1. Personal Financial Planning in Action 1

Introduction 2

1.1 The Personal Financial Planning Process 2

1.2 Factors That Influence Personal Financial Planning 6

1.3 Elements of a Comprehensive Financial Plan 12

1.4 Making Effective Decisions 13

Summary 17

Key Terms 17

Summary Questions 18

Applying This Chapter 19

You Try It 21

2. Money Management Strategies and Skills 22

Introduction 23

2.1 Collecting and Organizing Your Financial Information 23

2.2 Using Personal Financial Statements 25

2.3 Using Financial Ratios 33

Summary 36

Key Terms 37

Summary Questions 38

Applying This Chapter 39

You Try It 41

3. Managing Your Taxes 42

Introduction 43

3.1 The Basics of Federal Income Tax 43

3.2 Calculating Taxable Income and Taxes Owed 48

3.3 Filing Your Federal Tax Return 58

3.4 Tax Planning Strategies 62

Summary 68

Key Terms 68

Summary Questions 71

Applying This Chapter 72

You Try It 74

Part II: Managing Your Personal Finances 75

4. Managing Your Cash and Savings 75

Introduction 76

4.1 Objectives of Cash Management 76

4.2 Rules of Effective Cash Management 79

4.3 Selecting a Financial Institution 81

4.4 Cash Management Products and Services 86

4.5 Resolving Cash Management Problems 96

Summary 99

Key Terms 99

Summary Questions 102

Applying This Chapter 103

You Try It 105

5. Consumer Credit 106

Introduction 107

5.1 What is Consumer Credit? 107

5.2 Types of Consumer Credit 111

5.3 Applying for Credit 113

5.4 Protecting Your Credit and Correcting Credit Mistakes 115

5.5 Credit Cards 119

5.6 Advantages and Disadvantages of Credit Card Use 124

Summary 128

Key Terms 128

Summary Questions 131

Applying This Chapter 132

You Try It 133

6. Using Consumer Loans 134

Introduction 135

6.1 Characteristics of Consumer Loans 135

6.2 Types of Consumer Loans 137

6.3 Sources of Consumer Loans 142

6.4 Managing Your Debts 144

6.5 Declaring Personal Bankruptcy 149

Summary 152

Key Terms 152

Summary Questions 154

Applying This Chapter 155

You Try It 157

7. Making Automobile and Housing Decisions 158

Introduction 159

7.1 Buying a Motor Vehicle 159

7.2 Automobile Financing Alternatives 167

7.3 The Housing Decision 170

7.4 Buying a Home 174

7.5 Mortgage Financing 176

7.6 Completing a Real Estate Transaction 183

Summary 185

Key Terms 185

Summary Questions 187

Applying This Chapter 188

You Try It 189

Part III: Protecting Yourself with Insurance 190

8. Insuring Your Home and Automobile 190

Introduction 191

8.1 How Insurance Works 191

8.2 Managing Homeowners’ and Renters’ Risk 194

8.3 Homeowner’s Insurance Policies 197

8.4 Automobile Insurance 202

8.5 Buying Insurance and Filing Claims 209

Summary 211

Key Terms 211

Summary Questions 214

Applying This Chapter 215

You Try It 217

9. Health and Disability Insurance 218

Introduction 219

9.1 Employee Compensation and Health Insurance 219

9.2 Types of Health Insurance 225

9.3 Planning for Disability Income Needs 236

Summary 240

Key Terms 240

Summary Questions 243

Applying This Chapter 244

You Try It 246

10. Financial Planning with Life Insurance 247

Introduction 248

10.1 What is Life Insurance? 248

10.2 Determining Your Life Insurance Needs 251

10.3 Choosing Life Insurance Companies and Policies 258

10.4 Buying Life Insurance 264

10.5 Important Provisions in a Life Insurance Contract 267

Summary 271

Key Terms 271

Summary Questions 274

Applying This Chapter 275

You Try It 277

Part IV: Managing Your Investments and Your Future 278

11. Investment Basics 278

Introduction 279

11.1 Developing Realistic Investment Goals 279

11.2 Understanding Your Investment Alternatives 284

11.3 Factors That Reduce Investment Risk 289

11.4 Establishing Your Investment Strategy 297

Summary 301

Key Terms 301

Summary Questions 304

Applying This Chapter 305

You Try It 306

12. Investing in Stocks and Bonds 307

Introduction 308

12.1 Common Stock 308

12.2 Classification of Common Stock 314

12.3 Buying and Selling Stocks 317

12.4 Stock Selection and Performance Evaluation 323

12.5 Investing in Bonds 328

12.6 Buying and Selling Bonds 337

12.7 Preferred Stock 341

Summary 343

Key Terms 344

Summary Questions 347

Applying This Chapter 348

You Try It 350

13. Investing in Mutual Funds 351

Introduction 352

13.1 What is a Mutual Fund? 352

13.2 Mutual Fund Investment Classifications 363

13.3 Selecting and Evaluating Mutual Funds 367

Summary 373

Key Terms 374

Summary Questions 376

Applying This Chapter 377

You Try It 378

14. Planning for Retirement 380

Introduction 381

14.1 Estimating Retirement Income Needs 381

14.2 Sources of Retirement Income 386

14.3 Personal Retirement Savings Options 394

14.4 Preparing for Retirement Payouts 397

Summary 400

Key Terms 400

Summary Questions 401

Applying This Chapter 402

You Try It 403

15. Preserving Your Estate 404

Introduction 405

15.1 What is Estate Planning? 405

15.2 Key Components of an Estate Plan 408

15.3 Types and Formats of Wills 411

15.4 Estate and Gift Taxes 417

15.5 Reducing Taxes Through Trusts and Gifts 421

Summary 426

Key Terms 426

Summary Questions 428

Applying This Chapter 429

You Try It 431

Endnotes 432

Appendix 433

Glossary 455

Index 478