144CFAs (Chartered Financial Analysts), 25CFPs (Certified Financial Planners),

25–26, 279change of policy, 282charitable deductions, 533charitable lead (or income) trusts, 529charitable remainder trusts, 529Chartered Financial Analysts (CFAs), 25Chartered Financial Consultants (ChFCs),

25–26, 279Chartered Life Underwriters

(CLUs), 25, 279Chartered Property and Casualty

Underwriters (CPCUs), 344chattel mortgage, 236checkbook ledgers, 124checking accounts

cost of, 122–123individual versus joint accounts, 123–124interest-paying, 116–117monthly statements, 125–127overdrafts, 124–125overview, 114–116procedures, 124rate of return, 110special types of checks, 127–129stopping payment, 125

ChFCs (Chartered Financial Consultants), 25–26, 279

child tax credit, 88CICs (Certified Insurance Counselors), 344claims adjustments, 345claims adjustors, 345claims paying ability, 278cliff vesting, 487closed-end investment companies,

437–438closed-end leases, 151closing costs, 162closing statements, 172–173CLUs (Chartered Life Underwriters),

25, 279COBRA (Consolidated Omnibus Budget

Reconciliation Act) (1986), 306codicils, 518, 521–522co-insurance, 307, 323–324COLA (cost-of-living adjustment), 315collateral, 225, 234, 236–237collateral notes, 236college health insurance, 292collision insurance, 338

commercial banks, 112, 229–230commission-based planners, 24common stock

advantages and disadvantages of, 411bonds versus, 416–417decisions regarding, 412–415dividends, 404–405foreign, 410issuers of, 403–404key measures of performance, 405–407overview, 357, 401–403rate of return, 352tax considerations, 404timing investments, 414types of, 408–410voting rights, 404

common-law states, 526community property, 526–527compound interest, 64, 131–133, 132compound value, 353comprehensive automobile insurance,

338comprehensive major medical

insurance, 303comprehensive mortgage payment tables,

163comprehensive personal liability

coverage, 326comprehensive policies, 324compulsory auto insurance laws, 341computer-based tax returns, 99–101condominiums (condos), 154Consolidated Omnibus Budget

Reconciliation Act (COBRA) (1986), 306consolidation loans, 226consumer credit, 187Consumer Credit Counseling Services

(CCCS), 219consumer debt, tracking, 235consumer finance companies, 230consumer loans, 224–253, 225

installment loans, 241–248keeping track of debt, 234–236obtaining, 229–232shopping for, 232–234single-payment loans, 236–241types of, 225–229using, 224–225

consumer price index (CPI), 31, 311contingency clause, 171contingent beneficiaries, 280continuation of group coverage, 306–307continued stay review, 307continuous premium whole life insurance,

267–268contributory pension plans, 487conventional mortgages, 163, 179conversion (exchange) privileges, 452conversion premiums, 422conversion privilege, 422conversion ratio, 422conversion value, 422convertibility provision, 267convertible ARMs, 177convertible bond funds, 447convertible bonds, 422convertible securities, 357cooperative apartments, 156coordination of benefits provision, 305corporate bonds, 421corporate fleet cars, 144

corporate trustees, 528cost-of-living adjustment (COLA), 315cost-of-living calculators, 32coupons, 417Coverdell Education Savings Accounts

(ESAs), 496CPAs (Certified Public Accountants),

99–100CPCUs (Chartered Property and Casualty

Underwriters), 344CPI (consumer price index), 31, 311credit, 187–223

credit cards, 195–201, 212–214credit scoring, 209debit cards, 201–202establishing, 190–194finance charges, computing, 211–212improper uses of, 188–190opening accounts, 205–209prepaid cards, 202reason for use of, 188revolving lines of credit, 202–2052007–2009 meltdown, 189wise use of, 214–219

credit bureaus, 206–209Credit Card Act (2009), 197credit cards, 23, 195–201, 212–214credit counselors, 219credit disability insurance, 246credit investigations, 206credit life insurance, 246, 274credit limits, 195, 534credit scoring, 209credit shelter trusts, 529credit statements, 195credit unions, 112, 230Crummey trusts, 529CTFAs (Certified Trust & Financial

Advisors), 25current (short-term) liability, 42current replacement cost, 331current yield, 426–428custodial care, 310custodians, 436cyclical stocks, 409

Dday traders, 380–381dealer markets, 359–362dealer’s cost, 148death of spouse, 23death protection, 268, 272death-related costs, 513debenture, 418debit cards, 118, 201–202debt safety ratio, 56, 192–194, 234decreasing term life insurance, 265–266decreasing term policies, 266deductibles, 304

choosing options, 84example of, 94–95exemptions, 84–85health insurance, 304homeowner’s insurance, 331–332itemized deductions, 83–84maximizing, 102standard deduction, 83

deemed to transfer, 534defensive stocks, 409deferred annuities, 499, 502deferred calls, 418


Index 549

deferred spending, 5deferring taxes, 101–102deficits. See cash deficitsdefined benefit plans, 487–489, 488defined contribution plans, 487–489demand deposits, 115demand-and-supply distribution, 290demographics, effects on personal

income, 31–32denied claims, 345dental insurance, 303dependents, 84deposit insurance, 113deposition of proceeds, 500depository financial institutions, 111–112depreciation, 144depression, 29desired rate of return, 401diesel-powered automobiles, 144direction of payments clause, 518disabilities, 514disability clause, 283disability income insurance, 312–316discount basis, 131discount bonds, 417, 425discount brokers, 366–367discount method, 240–241discount stockbrokers, 365–366discounting, 66disposable income, 57disposition of property clause, 518distribution period, 498distributors, 436diversification, 381dividend reinvestment plan (DRP), 414dividend yield, 405dividends, 404–405divorce, 23Dow Jones Industrial Average (DJIA),

372–373, 401Dow Jones Wilshire 5000 index, 374down payments, 143, 160–162dread disease policies, 303driver’s training discount, 340–341DRP (dividend reinvestment plan), 414dual incomes, 19–21durable goods loans, 225durable power of attorney for

financial matters, 524durable power of attorney for health

care, 524–525

Eearnest money deposits, 171earnings per share (EPS), 406earnings test, 484earthquake insurance, 342EAs (Enrolled Agents), 99–100ECNs (electronic communications

networks), 361economic cycles, 29–30Economic Growth and Tax Relief

Reconciliation Act (EGTRRA) (2001), 531, 533, 535

education, effects on personal income, 32

education loans, 225effective rate of interest, 132e-file program, 97EFTSs (electronic funds transfer

systems), 117–119, 121

EGTRRA (Economic Growth and Tax Relief Reconciliation Act) (2001), 531, 533, 535

electronic banking services, 117–121electronic communications networks

(ECNs), 361Electronic Fund Transfer Act (1978), 121electronic funds transfer systems

(EFTSs), 117–119, 121E-Loan, 149, 174Employee Benefit Research Institute, 492employee benefits, 18, 21–22Employee Retirement Income Security

Act (ERISA) (1974), 486employer’s health care plans, 297employer-sponsored retirement programs

cash-balance plans, 489contributions, 487defined benefit plans, 487–489defined contributions plans, 487–489evaluating, 493–494participation requirements, 486–487profit-sharing plans, 490qualified pension plans, 489salary reduction plans, 491–493thrift and savings plans, 490–491

Enrolled Agents (EAs), 99–100Environmental Protection Agency

(EPA), 146e-pay program, 97EPO (exclusive provider

organization), 293EPS (earnings per share), 406equipment trust certificates, 418equity, 44, 357equity analyst reports, 413equity REITs, 465equity risk premiums, 353equity-income funds, 446ERISA (Employee Retirement Income

Security Act) (1974), 486ESAs (Coverdell Education Savings

Accounts), 496escheat to the state, 516estate planning, 509–539

asset planning, 511–512break-up of estates, 513–514estate, defined, 514–515need for, 511overview, 18–19people planning, 511principles of, 509–511process, 515–516techniques for, 537–538trusts, 527–530Uniform Transfer Tax, 531–537wills, 516–527

estate taxes, 531–538estimated taxes, 96ETFs (exchange traded funds), 357–358,

439–440ethical wills, 525Euronext, 360event risk, 396exchange traded funds (ETFs), 357–358,

439–440exclusions, 283exclusive provider organization

(EPO), 293execution and attestation clause, 520executors, 518, 524exemptions, 84–85

expansion, 29expenses, 47, 58–59extended term insurance, 282

Ffacilitators, 170factors of production, 28fair market value, 42“Fannie Mae” (Federal National Mortgage

Association), 161FASTWEB (Financial Aid Search Through

the WEB), 226Federal Deposit Insurance Corporation

(FDIC), 113Federal Housing Administration (FHA)

mortgage insurance, 179federal income taxes. See taxesFederal Insurance Contributions Act

(FICA), 79Federal National Mortgage Association

(“Fannie Mae”), 161federal withholding taxes, 78–79fee-only planners, 24FHA (Federal Housing Administration)

mortgage insurance, 179FICA (Federal Insurance Contributions

Act), 79FICO scores, 21015-year fixed-rate loan, 175filing deadlines, 96–97filing extensions, 97filing status, 77–78fill-in tax forms, 101finance charges, 232–233, 238–247Financial Aid Search Through the WEB

(FASTWEB), 226financial assets, 6financial calculators, 355, 459–460,

546–547financial consultants. See stockbrokersfinancial goals, 8

assessing, 41defining, 8–9putting dollar value on, 63–67putting target dates on, 12–14types of, 11–12

financial institutions, 111–112Financial Modernization Act (1999), 111financial planners. See professional

financial plannersfinancial planning, 2–74.

assessment, 41financial goals, 8–9, 11–14, 63–67life cycle of, 15–16personal income, 31–34planning environment, 27–32process, 7–14professional financial planners, 24–27relationships, money and, 9–11rewards of, 2–6role of financial statements in, 39–40special concerns, 19–23steps in process, 7–8technology in, 23–24types of plans, 16–19See also personal financial statements

financial presscompany data, 374Dow Jones Industrial Average, 372–373industry data, 374market data, 372–374


550 Index

NASDAQ, 373–374NYSE index, 373–374Standard & Poor’s indexes, 373stock quotes, 374–375

financial products, 111financial responsibility laws, 341–342financial risk, 395financial services industry, 111financial shocks, 15financial statements. See personal

financial statementsfirst-level death-related costs, 513first-year benefits, 484529 College Savings Plan, 228fixed amount settlements, 281fixed automobile costs, 144fixed cash-value schedules, 271fixed expenses, 47fixed period settlements, 280fixed-income securities, 395fixed-rate annuities, 500–501fixed-rate consumer loans, 229fixed-rate mortgages, 175–176, 178flexible-benefit (cafeteria)

plans, 21, 298flood insurance, 342foreclosure, 169foreign securities markets, 362foreign stocks, 410forms, tax. See tax forms and schedules457 plans, 492401(k) plans, 457, 491–493403(b) plans, 492franchise dealerships, 145fraud, credit, 217–218free checking, 123freedom of choice, valid will, 520freely callable bonds, 418frequent flyer programs, 199friends, obtaining consumer loans

from, 231–232full-service brokers, 365–366fun money allowance, 59future value, 64–65, 132–133, 544

Ggas-powered automobiles, 144gatekeeper provisions, 310GDP (gross domestic product), 30general obligation bonds, 421general-purpose money funds, 447geography, effects on personal

income, 32–33gift splitting, 532gift taxes, 531–532, 534GIO (guaranteed insurability option), 315goal dates, 12goals. See financial goalsgood-student discounts, 340–341government bond funds, 446government health insurance

plans, 294–296government securities money

funds, 447grace period, 197, 281graduated-payment mortgages, 178Gramm-Leach-Bliley Act (1999), 111grantors, 527gross domestic product (GDP), 30gross estate, 514, 535gross income, 80–82, 91–94

gross wages, 47group health insurance, 291group HMOs, 293group life insurance, 274growing-equity mortgages, 178growth funds, 445growth stocks, 408growth-and-income funds, 446guaranteed insurability option (GIO), 315guaranteed mortgages, 179guaranteed purchase option, 283guaranteed renewability, 310guaranteed-minimum annuity, 500guardians, choosing, 520

Hhappiness, money and, 5head of household filing status, 77health care reform, 295health insurance, 289–317

choosing, 300cost containment provisions, 307decisions, 297–300disability income insurance, 312–316importance of, 289–291long-term care insurance, 308–311policy provisions, 303–305saving on, 299types of, 291–296, 301–303

Health Insurance Portability and Accountability Act (HIPAA) (1996), 306

health maintenance organizations (HMOs), 293

health reimbursement accounts (HRAs), 298

health savings accounts (HSAs), 298–299

high-frequency trading, 366high-grade corporate bond funds, 447high-yield corporate bond funds, 447HIPAA (Health Insurance Portability and

Accountability Act) (1996), 306HMOs (health maintenance

organizations), 293home equity credit lines, 203–205home equity loans, 242home remodeling, 169home service life insurance, 274homeowner’s insurance, 165

costs, 326–327coverage, 328–329keeping affordable, 332–333limitations on payment, 329–332locations covered, 329overview, 255perils covered, 324–326personal property floater, 327persons covered, 329premiums, 332property covered, 327renter’s insurance, 327–328

HomePath Renovation Mortgage Financing program, 161

hospital income policies, 303hospitalization insurance, 255, 301household expenditures, 477–478housing

affordability, 159–168mortgage loans, 173–181process, 168–173purchasing versus renting, 154–159

HRAs (health reimbursement accounts), 298

HSAs (health savings accounts), 298–299

HSBC Auto Finance, 149hybrid automobiles, 144hybrid REITs, 465

II savings bonds, 135IANC (Interest Adjusted Net Cost), 280identity theft, 217immediate annuities, 498incentive programs, 199income, 47

determining factors in, 31–34estimating, 57–58

income (income-producing) property, 463–464

income and expense statements, 40cash surpluses/deficits, 47–49example of, 51–52expenses, 47income, 47overview, 46–47preparing, 49–51ratio analysis, 55–56

income shifting, 102–103income stocks, 409income taxes, 76. See also taxesindemnity (fee-for-service) plans, 292independent agents, 343independent individual policies, 292independent used car lots, 145index funds, 447–448index rate, 176individual checking accounts, 123–124individual practice associations

(IPAs), 293individual retirement arrangements

(IRAs), 18, 422, 494–497, 495industrial life insurance, 274inflation, 30–31, 513inflation factor, 478inflation hedges, 160insolvency, 44installment loans, 228–229, 241–248installment premium annuity

contracts, 498–500, 499insurance planning, 16–17insurance policies, 256–257. See also

specific types of insuranceinsured persons, 336integrated pension plans, 483interest, determining earnings from, 135Interest Adjusted Net Cost (IANC), 280interest charges, 196–197interest only settlements, 280interest rate cap, 176interest rate risk, 395interest-only mortgages, 178interest-paying checking accounts,

116–117interim construction loans, 173interim financing, 229intermediate care, 310intermediate goals, 13–14intermediate-term bond funds, 447internal limits, 304–305Internal Revenue Service (IRS), 98.

See also taxes


Index 551

international funds, 449Internet banks, 112intestacy, 514, 516–517introductory clause, 518Intuit TurboTax program, 99–100investing, 350–471.

managing holdings, 381–388marks of good investments, 399–401methods of, 357–358objectives, 355–357online investor services, 378–381overview, 351research, 371–378returns from, 396–398risk-return trade-off, 398–399risks of, 394–396role of, 352–355securities markets, 358–371See also bonds; common stock; mutual

funds; real estateinvestment advisors, 436investment banking firms, 359Investment Company Act (1940), 362investment plans, 17–18, 355investment programs, 474investments, 42

guidelines for effective, 396lessons learned from financial crisis, 407myths about, 411

IPAs (individual practice associations), 293

IRAs (individual retirement arrangements), 18, 422, 494–497, 495

irrevocable beneficiaries, 280irrevocable life insurance trusts, 530irrevocable living trusts, 527, 530IRS (Internal Revenue Service), 98.

See also taxesitemized deductions, 83–84, 94–95

Jjoint checking accounts, 123–124joint tenancy, 525junior bonds, 418junk bonds, 423

KKelley Blue Book, 148Keogh plans, 494–498

Llarge-cap stocks, 409–410lease agreements, 157leases, 150–154ledgers, 52legacy statements, 525LendingTree, 174lessees, 157lessors, 157letters of last instructions, 522–523leverage, 462–463liabilities, 42–44, 344, 357liability coverage, 334–336liability exposure, 322liability insurance, 320liability planning, 16–17liens, 236life annuity, period certain, 500life annuity with no refund (pure life),

500life cycle of financial planning, 15–16

life income settlements, 281life insurance, 255–288

benefits of, 258determining amount of, 259–264as estate planning tool, 538features of, 279–284filing claims, 282need for, 258–259purchasing, 275–279reasons to buy, 257–259risk, 256–257types of, 265–275underwriting, 257, 264

life insurance agents, 278–279life insurance companies, 231Life Insurance Coverage Needs

Analyzer, 261life insurance provisions, 499life-cycle funds, 449lifetime gifts, 534limit orders, 369limited liability companies (LLCs), 465limited partnerships (LPs), 465limited payment whole life insurance,

268–269lines of credit, 196, 202–205liquid assets, 16, 41, 109liquidity (marketability) risk, 395liquidity ratio, 55living (inter vivos) trust, 529living benefit riders, 283living benefits, 283living death, 514living trusts, 527, 529–530living wills, 524–525LLCs (limited liability companies), 465load funds, 440–441loan applications, 236loan disclosure statements, 238loan rollovers, 238loan-to-value ratio, 160local tax services, 99lodging of wills, 522long-term care, 308long-term care insurance, 308–311long-term goals, 12–13long-term interest rates, 130long-term investments, 398long-term liability, 43loss control, 256loss prevention, 256, 297low-balling, 147low-load funds, 440, 458–460low-load whole life insurance, 270LPs (limited partnerships), 465lump sum settlements, 280

Mmaintenance expenses, 165major medical insurance plans, 302–305Maloney Act (1938), 363managed care plans, 292–293management companies, 436management fees, 441margin, 176margin trades, 370–371marginal tax rate, 77, 87marital deduction, 533–534market capitalization, 409market orders, 369market risk, 395

married filing jointly filing status, 77married filing separately filing status, 77maturity, 233–234, 237–238Medicaid, 296medical payments coverage, 336–337Medicare, 294–296mental capacity, 520mental illness, 306micro-caps, 409mid-cap stocks, 409–410minimum monthly payments, 214minor’s section 2503(c) trust, 529MLS (Multiple Listing Service), 170MMDAs (money market deposit

accounts), 110, 116MMMFs (money market mutual funds),

110, 116–117, 447money, 8

happiness and, 5psychology of, 9relationships and, 9–11role of, 8–9safety of, 112–114saving, 4

money factor, 151money market, 358money market deposit accounts

(MMDAs), 110, 116money market mutual funds (MMMFs),

110, 116–117, 447monthly loan payments, 143monthly statements, 125–127mortgage bankers, 173mortgage bonds, 418mortgage brokers, 173mortgage insurance, 179mortgage life insurance, 274mortgage loans, 164–165, 173–181mortgage points, 161–162mortgage REITs, 465mortgage-backed bonds, 419–420,

446–447mortgage-backed securities, 420most-stolen vehicles, 339multicar discount, 340–341multiple indemnity clause, 283Multiple Listing Service (MLS), 170multiple-of-earnings method, 259municipal bonds, 103, 420–421, 447mutual associations, 112mutual companies, 269mutual funds, 433–444

buying and selling, 443–444closed-end investment companies,

437–438comparative performance of, 437cost considerations, 440–441exchange traded funds, 439–440fee table, 443investing in, 453–456, 458–460key rules for, 444open-end investment companies,

437–438organization of, 436–437overview, 357–358pooled diversification, 435quotes, 442reasons for investing in, 435–436services offered by, 450–453structure of, 434types of, 445–450


552 Index

NNADA (National Automobile Dealers

Association), 148named peril policies, 324NASD (National Association of

Securities Dealers), 280, 363NASDAQ, 359–361, 373–374, 379National Association of Insurance

Commissioners, 339National Association of Securities

Dealers (NASD), 280, 363National Automobile Dealers Association

(NADA), 148National Committee for Quality Assurance

(NCQA), 299–300National Labor Relations Board (NLRB), 485national tax services, 99NAV (net asset value), 438NCQA (National Committee for Quality

Assurance), 299–300needs analysis method, 259negative amortization, 177negative equity, 154negligence, 322negotiable order of withdrawal (NOW)

accounts, 116negotiating price of automobiles, 147–149net asset value (NAV), 438net operating income (NOI), 463–464net payment cost index, 277net profit margin, 406net worth, 44New York Stock Exchange (NYSE),

360–361New York Stock Exchange (NYSE)

index, 373–374NLRB (National Labor Relations

Board), 485no-fault automobile insurance, 338–339NOI (net operating income), 463–464no-load funds, 441, 456nominal (stated) rate of interest, 132noncallable bonds, 418noncontributory pension plans, 487nondepository financial institutions, 112nondrinker discount, 340–341nonforfeiture options, 281–282nonforfeiture right, 267nonsmoker discount, 340–341NOW (negotiable order of withdrawal)

accounts, 116NYSE (New York Stock Exchange),

360–361NYSE (New York Stock Exchange)

index, 373–374

OOASDHI (Old Age, Survivor’s, Disability,

and Health Insurance) program, 481–482odd lots, 368off-lease cars, 144Old Age, Survivor’s, Disability, and Health

Insurance (OASDHI) program, 481–482old-age benefits, 483online banking services, 119–120online bill payment services, 119–120online brokers, 365–366online investor services, 378–381online retirement planning, 480open account credit, 195

open account credit obligations, 43open-end (finance) leases, 151open-end investment companies,

437–438operating expenses

of automobiles, 144of housing, 165

optional renewability, 310orphan’s court, 522OTC (over-the-counter) market, 359overall caps, 176overdraft protection, 125, 203overdrafts, 124–125overspending, 189over-the-counter (OTC) market, 359own occupation (“Own Occ”) definition,

314

Ppaid-up insurance, 281paper gains, 404PAPs (personal automobile policies), 334Parent Loans for Undergraduate Students

(PLUS), 226, 228participating policies, 283participation (co-insurance) clause, 304passive income, 81Patriot Bonds, 134pay-as-you-go system, 78, 96payment caps, 176payoff projections, 280PBGC (Pension Benefit Guaranty

Corp), 488P/E (price/earnings) ratio, 406Pension Benefit Guaranty Corp (PBGC),

488Pension Protection Act (2006), 486, 488Pension Reform Act, 486perils, 321–322, 324–326periodic caps, 176Perkins loans, 226, 228permanent financing, 173personal automobile policies (PAPs), 334personal bankruptcy, 218–219personal financial planning, 7Personal Financial Specialists (PFSs), 25personal financial statements, 39

balance sheets, 41–46budgets, 56–63income and expense statements, 46–52ratio analysis, 54–56record keeping, 52–54role of, 39–40

personal identification numbers (PINs), 118personal income. See incomepersonal liability umbrella policies,

342–343personal loans, 226personal property, 16, 42, 322personal property floater (PPF), 327personal wealth, assessing, 3PFSs (Personal Financial Specialists), 25physical damage coverage, 338physician expenses, 301–302PINs (personal identification numbers), 118PITI acronym, 165PLUS (Parent Loans for Undergraduate

Students), 226, 228PMI (private mortgage insurance),

161, 179

point-of-service (POS) plans, 293policy loans, 281policy reinstatement, 282pooled diversification, 435portfolios, 81, 381–386POS (point-of-service) plans, 293pour-over wills, 530PPF (personal property floater), 327PPOs (preferred provider

organizations), 292–293preadmission certification, 307preauthorized deposits, 118–119preauthorized payments, 118–119predatory lenders, 233preexisting condition clause, 306, 311preferred provider organizations

(PPOs), 292–293preferred securities, 357pregnancy, 306premium bonds, 417, 425premium payments, 281prepaid cards, 202prepayment penalties, 238, 246prequalification, 170–171prescription drug coverage, 296present value, 66–67, 545presumptive disability clause, 314price volatility, 406price/earnings (P/E) ratio, 406primary beneficiaries, 280primary markets, 359principal, 44principle of indemnity, 323private annuities, 537–538private health insurance plans, 291–294private mortgage insurance (PMI),

161, 179private sales, automobile, 145private tax preparers, 98–99probate estate, 514probate process, 524probationary period, 314professional financial planners, 24–27professional tax preparation services,

98–99profit-sharing plans, 490progressive tax structure, 27, 76proof of loss, 321property and liability insurance agents,

343–344property damage liability losses, 336property insurance, 320–348

automobile insurance, 333–342co-insurance, 324exposure, 320–322homeowner’s insurance, 324–332personal liability umbrella policy, 342–343principle of indemnity, 323purchasing, 343–344settling claims, 344–345supplemental property insurance

coverage, 342property loss exposure, 321–322property taxes, 165prospectus, 359proxies, 404public offerings, 403publicly traded issues, 403purchase options, 151purchasing power, 31purchasing power risk, 395


Index 553

Qqualified pension plans, 489qualified terminable interest property

(QTIP) trusts, 529qualifying widow or widower with

dependent child filing status, 77quality of life, 3

Rrates of return, 110, 352, 399, 401rating territory, 339ratio analysis, 54–56real estate

capital gains, 82investing in, 461–466overview, 358

real estate agents, 170real estate investment trusts (REITs),

464–466real estate limited liability companies,

465–466real estate limited partnerships, 465–466real estate sales contract, 171Real Estate Settlement Procedures Act

(RESPA), 171real estate short sales, 169real property, 16, 42recession, 29, 330recovery phase, 29reducing taxes, 101refinancing

automobiles, 149–150mortgage loans, 180–181

refund annuities, 500refunds, tax, 95–96Registered Financial Associates (RFAs), 25regular checking, 115regular medical expenses, 301regulation

of electronic funds transfer systems, 121role in financial planning environment, 28of securities markets, 362–363

rehabilitation coverage, 306reinvested dividends, 415REITs (real estate investment trusts),

464–466relationships, money and, 9–11relatives, obtaining consumer loans from,

231–232reliability of automobiles, 146renewability provision, 266rental cars, 144rental contract (lease agreement), 157rental units, 156renter’s insurance, 327–328renting, 157–159replacement cost, 323, 328–331, 329reported taxable income, 85res, 527residual benefit options, 314residual owners, 401residual value, 151RESPA (Real Estate Settlement

Procedures Act), 171retail charge cards, 201retirement, 473–508

annuities, 498–503employer-sponsored programs, 486–494estimating income needs, 476–480as investment objective, 356

mutual funds and, 452–453planning for, 18–19, 474–476, 480role of, 474self-directed programs, 494–498Social Security, 481–485sources of income, 480–481

return on equity (ROE), 406revenue bonds, 421revocable living trusts, 527, 529–530revolving lines of credit, 202–205reward (co-branded) credit cards, 199RFAs (Registered Financial Associates),

25right of subrogation, 323right of survivorship, 525risk, 256–257, 394–396risk assumption, 256, 297risk averse, 350, 398risk avoidance, 256, 297risk-free rate of return, 399risk-free security, 400–401risky security, 400–401ROE (return on equity), 406rollovers, 497Roth 401(k), 492Roth IRAs, 496round lots, 368row houses, 154rule of 72, 65–66rule of 78s (sum-of-the-digits method),

246

SS&Ls (savings and loan associations),

112, 230S&P (Standard & Poor’s) indexes, 373safe-deposit boxes, 121safe-driving discounts, 340–341safety of money, 112–114salary reduction plans, 491–493sales contracts, 149sales finance companies, 230–231sandwich generation, 15Sarbanes-Oxley Act (SOX) (2002), 363savings

certificates of deposit, 133–134earning interest, 131–133I savings bonds, 135overview, 61, 129–130planning for, 17–18Series EE bonds, 134–135starting savings program, 130–131U.S. Treasury bills, 134

savings accounts, 110, 114, 116savings and loan associations (S&Ls),

112, 230savings banks, 112savings ratio, 55schedule of benefits, 301scheduled PPFs, 327schedules, tax. See tax forms and

schedulesSEC (Securities and Exchange

Commission), 362second income, 19–21second surgical opinions, 307secondary markets, 359second-level death-related costs, 513Section I coverage, 324–326, 328–329Section II coverage, 326, 329sector funds, 448

secured (collateralized) credit cards, 200Securities Act (1933), 362Securities and Exchange Commission

(SEC), 362Securities Exchange Act (1934), 362securities exchanges, 359Securities Investor Protection Act (1970),

363Securities Investor Protection

Corporation (SIPC), 363, 368securities markets, 358

broker markets, 359–361bull markets versus bear markets,

363–365dealer markets, 359–362executing trades, 368–369foreign securities markets, 362margin trades, 370–371overview, 358primary markets, 359regulating securities markets, 362–363secondary markets, 359short sales, 370–371stockbrokers, 365–368types of orders, 369–370

self-directed retirement programs, 494–498

self-image, money and, 9self-proving wills, 520selling paper, 230SEP (simplified employee pension) plans,

494–495serial obligation, 421Series EE bonds, 102, 110, 134–135settlement options, 280–281share draft accounts, 112shared-appreciation mortgages, 178shifting taxes, 101short sales, 370–371short-term goals, 13–14short-term interest rates, 130sickness policies, 303simple interest, 132, 240, 242–244simplified employee pension (SEP) plans,

494–495simultaneous death clause, 519single premium annuity contracts,

498–500single premium life insurance (SPLI),

269–270single taxpayers filing status, 77single-family homes, 154single-payment loans, 228–229, 236–241sinking funds, 418SIPC (Securities Investor Protection

Corporation), 363, 368skilled care, 310small-cap stocks, 409–410SMI (supplementary medical

insurance), 294Social Security, 481–485Social Security Act (1935), 481Social Security survivor’s benefits, 262Social Security tax, 79socially responsible funds (SRFs),

448–449solvency ratio, 55SOX (Sarbanes-Oxley Act) (2002), 363SPDRs (Spiders), 439special allowances, 78special needs trusts, 529


554 Index

special-purpose life policies, 274–275speculating, 350, 463speculative stocks, 408–409Spiders (SPDRs), 439SPLI (single premium life insurance),

269–270SRFs (socially responsible funds),

448–449Stafford loans, 226, 228Standard & Poor’s (S&P) indexes, 373standard deduction, 83, 94–95standard of living, 3–4stock brokerage firms, 112stock companies, 269stock dividends, 405stock quotes, 374–375stockbrokers, 365

brokerage fees, 366–368discount, 365–366full-service, 365–366investor protection, 368online, 365–366selecting, 365

stop payment, 125stop-loss (stop) orders, 369–370stop-loss provision, 304straight bankruptcy, 219straight term policies, 265student credit cards, 200–201students

credit cards, 200–201debt, 10health insurance, 292homeowner’s insurance, 329loans, 226–228

subrogation, 323subscription advisory services, 378suggested retail prices, 147suicide clause, 283sum-of-the-digits method, 246superstores, automobile, 145supplemental property insurance

coverage, 342supplementary medical insurance

(SMI), 294surgical expenses, 301surpluses. See cash surplusessurrender cost index, 276–277surrogate’s court, 522survivor’s benefits, 262, 483survivorship benefit, 498systematic withdrawal plans, 452

Ttake-home pay, 57, 78–79tangible assets, 6tax attorneys, 99–100tax audits, 97tax avoidance, 101tax clause, 518tax credits, 87–88tax deferred, 103–104tax deferred annuities, 502tax evasion, 101tax forms and schedules

avoiding errors on, 91Form 1040, 89–96overview, 88–90

tax liability, 95–96

tax preparation services, 98–100tax rates, 85–87Tax Reform Act (1986), 528tax shelters, 160, 356–357taxable estates, 535taxable income, 79–85, 95TaxCut program, 99–100taxes, 75–107

calculating and filing, 85–101economics of, 76–77estate, 531–538filing status, 77–78gifts, 531–532, 534planning for, 18, 101–104property, 165real estate investment, 461–462role in financial planning environment,

27–28Social Security benefit, 485take-home pay, 78–79

tax-exempt money funds, 447tax-free bonds, 420tax-free income, 103–104Taxpayer Relief Act (1997), 535tax-sheltered investment vehicles,

269–270T-bills (U.S. Treasury bills), 110, 134“teaser” rates, 177tech stocks, 408technically insolvent, 44, 55technology in financial planning, 23–24tenancy by the entirety, 525tenancy in common, 526term life insurance, 265–267, 275testamentary trusts, 527, 530testators, 517thin markets, 39530-year fixed-rate loans, 175thrift and savings plans, 490–491time deposits, 116time value of money, 64timelines, 64TIPSs (treasury inflation-indexed

bonds), 419title checks, 171–172total return, 396townhouses, 154transfer agents, 436transit ID number, 124traveler’s checks, 129Treasury bonds, 352, 419treasury inflation-indexed bonds

(TIPSs), 419trust principal, 527trust services, 122trustees, 527trusts, 527–530Truth-in-Savings Act (1993), 114TurboTax program, 99–10012(b)-1 fees, 441two-income families, 4two-step ARMs, 177

UUCR (usual, customary, and reasonable)

charges, 292underinsured motorists coverage,

337–338underwriting, 257, 264, 359

undue influence, 520unified rate schedule, 531–532unified tax credit, 535Uniform Transfer Tax, 531–537uninsured motorists coverage, 337U.S. Treasury bills (T-bills), 110, 134universal life insurance, 271–273, 275unsecured bonds, 418unsecured personal credit lines, 203used automobiles, 144–145usual, customary, and reasonable (UCR)

charges, 292utility, 8

VVA (Veterans Administration) loan

guarantees, 179value funds, 445–446VantageScore system, 209variable annuities, 501, 502variable expenses, 47, 144variable life insurance, 258, 273–275variable-rate annuities, 500–501variable-rate loans, 229vehicles of transfer, 513–514vested rights, 486Veterans Administration (VA) loan

guarantees, 179viatical settlement, 284voluntary profit-sharing plans, 490voting rights, 404

WWage Earner Plan, 218–219waiting (elimination) period, 310,

314–315waiver of premium, 315warranties, automobile, 146wealth, 6whole life insurance, 267–271, 275widow’s gap, 483wills, 516

administration of estate, 524codicils, 521–522durable power of attorney for financial

matters, 524durable power of attorney for health

care, 524–525ethical wills, 525features of, 518–520intestacy, 516–517joint ownership, 525–527letter of last instructions, 522–523living wills, 524–525preparing, 517–518requirements of, 520revoking, 521–522safeguarding, 522tips for writing, 521

withholding taxes, 78–79witness clause, 520workers’ compensation insurance, 296

Yyield to maturity, 426–428

Zzero coupon bonds, 421–422


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