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Personal FinanceTurning Money into Wealth

Eighth Edition

Arthur J. KeownVirginia Polytechnic Institute and State University

Alumni Distinguished Professor and R.B. Pamplin Professor of Finance

New York, NY

A01_KEOW0363_08_SE_FM.indd 1 01/12/17 5:33 PM

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ISBN 10: 0-13-473036-4ISBN 13: 978-0-13-473036-3


v

Arthur J. Keown is an Alumni Distinguished Professor and the R. B. Pamplin Pro-fessor of Finance at Virginia Polytechnic Institute and State University. He received his bachelor’s degree from Ohio Wesleyan University, his MBA from the University of Michigan, and his doctorate from Indiana University. An award-winning teacher, he is a member of the Academy of Teaching Excellence at Virginia Tech, he has received five Certificates of Teaching Excellence, the W. E. Wine Award for Teaching Excellence, and the Alumni Teaching Excellence Award, and in 1999 he received the Outstanding Faculty Award from the State of Virginia. In 2016, he was named to be one of 10 Alumni Distinguished Professors on campus and the first and only Alumni Distinguished Professor in the Pamplin College of Business. Professor Keown is widely published in academic journals. His work has appeared in Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Financial Research, Journal of Banking and Finance, Financial Management, Journal of Portfolio Management, and many others. Two of his books are widely used in college finance classes all over the country—Financial Management and Foundations of Finance: The Logic and Practice of Financial Management. Professor Keown is a Fellow of Deci-sion Sciences Institute and served as Department Head for twelve years. In addition, he has served as the co-editor of both the Journal of Financial Research and the Finan-cial Management Association’s Survey and Synthesis Series. He was recently inducted into Ohio Wesleyan’s Athletic Hall of Fame for wrestling. His daughter and son are both married and live in Houston, Texas, and on Jeju Island in South Korea, while he and his wife live in Blacksburg, Virginia, where he collects original art from Mad magazine.

About the Author


vi

Brief ContentsPreface xiii

PART 1 Financial Planning 1

1 The Financial Planning Process 2 2 Measuring Your Financial Health and Making a Plan 30 3 Understanding and Appreciating the Time Value of Money 60 4 Tax Planning and Strategies 94

PART 2 Managing Your Money 135

5 Cash or Liquid Asset Management 136 6 Using Credit Cards: The Role of Open Credit 168 7 Student and Consumer Loans: The Role of Planned Borrowing 200 8 The Home and Automobile Decision 240

PART 3 Protecting Yourself with Insurance 289

9 Life and Health Insurance 290 10 Property and Liability Insurance 334

PART 4 Managing Your Investments 365

11 Investment Basics 366 12 Investing in Stocks 406 13 Investing in Bonds and Other Alternatives 434 14 Mutual Funds and Exchange Traded Funds: An Easy Way to Diversify 466

PART 5 Life Cycle Issues 503

15 Retirement Planning 504 16 Estate Planning: Saving Your Heirs Money and Headaches 542 17 Financial Life Events—Fitting the Pieces Together 566

Appendix A: Compound Sum of $1 604 Appendix B: Present Value of $1 606 Appendix C: Compound Sum of an Annuity of $1 for n Periods 608 Appendix D: Present Value of an Annuity of $1 for n Periods 610 Appendix E: Monthly Installment Loan Tables ($1,000 loan with interest

payments compounded monthly) 612

Index 614


viivii

ContentsPreface xiii

PART 1 Financial Planning 1

1 The Financial Planning Process 2Facing Financial Challenges 4

The Personal Financial Planning Process 5Step 1: Evaluate Your Financial Health 5Step 2: Define Your Financial Goals 5Step 3: Develop a Plan of Action 6Step 4: Implement Your Plan 6Step 5: Review Your Progress, Reevaluate, and

Revise Your Plan 7

Establishing Your Financial Goals 7The Life Cycle of Financial Planning 8

Thinking About Your Career 11Choosing a Major and a Career 11Getting a Job 14Being Successful in Your Career 15What Determines Your Income? 15Keeping a Perspective—Money Isn’t Everything 15

Developing Skills for Your Career 16

Lessons from the Recent Economic Downturn 18

Ten Principles of Personal Finance 20Principle 1: The Best Protection Is Knowledge 20Principle 2: Nothing Happens Without a Plan 21Principle 3: The Time Value of Money 21Principle 4: Taxes Affect Personal Finance

Decisions 22Principle 5: Stuff Happens, or the Importance of

Liquidity 22Principle 6: Waste Not, Want Not—Smart Spending

Matters 23Principle 7: Protect Yourself Against Major

Catastrophes 23Principle 8: Risk and Return Go Hand in Hand 23

Chapter Summaries 26 • Problems and Activities 27 • Discussion Case 1 28 • Discussion Case 2 29

2 Measuring Your Financial Health and Making a Plan 30Using a Balance Sheet to Measure Your

Wealth 32Assets: What You Own 33Liabilities: What You Owe 35Net Worth: A Measure of Your Wealth 35Sample Balance Sheet for Larry and Louise Tate 36

Using an Income Statement to Trace Your Money 36

Income: Where Your Money Comes From 38Expenditures: Where Your Money Goes 39Preparing an Income Statement: Louise and Larry

Tate 39

Using Ratios: Financial Thermometers 42Question 1: Do I Have Enough Liquidity to Meet

Emergencies? 42Question 2: Can I Meet My Debt Obligations? 44Question 3: Am I Saving as Much as I Think I Am? 45

Record Keeping 45

Putting It All Together: Budgeting 48Developing a Cash Budget 49Implementing the Cash Budget 50

Hiring a Professional 52What Planners Do 52Choosing a Professional Planner 52


3 Understanding and Appreciating the Time Value of Money 60Compound Interest and Future Values 62

How Compound Interest Works 62The Future-Value Interest Factor 64The Rule of 72 65Compound Interest with Nonannual Periods 65Using an Online or Handheld Financial

Calculator 66

Compounding and the Power of Time and Interest 68The Power of Time 68The Importance of the Interest Rate 69

Present Value—What’s It Worth in Today’s Dollars? 71Solving for I/Y and N Using a Financial Calculator 75

Annuities 76Compound Annuities 77Present Value of an Annuity 79How the Interest Rate and Time Work

Together 82Amortized Loans 83Amortized Loans with Monthly Payments Using a

Financial Calculator 84Perpetuities 85


Appendix Crunchin’ the Numbers—Advanced Topics in Time Value of Money Using the Tables 93


viii Contents

4 Tax Planning and Strategies 94The Federal Income Tax Structure 96

Marginal Versus Average Rates 98Effective Marginal Tax Rate 99Capital Gains and Dividend Income 100Cost-of-Living Increases in Tax Brackets,

Exemptions, and Deductions 101Paying Your Income Taxes 102

Other Taxes 102Other Income-Based Taxes 102Non-Income-Based Taxes 103

Calculating Your Taxes 103Step 1: Determining Gross or Total

Income 104Step 2: Calculating Adjusted Gross Income 104Step 3: Subtracting Deductions 105Step 4: Claiming Your Exemptions 107Step 5: Calculating Your Taxable Income and, from

That, Calculating Your Base Income Tax 108Step 6: Subtracting Your Credits and Determining

Your Taxes Due 110

Other Filing Considerations 111Choosing a Tax Form 111Electronic Filing 113Filing Late and Amending Returns 113Being Audited 114Help in Preparing Taxes 114

Model Taxpayers: The Taylors File Their Federal Tax Return 115Determining Gross or Total Income (line 22) 117Subtracting Adjustments to Gross or Total Income

and Calculating Adjusted Gross Income (line 37) 118

Subtracting Deductions (line 40) 118Claiming Exemptions (line 42) 118Calculating Total Tax (line 63) 118

Tax Strategies to Lower Your Taxes 119Maximize Deductions 120Look to Capital Gains and Dividend Income 121Shift Income to Family Members in Lower Tax

Brackets 122Receive Tax-Exempt Income 122Defer Taxes to the Future 122

Chapter Summaries 124 • Problems and Activities 126 • Discussion Case 1 127 • Discussion Case 2 128 • Continuing Case: Cory and Tisha Dumont 129

PART 2 Managing Your Money 135

5 Cash or Liquid Asset Management 136

Managing Liquid Assets 138

Automating Savings: Pay Yourself First 138

Financial Institutions 139“Banks” or Deposit-Type Financial Institutions 139

Nondeposit-Type Financial Institutions 139Online and Mobile Banking 140What to Look for in a Financial Institution 141

Cash Management Alternatives 142Checking Accounts 142Savings Accounts 143Money Market Deposit Accounts 143Certificates of Deposit 144Money Market Mutual Funds 144Asset Management Accounts 145U.S. Treasury Bills, or T-Bills 146U.S. Savings Bonds 146

Comparing Cash Management Alternatives 147Comparable Interest Rates 148Tax Considerations 149Safety 150

Establishing and Using a Checking Account 150Choosing a Financial Institution 151Balancing Your Checking Account 153Other Types of Checks 153

Electronic Funds Transfers 156Automated Teller Machines 156Debit Cards 157Smart Cards 158Prepaid Debit or Gift Cards 158Fixing Mistakes—Theirs, Not Yours 159


6 Using Credit Cards: The Role of Open Credit 168A First Look at Credit Cards and Open

Credit 170Interest Rates 170Calculating the Balance Owed 171Buying Money: The Cash Advance 172Grace Period 173Annual Fee 173Additional Fees 173

The Pros and Cons of Credit Cards 174The Advantages of Credit Cards 174The Drawbacks of Credit Cards 175What the CARD Act Means for You 176

Choosing a Source of Open Credit 177Bank Credit Cards 177Bank Credit Card Variations 178Travel and Entertainment Cards 178Single-Purpose Cards 179Traditional Charge Accounts 179The Choice: What’s Best for You 179

Getting a Credit Card 180Credit Evaluation: The Five Cs of Credit 181Your Credit Score 182Consumer Credit Rights 186Identity Theft 188


Contents ix

Controlling and Managing Your Credit Cards and Open Credit 189Reducing Your Balance 189Protecting Against Fraud 190Trouble Signs in Credit Card Spending 190If You Can’t Pay Your Credit Card Bills 191


7 Student and Consumer Loans: The Role of Planned Borrowing 200Consumer Loans—Your Choices 202

First Decision: Single-Payment Versus Installment Loans 202

Second Decision: Secured Versus Unsecured Loans 202

Third Decision: Variable-Rate Versus Fixed-Rate Loans 203

Fourth Decision: The Loan’s Maturity— Shorter-Versus Longer-Term Loans 204

Understand the Terms of the Loan: The Loan Contract 204

Special Types of Consumer Loans 205

Cost and Early Payment of Consumer Loans 207Cost of Single-Payment Loans 207Payday Loans—A Dangerous Kind of Single-

Payment Loan 210Cost of Installment Loans 211Early Payment of an Add-On Loan 214

Getting the Best Rate on Your Consumer Loans 215Inexpensive Sources 216More Expensive Sources 216Most Expensive Sources 216Keys to Getting the Best Rate 216Should You Borrow or Pay Cash? 217

Controlling Your Use of Debt 217Debt Limit Ratio 218Debt Resolution Rule 218Controlling Consumer Debt 218What to Do If You Can’t Pay Your Bills 219

Student Loans and Paying for College 221So Many Choices—Schools and Majors 222Borrowing Less and Borrowing Smarter 223Paying for Your College Education 225Manage Your Money Responsibly 229Repaying Your Loans 230


8 The Home and Automobile Decision 240Smart Buying 241

Step 1: Differentiate Want from Need 242Step 2: Do Your Homework 242

Step 3: Make Your Purchase 242Step 4: Maintain Your Purchase 243

Smart Buying in Action: Buying a Vehicle 244Step 1: Differentiate Want from Need 246Step 2: Do Your Homework 246Step 3: Make Your Purchase 248Step 4: Maintain Your Purchase 252

Smart Buying in Action: Housing 254Your Housing Options 254Step 1: Differentiate Want from Need 255Step 2: Do Your Homework 256

Renting Versus Buying 259

Determining What You Can Afford 262

Financing the Purchase—The Mortgage 264Sources of Mortgages 264Conventional and Government-Backed

Mortgages 264Fixed-Rate Mortgages 265Adjustable-Rate Mortgages 266Adjustable-Rate Versus Fixed-Rate

Mortgages 268Specialty Mortgage Options 268A Word of Warning: Beware of Subprime

Mortgages and Predatory Lending 270Mortgage Decisions: Length or Term of the

Loan 271Coming Up with the Down Payment 273Prequalifying 273Step 3: Make Your Purchase 273Step 4: Maintain Your Purchase 276


Appendix Crunchin’ the Numbers— Calculations for Figure 8.6 288

PART 3 Protecting Yourself with Insurance 289

9 Life and Health Insurance 290

The Importance of Insurance 292Why Are Health and Life Insurance So

Important? 292Why Is Health Care So Costly? 292What Do These High Costs Mean for You? 293What About Those Who Have No Health

Insurance? 293

Determining Your Life Insurance Needs 293Do You Need Life Insurance? 293How Much Life Insurance Do You Need? 295

Major Types of Life Insurance 298Term Insurance and Its Features 298Cash-Value Insurance and Its Features 300Term Versus Cash-Value Life Insurance 303Fine-Tuning Your Policy: Contract Clauses, Riders,

and Settlement or Payout Options 303


x Contents

Buying Life Insurance 306Selecting an Agent 307Comparing Costs 307Making a Purchase 308

Health Insurance 3082010 Health-Care Reform—Patient Protection and

Affordable Care Act 309Basic Health Insurance 310Dental and Eye Insurance 311Basic Health-Care Choices 311Private Health-Care Plans 312Government-Sponsored Health-Care Plans 315Controlling Health-Care Costs 318COBRA and Changing Jobs 319What About Choosing Not to Be Insured? 319What to Look for in a Health Insurance Plan 320Choosing an Insurance Plan 320

Disability Insurance 321Sources of Disability Insurance 321How Much Disability Coverage Should You

Have? 322Disability Features That Make Sense 322

Long-Term Care Insurance 324


10 Property and Liability Insurance 334Protecting Your Home 335

Packaged Policies: HOs 336Supplemental Coverage 339

Your Insurance Needs 340Coinsurance and the “80 Percent Rule” 340The Bottom Line 341Keeping Your Costs Down—Insurance Credit

Scoring 341Keeping Your Costs Down—Discounts and

Savings 343

Making Your Coverage Work 345

Automobile Insurance 346Personal Automobile Policy 347No-Fault Insurance 352Buying Automobile Insurance 352Filing a Claim 354


PART 4 Managing Your Investments 365

11 Investment Basics 366Before You Invest 368

Investing Versus Speculating 368Setting Investment Goals 369Financial Reality Check 370

Starting Your Investment Program 370Fitting Taxes into Investing 371Investment Choices 371The Returns from Investing 373

A Look at Risk–Return Trade-Offs 374Nominal and Real Rates of Return 374Historical Levels of Risk and Return 374Sources of Risk in the Risk–Return Trade-Off 375Diversification 376Understanding Your Tolerance and Capacity for

Risk 378

The Time Dimension of Investing and Asset Allocation 379Meeting Your Investment Goals and the Time

Dimension of Risk 379Asset Allocation 381

What You Should Know About Efficient Markets 383

Securities Markets 383Primary Markets 383Secondary Markets—Stocks 384International Markets 385Regulation of the Securities Markets 385

How Securities Are Traded 386Placing an Order 387Types of Orders 387Short Selling 388Dealing with Brokers 389Brokerage Accounts 389Cash Versus Margin Accounts 390Joint Accounts 391Choosing a Broker 391Online Trading 392

Sources of Investment Information 394Corporate Sources 394Brokerage Firm Reports 394The Press 395Investment Advisory Services 395Internet Sources 395

Chapter Summaries 398 • Problems and Activities 402 • Discussion Case 1 404 • Discussion Case 2 404 • Discussion Case 3 405

12 Investing in Stocks 406Why Consider Stocks? 407

The Language of Common Stocks 409Limited Liability 409Claims on Income 409Claims on Assets 410Voting Rights 410Stock Splits 410Stock Repurchases 411Book Value 411Earnings per Share 411Dividend Yield 411Market-to-Book or Price-to-Book Ratio 412Classification of Stocks 412

Stock Indexes and Quotes 412The Dow 413The S&P 500 and Other Indexes 413


Contents xi

Market Movements 413Reading Stock Quotes Online and in the

Newspaper 413

Valuation of Common Stock 415Fundamental and Technical Analysis

Approaches 415The Price/Earnings Ratio Approach 415SWOT Analysis 416

Stock Investment Strategies 418Dollar Cost Averaging 418Buy-and-Hold Strategy 420Dividend Reinvestment Plans 421As an Investor, What Should You Know? 421

Risks Associated with Common Stocks 421Another Look at Principle 8: Risk and Return Go

Hand in Hand 422


13 Investing in Bonds and Other Alternatives 434Why Consider Bonds? 436

Basic Bond Terminology and Features 437Par Value 437Coupon Interest Rate 437Indenture 437Call Provision 437Sinking Fund 438Types of Bonds 438Corporate Bonds 438Treasury and Agency Bonds 439Municipal Bonds 441Special Situation Bonds 441

Evaluating Bonds 442Bond Ratings—A Measure of Riskiness 442Bond Yield 443Valuation Principles 446Bond Valuation 446Why Bonds Fluctuate in Value 449What Bond Valuation Relationships Mean to the

Investor 453Reading Online Corporate Bond Quotes 453

Preferred Stock—An Alternative to Bonds 454Features and Characteristics of Preferred Stock 454Valuation of Preferred Stock 455Risks Associated with Preferred Stock 456

Investing in Real Estate 456Direct Investments in Real Estate 457Indirect Investments in Real Estate 457Investing in Real Estate: The Bottom Line 457

Investing—Speculating—in Gold, Silver, Gems, and Collectibles 458


14 Mutual Funds and Exchange Traded Funds: An Easy Way to Diversify 466Why Invest in Mutual Funds? 468

Advantages of Mutual Fund Investing 468Disadvantages of Mutual Fund Investing 469Mutual Fund-Amentals 470

Investment Companies 471Open-End Mutual Funds 472Closed-End Mutual Funds 472Exchange Traded Funds 473Unit Investment Trusts 474Real Estate Investment Trusts 475Hedge Funds—Something to Avoid 476

Calculating Mutual Fund Costs and Returns 476Load Versus No-Load Funds 476Management Fees and Expenses 47712b-1 Fees 477Calculating Mutual Fund Returns 478

Types and Objectives of Mutual Funds 481Money Market Mutual Funds 481Stock Mutual Funds 481Balanced Mutual Funds 483Asset Allocation Funds 484Life Cycle and Target Retirement Funds 484Bond Funds 484Mutual Fund Services 486

Buying a Mutual Fund 488Step 1: Determining Your Goals 488Step 2: Meeting Your Objectives 488Step 3: Selecting a Fund 488Step 4: Making the Purchase 491


PART 5 Life Cycle Issues 503

15 Retirement Planning 504Social Security and Employer-Funded

Pensions 506Financing Social Security 506Eligibility 507Retirement Benefits 507Disability and Survivor Benefits 509Employer-Funded Pensions 509Defined-Benefit Plans 509Cash-Balance Plans: The Latest Twist in Defined-

Benefit Plans 510

Plan Now, Retire Later 511Step 1: Set Goals 512Step 2: Estimate How Much You Will Need 512Step 3: Estimate Income at Retirement 514Step 4: Calculate the Annual Inflation-Adjusted

Shortfall 514


xii Contents

Step 5: Calculate How Much You Will Need to Cover This Shortfall 514

Step 6: Determine How Much You Must Save Annually Between Now and Retirement 515

Step 7: Put the Plan in Play and Save 515What Plan Is Best for You? 516

Retirement Plans in Addition to Social Security and Employer-Funded Pensions 518Employer-Sponsored Retirement Plans 518Retirement Plans for the Self-Employed and

Small-Business Employees 520Individual Retirement Arrangements 521

Facing Retirement—The Payout 525An Annuity, or Lifetime Payments 526A Lump-Sum Payment 527Tax Treatment of Distributions 528

Putting a Plan Together and Monitoring It 528Saving for Retirement—Let’s Postpone Starting for

1 Year 530


Appendix Crunchin’ the Numbers—Funding Your Retirement Needs 538

16 Estate Planning: Saving Your Heirs Money and Headaches 542The Estate Planning Process 544

Step 1: Determine the Value of Your Estate 545Step 2: Choose Your Heirs and Decide What They

Receive 545Step 3: Determine the Cash Needs of the

Estate 545Step 4: Select and Implement Your Estate

Planning Techniques 545Understanding and Avoiding Estate Taxes 546Calculating Estate Taxes 548

Wills 549Wills and Probate 549Wills and Estate Planning 550Writing a Will 550Updating or Changing a Will—The Codicil 551Letter of Last Instructions 551Selecting an Executor 551Other Estate Planning Documents 552

Avoiding Probate 552Joint Ownership 552Gifts 553Naming Beneficiaries in Contracts—Life Insurance

and Retirement Plans 554Trusts 554Living Trusts 555Testamentary Trusts 556A Last Word on Estate Planning 557


17 Financial Life Events—Fitting the Pieces Together 566The Ingredients of Success 568

The Financial Life Cycle 568Women and Personal Finance 569

Financial Life Events 569Life Event 1: Getting Started 569Life Event 2: Marriage 572Life Event 3: Buying a Home 575Life Event 4: Having a Child 576Life Event 5: Inheritances, Bonuses, or

Unexpected Money 579Life Event 6: A Major Illness 580Life Event 7: Caring for an Elderly

Parent 581Life Event 8: Retiring 582Life Event 9: Death of a Spouse 584Life Event 10: Divorce 585

The Keys to Success: A Dozen Decisions 586Number 1: Become Knowledgeable 586Number 2: Don’t Procrastinate 587Number 3: Live Below Your Means 587Number 4: Realize You Aren’t

Indestructible 588Number 5: Protect Your Stuff (and Look Out for

Lawyers) 588Number 6: Embrace the “B” Word (Budget) 589Number 7: Reinvent and Upgrade Your

Skills 590Number 8: Hide Your Plastic 590Number 9: Stocks Are Risky, but Not as Risky as

Not Investing in Them 591Number 10: Exploit Tax-Favored Retirement Plans

to the Fullest 591Number 11: Plan for the Number of Children You

Want 592Number 12: Stay Married 592

Tying Things Together: Debt and the Real World 592The Trap of Too Much Debt 593Successful Debt Management 593


Appendix A: Compound Sum of $1 604Appendix B: Present Value of $1 606Appendix C: Compound Sum of an Annuity of $1 for n

Periods 608Appendix D: Present Value of an Annuity of $1 for n

Periods 610Appendix E: Monthly Installment Loan Tables ($1,000

loan with interest payments compounded monthly) 612

Index 614


New to This EditionSince the last edition of Personal Finance: Turning Money into Wealth, a lot has changed in the world of personal finance, and much of this is driven by the economic turmoil resulting from the recent crash of the financial markets and the worst downturn in the economy since the Great Depression. While employment has recovered, many individuals left the workforce because they were unable to find jobs; interest rates are near all-time lows and just now starting to rise; housing prices dropped and then recovered, but not evenly; consumer debt (including mortgage debt) reached $12.25 trillion, more than doubling since 2000; and student loans have continued to rise at an alarming rate and now tops $1.44 trillion, with over 11 percent of those student loan balances over 90 days delinquent or in default. While the Federal Reserve and the government have made a number of changes aimed at bringing about stability in the financial markets, the economy has had a difficult time regaining its footing. If that wasn’t enough in the way of changes, the Affordable Care Act was almost dis-mantled, but even with the proposed legislative changes, much of it would continue to stand. As you will see, the entire book is updated to reflect the recent changes in the area of financial planning, including possible tax changes, new laws, the ever-changing investments landscape, the explosion of student loans, and credit card challenges facing graduating students, as well as other changes in the world of per-sonal finance. In addition, when legislative changes impacting topics in this book happen, they, along with their implications for personal finance, will be made avail-able in a companion website available at www.pearsonhighered.com/keown/. In short, because of these continuous and fast-paced changes occurring in the personal finance landscape, little remains exactly as it was in the previous edition. Some of the more dramatic changes to the new edition include the following revisions.

All text discussions and figures, tables, and facts have been updated to accurately reflect exciting developments in the field of finance in the last three years. Specific highlights include the following:

◆◆ New Love & Money Feature. Even before reading this book and taking this class you have probably realized that the way you approach personal finance has a huge impact on many different areas of your life. Certainly it will affect your ability to buy a house, your investment success, and whether or not you are able to retire early and comfortably, but it also can have just as big an impact on your love life and other personal relationships. While there is no ques-tion that money problems can cause tension in relationships, there is also no reason why it has to be this way. As you might expect, while there are some things that you simply shouldn’t do when it comes to handling your money and mak-ing personal financial decisions if you want your relationships to thrive, there are also some actions you can take to keep money from sabotaging your relationships. In the Love & Money boxes, we’ll not only take a look at people’s attitudes towards and thinking about money and love, we’ll also give you some personal finance advice aimed at helping you build better, stronger, and perhaps lasting relationships.

Preface

CHAPTER 7 • Student and Consumer Loans: The Role of Planned Borrowing 231

BEHAVIORAL INSIGHTS

Principle 9: Mind Games, Your Financial Personality, and Your Money Try this little experi-ment: Write down on a piece of paper six things you own that are in your current home. Make two copies of the paper. On one copy, write down how much you would have to be paid to sell each item. On the second page, write down how much you would be willing to pay for each item if you found it at the local thrift shop. Really, try this and we will talk about it later.

principle

9

L O V E M O N E Y

With over $1.4 trillion in student debt carried by over 40 million Americans, it seems like everyone has stu-dent debt these days. So it doesn’t cause any damage to your love life, does it? Well, according to a recent TD Ameritrade survey, it does. In fact, 26 percent of those surveyed said they would be less likely to date someone with student debt. That’s not as bad as we saw for credit card debt in the last chapter, but it’s still substantial.

As we all know, student debt can be enormous—even reaching above $100,000. In fact, the aver-age U.S. household with student debt owes about $49,042. It shouldn’t come as any surprise that student debt can derail your love life. After all, marrying some-one who owes close to $50,000 can present chal-lenges. But why might student debt be a deal breaker? The question here is whether it was taken on as part of a bigger plan: For example, was it the only way you could realistically attend college and get that degree so that you could get the job you really aspired to, or was it simply a result of carelessness and bad financial habits? That being said, you can see why the answers to these questions are so critically important:

• Is there a plan to pay the loan off?• Does “extra money” go toward the loan, or is it

spent on the fun activity of the day?• If the debt was the result of bad financial habits, are

those habits a thing of the past?

If there is a plan, there is a good chance that the per-son is responsible and financially committed—the kind of person that won’t drag you into financial problems in the future.

Just as student loans can have a negative impact on your love life, any substantial debt can also do seri-ous damage. NerdWallet recently polled millennials (those between 18 and 34 years old) and found that 38 percent brought auto loan debt into their new rela-tionship, while 27 percent brought medical debt. So what’s the answer? If you’re bringing student or other types of debt into a relationship, what should you do? And if it’s your partner with the debt, how can you make things work? The key is openness and honesty. Once the relationship gets serious, it’s time to bring everything to the table. Each partner should be aware of where the other partner stands with respect to debt and money. After that, you need to put together a plan for dealing with the debt and align your financial goals. While you may not have the amount of finan-cial flexibility a debt-free relationship has, there is a good deal of satisfaction in setting realistic goals and working toward them as a couple.

74% woulddate someone

with student debt

26% wouldnot date

someone withstudent debt

26 percent of those surveyed said they would be less likely to date someone with student debt.

M07_KEOW0363_08_SE_C07.indd 231 15/11/17 4:52 PM

xiii


xiv Preface

◆◆ Expanded Coverage of Behavioral Finance. Each chapter ends with a section titled “Behavioral Insights—Principle 9: Mind Games, Your Financial Personality, and Your Money.” These boxes have been updated and expanded and serve not only to highlight how behavioral biases can sabotage financial well-

CHAPTER 8 • The Home and Automobile Decision 277

of $83,789.07. If you refinance this loan over 15 years at 8 percent, your payments will drop to $800.73.

If you estimate that your total after-tax closing costs will be $2,600, it will take you 23.8 months for the savings from the decrease in monthly payments to cover the closing costs incurred as a result of refinancing, as shown in Figure 8.11. Thus, if you expect to continue to live in your home for over 2 years, you should consider refinancing at the lower rate.

srebmuN ruoYelpmaxEgnicnanifeR morf stifeneB ylhtnoM

a. Present monthly mortgage payments $952.32 ___________b. Mortgage payments after refinancing $800.73 ___________c. Monthly savings, pretax (line a line b) $151.59 ___________d. Lost tax savings (line c 28% tax rate) $42.45 ___________e. Monthly savings on an after-tax basis (line c line d) $109.14 ___________

Cost of Refinancing

f. Total after-tax closing costs, including any prepayment penalty incurred $2,600 ___________

Number of Months Needed to Break Even

g. Months needed for interest saved to equal the refinancing costs incurred as a result of taking out a new mortgage loan (line f shtnom 8.32 )e enil ___________

FIGURE 8.11 Worksheet for Refinancing Analysis

BEHAVIORAL INSIGHTS

Principle 9: Mind Games, Your Financial Personality, and Your Money While much of this book deals with saving money, much of this chapter looks at spending it—and spend-ing it intelligently, using the smart buying process. Do you think you are a smart buyer? You are at your local mall shopping for a sweater for your dad’s birthday. Ever find yourself wishing you had a calculator? How fast can you figure out what 25 percent off of $52.00 is? Would you make your “decision to purchase” faster if the seller just said “$13.00 off these sweaters today”? Hint: 25 percent of $52.00 is $13.00!

We all know how important “presentation” is in our daily life. Most of us would be willing to pay a little more for the exact same “eggs over easy with ham and hash browns” when it is served on a china plate with stainless utensils as opposed to being served on a paper plate with a plastic fork! Same breakfast—different pre-sentation. When it comes to smart buying, how a discount is presented can impact sales. Remember that sweater that normally costs $52 and is on sale for $39; it is sell-ing for 25 percent off or $13 off—same thing. But when it is presented to consumers, more people will buy it if they see it on sale for 25 percent off rather than $13 off. On the other hand, if a new HDTV that normally sells for $2,000 is on sale for $1,500, it could be advertised as either 25 percent off or $500 off—but in this case, $500 off would produce more sales. This is referred to as “the Rule of 100,” which is a mar-keting concept that basically says that if a product costs less than $100, a “percentage discount” seems larger than a stated “dollar amount” discount. And it’s why you feel better about taking that 25 percent discount on the sweater for dad instead of just $13 off, but you’d want $500 off that TV rather than a 25 percent discount.

principle

9

M08_KEOW0363_08_SE_C08.indd 277 22/11/17 10:04 AM

being but also to demonstrate how an under-standing of these biases can be used to avoid destructive financial behavior. In addition, we discuss how recognizing these behavioral biases can lead to better financial decisions. For example, acknowledgment of the psychological/behavioral patterns or mind games that come into play when making financial decisions may help students avoid excessive credit card and student loan debt, save more for retirement, and make better investment decisions now and in the future.◆◆ Increased Emphasis on the Use of the Internet and Apps for Smartphones. This edition continues to increase emphasis on the use of apps for smartphones and the best of the Internet where appropriate. For example, the Mvelopes, Quapital, Mint.com and Level Money apps are easily installed on a smartphone and are both introduced and described when discussing budgeting, saving for your goals, and record keeping. These apps make tedious tasks easy—and, if you can imagine, fun. Apps and the best of personal finance Web sites on the Internet are also introduced when discussing credit cards, student loans, insurance, invest-ments, and retirement planning.◆◆ Updated Coverage of Investments. The Dow Jones Industiral Average has more than tripled since March 2009! This has brought about changes in basic invest-ments and asset allocation decisions. These changes are reflected in Chapters 11 and 12. In addition, how information on investment alternatives is gathered has changed quite a bit since the previous edition – these changes are reflected in Chapter 11.◆◆ Updated Coverage of Bonds and the Bond Market. While the stock market climbed dramatically since the great recession, interest rates have moved down slightly, with long-term rates reaching historical low levels. Since asset allocia-tion decisions involve deciding how much to invest in stocks versus bonds, the impact of low interest rate on bonds is examined in Chapter 13 along with the inverse relationship between bond prices and interest rates – that is, when mar-ket interest rates rise, the value of a bond that is owned falls. This is not only examined, but the implications for asset allocation decisions are also developed and discussed.◆◆ Updated and Expanded Coverage of ETFs. Chapter 14 has been retitled to “Mutual Funds and ETFs: An Easy Way to Diversify,” to reflect the increased emphasis on ETFs in this chapter. Today, over $2.5 trillion is invested in ETFs, and ETFs are growing at an ever-increasing rate. Because ETFs are increasingly used as a tool for diversification by allowing investors to take an instant position in a sector or country with very low costs, they now play an increased role in the asset allocation process of investors.

Solving Teaching and Learning ChallengesOnce, not that long ago, a fundamental background in financial planning and invest-ments was not necessary for most university students. Financial instruments were not overly complex; students did not have access to numerous, high-limit credit


Preface xv

cards which enabled them to amass significant personal debt almost effortlessly; and a college education did not involve much in the way of student loans. In addition, in an earlier age of relatively high, full-time, and stable employment, retirement planning was easy: your long-term employer basically did it for you. In such a period, financial explanations, expectations, and communications were gener-ally straightforward, realistic, and clear. And that—by and large—has changed. Today, we are living in a world where financial instruments are increasingly complex and require a higher level of financial literacy. At an early age students are asked to make financial decisions as to how they will finance their college experience. This includes choosing between various types of student loans and even how much they will need to borrow, which will impact them for years to come. Once they graduate they will face consumer loan decisions when buying a car, furniture, appliances or even stereo equipment that involve making deci-sions on single-payment versus installment loans, secured versus unsecured loans, variable rate versus fixed-rate loans, as well as a decision on the maturity of the loan. Similarly, deciding on a mortgage to buy a house involves choices of not only how much to borrow, but also how to select from among the different loan structures with fixed rate, variable rate, and interest-only loans, each one having different implications for the borrower’s financial future. This complexity also extends to life insurance. When the time is right to get our first life insurance policy, most of us do not seek it out—instead, someone approaches us, convinces us it’s important, and then we buy it. Because insurance has a language all its own, it is often difficult to understand all of the subtle differences between one policy and another, and to know how much to buy – once again, financial literacy is the key to making good financial decisions. Finally, just 30 years ago retire-ment meant taking a pension from your employer and letting Social Security pick up any slack. Not anymore. Thanks to the recent drive to cut spending, employ-ers tend not to provide pensions, and those that still do have reduced them to as little as possible. That leaves a lot of slack for Social Security, and given the unsustainability of those promised benefits from Social Security coupled with the government’s drive to cut its own spending, it is likely that the Social Security system that our students see upon their retirement will not be the same one we have now, and that is also true for Medicare. Today’s students will have to rely on self-directed retirement plans, 401k and IRA accounts, where they not only decide how much to save, but also how to invest that money – decisions requiring a knowledge of investing terms and tools – with the results of those decisions deter-mining whether they have a retirement of leisure or nightmare. In effect, our stu-dents must not only know how much they will need for retirement, but they must also have a solid grounding in the terms, tools and rules of investing in order to reach their financial goals and avoid the pitfalls that might upend their financial future. The bottom line is that everyone must take responsibility for their own retirement, and the earlier that process begins, the easier it becomes.

For many students, the Personal Finance course is their initial and only expo-sure to personal finance, so it is important that the material is presented in a way that leaves a lasting impression. Tools, techniques, and equations are eas-ily forgotten, but the logic and fundamental principles that drive their use, once understood, will remain and will become part of each student’s “financial per-sonality.” Personal Finance: Turning Money into Wealth, Eighth Edition, empowers students, through the presentation of the ten fundamental principles of personal finance, to successfully make and carry out a plan for their financial future. Throughout the rest of their lives, students will have the ability to draw on these principles, which will help them effectively deal with an ever-changing financial environment.


xvi Preface

◆◆Easy-to-Follow Advice. The proac-tive checklists, which appear through-out the text, serve as useful learning tools for students. These boxes identify areas of concern and propose ques-tions to ask when buying a car, getting insurance, and investing in mutual funds, as well as performing other per-sonal finance tasks.

Some of the features used to overcome teaching and learning challenges include:

◆◆ The Ten Principles of Personal Finance. Each chapter of the text touches back on the ten principles introduced in Chapter 1 and shows how to apply these principles to particular situations.

226 PART 2 • Managing your Money

◆◆ The Federal Perkins Loan Program is a school-based loan program for under-graduate and graduate students who have exceptional financial need.◆◆ Direct Subsidized Loans are made only to undergraduates who establish finan-cial need. The government pays the interest on this loan while the student is still in school and during the 6-month grace period following graduation before the student starts loan repayment.◆◆ Direct Unsubsidized Loans are made to undergraduate, graduate, and profes-sional students. It is not necessary to establish financial need. If a student chooses

Federal Perkins Loan ProgramA school-based loan program for undergraduate and graduate students who have exceptional financial need.

Direct Subsidized LoansSubsidized student loans made only to undergraduates who establish financial need.

529 College Savings Plan

529 Prepaid Tuition Plan

Coverdell Educational Savings Account

Who Owns It? Contributor Contributor Contributor

What Can I Invest In?

Typically, plans provide several investment options.

Purchase units or credits at participating school.

No restrictions.

When Can It Be Used?

No age limit. Plan may set age or grade limits.

No contributions can be made after beneficiary turns age 18, and withdrawals must be made before beneficiary turns 30.An exception is made for special needs children.

What Expenses Are Covered Besides Tuition and Fees?

Qualified education expenses for postsecondary education.

Only tuition and mandatory fees for postsecondary education are covered. Few exceptions are made.

Qualified elementary and secondary education expenses or qualified postsecondary education expenses.

How Much Can I Contribute?

Varies from plan to plan. Majority of plans permit total contributions in excess of $250,000 per beneficiary.

Fixed by terms of contract you purchase.

Contributor: $2,000 per beneficiary per year.Beneficiary: $2,000, does not matter how many ESAs are set up.

Federal Tax Advantages

Earnings grow tax deferred and are tax free if used for qualified education expenses.



State Tax Advantages

Vary from state to state, but some states provide tax deduction for contributions, tax-free earnings growth, and tax-free withdrawals for qualified education expenses.

Vary from state to state, but some states provide tax deduction for contributions, tax-free earnings growth, and tax-free withdrawals for qualified education expenses.

None

Income Phase-Out

None None Single filers: $95,000–$110,000Joint filers: $190,000–$220,000

What Are Penalties for “Other Use”?

Earnings are taxed as ordinary income and may be subject to 10 percent penalty.

Earnings are taxed as ordinary income and may be subject to 10 percent penalty.

Withdrawals that exceed the beneficiary’s education expenses for the year may be taxable.

FIGURE 7.4 College Savings Plans Comparison

Source: Smart Saving for College—Better Buy Degrees. Copyright © 2016 FINRA. Reprinted with permission from FINRA.

M07_KEOW0363_08_SE_C07.indd 226 15/11/17 4:52 PM

452 PART 4 • Managing Your Investments

more than the call price for a bond because they know it could be called away from them for that price at any time. Before moving on, let’s make sure you understand the pros and cons of bonds. Table 13.2 lists the benefits and dangers of bonds, while Checklist 13.1 looks at picking a good bond.

TABLE 13.2 The Pros and Cons of Investing in Bonds

Benefits of Bonds◆● If interest rates drop, bond prices will rise. If interest rates drop, that inverse relationship between interest rates and bond prices will work in your favor. In that case, you’ll want a long-term, noncallable bond.

◆● Bonds reduce risk through diversification. Any time you add a new investment to your portfolio that doesn’t move in tandem with the other investments in your portfolio, you reduce your portfolio risk.

◆● Bonds produce steady current income. What more need we say?◆● Bonds can be a safe investment if held to maturity. If you hold the bond to maturity and it doesn’t default, it’ll return exactly what it promises.

Dangers of Bonds◆● If interest rates rise, bond prices will fall. The longer the maturity, the more the bond will fluctuate.◆● If the issuer experiences financial problems, bond values drop. If an issuer can’t make interest or princi-pal payments, the bond will plummet in value. Minor financial problems can also cause the bond to drop in value. Of course, any time the bond rating drops, bond values drop like a stone.

◆● If interest rates drop, the bond may be called. Most corporate bonds are callable. In theory, when interest rates drop, the value of a bond should rise. However, the issuer may decide to refinance the bond offering with bonds that have a lower interest rate. The bonds may be called away, leaving you to reinvest the pro-ceeds from the called bonds at lower interest rates.

◆● If you need to sell your bonds early, you may have a problem selling them at a reasonable price, par-ticularly if they’re bonds issued by a smaller corporation. There isn’t a strong secondary market for the bonds of smaller corporations. In short, bonds aren’t a very liquid investment.

◆● Finding a good investment outlet for the interest you receive may be difficult. If you’re using bonds to accumulate wealth, it may be difficult to find a good investment outlet for the interest you receive. Without reinvesting the interest payments, there’ll be no accumulation of wealth from investing in bonds unless you’re investing in zero or very low coupon bonds.

Think about the effect of taxes. Consider municipals, particularly if you’re in a high tax bracket. Keep the inverse relationship between interest rates and bond prices in mind. If interest rates are very low, the only way they can go is up (which would cause bond prices to drop), so you might want to invest in shorter-term bonds.

If you’re buying a corporate bond, avoid losers. Look for and avoid firms that might experience major financial problems. All other firms are pretty much the same.

Limit yourself to bonds rated AA or above. In this way, you minimize any worry regarding a possible default by the issuer.

Buy your bond when it’s first issued rather than in the secondary market. The price is generally fair, and the sales commission on a newly issued bond is paid by the issuer.

Avoid bonds that might get called. Before you buy a bond, ask your broker or financial planner if the bond is likely to be called. If so, pick another one.

Match your bond’s maturity to your investment time horizon. In this way, you can hold the bond to maturity and avoid having to sell in the secondary market, where you don’t always get a fair price.

Stick to large issues. If you think you might have to sell before maturity and are buying a corporate bond, make sure you buy a bond issued by a large corporation—the secondary market is generally more active for them.

When in doubt, go Treasury! If you’re still unsure, it’s better to be safe than sorry—buy a Treasury bond.

CHECKLIST 13.1 Picking a Good Bond

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442 PART 4 • Managing Your Investments

maturity, they return the entire par value. As a result, the entire return is made up of the bond’s appreciation in value from its discount purchase price to its price at maturity.

A zero coupon bond can be thought of as something similar to a savings bond, and it appeals to those investors who need a lump sum of money at some future date but don’t want to be concerned about reinvesting interest payments. Zero coupon bonds are issued by corporations and municipalities, and there are even mortgage-backed zeros, but without question, the dominant player in this market is the U.S. government. The government’s zero coupon bonds are called STRIPS.

The major disadvantage of these bonds is that while you don’t receive any income annually, you’re taxed as though you do. The IRS considers any annual appreciation in value (or as the IRS calls it, the undistributed interest) as subject to tax. Another disadvantage of zero coupon bonds is that they tend to fluctuate in value with changes in the interest rate more than traditional bonds do. For example, in 1994, the price of 30-year zero coupon Treasury bonds dropped 18.7 percent, and then in 1995, it rose 63.1 percent. Zero coupon bonds aren’t a good investment if you may have to sell them before they mature. They are best suited for tax-deferred retire-ment accounts such as IRAs or Keogh plans, where the tax disadvantage disappears.

Junk Bonds Junk bonds are low-rated bonds, also called high-yield bonds, which are bonds rated BB or below. (We explain bond ratings in the next section.) Origi-nally, the term applied to bonds issued by firms with sound financial histories that experienced severe financial problems and began suffering from poor credit ratings. Today, the term junk bond refers to any bond with a low rating. The major issuers of junk bonds are new firms that haven’t yet established a performance record.

Because junk bonds carry a much greater risk of default, they also carry an inter-est rate 3 to 6 percent above that of AAA-grade long-term bonds. The problem with junk bonds is that they haven’t been around long enough for us to really know what will happen in a major recession.

Junk bonds are high-risk investments. Moreover, most junk bonds are callable. That means that if the firm does do well and recovers from its difficulties, then the bond will be called. If the firm doesn’t do well, it could default. Neither alternative is a good one. Prudent investors generally avoid junk bonds. Hey, they’re not called junk for nothing!

Evaluating BondsNot only do you need to know bond terms and what kinds of bonds there are, but also you need to know how to evaluate them. That means understanding what a bond yield and a rating are and knowing how to read a bond quote on the Internet or in the newspaper.

Bond Ratings—A Measure of RiskinessJohn Moody first began to rate bonds in 1909. Since that time, two major rating agen-cies—Moody’s and Standard & Poor’s—have provided ratings on thousands of cor-porate, city, and state bonds. These ratings involve a judgment about the future risk potential of a bond—specifically, its default risk, or the chance that the issuer may not be able to meet its obligation to pay interest or repay the principal sometime in the future.

The poorer the bond rating, the higher the rate of return demanded by investors. That’s exactly what you’d expect, given Principle 8: Risk and Return Go Hand in Hand. Generally, these bond ratings run from AAA for the safest bonds to D for

principle

8

Junk BondsVery risky, low-rated bonds, also called high-yield bonds. These bonds are rated BB or below.

Calculate the value of a bond and understand the factors that cause bond value to change.

LO3

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◆◆ Extensive Coverage of Student Loans and Paying for College, Covering Almost Half of Chapter 7. This chapter, titled “Student and Consumer Loans: The Role of Planned Borrow-ing,” gives students an in-depth look at the world of student loans to help untangle the complexities and jargon associated with them and facilitate good decision-making practices.◆◆ Personal Finance Worksheets. Com-panion worksheets are available for this text that provide a step-by-step analy-

sis of many of the personal finance decisions examined in the book. Instructors can assign them as homework or use them to guide students through actual decisions. Icons in the text indicate content areas, as well as cases and problems that utilize the worksheets. The worksheets are available in MyLab Finance at http://www.pearson .com/mylab/finance and at the Instructor’s Resource Center at http://www .pearsonhighered.com/irc.

• Your Financial Plan. This series of exercises available in MyLab Finance at www.pearson.com/mylab/finance utilize the worksheets and generate a very basic financial plan to explore where students are today, where they want to be in the future, and what they need to do to get there. Also included is a sec-tion on how to use a financial calculator.

◆◆ Learning Objectives. Each chapter opens with a set of action-oriented learning objectives. As these objectives are covered in the text, an identifying icon appears in the margin.


Preface xvii

◆◆ Continuing Case of Cory and Tisha Dumont. The book is divided into five parts, and at the end of each part, a Con-tinuing Case provides an opportunity to synthesize and integrate the many different financial concepts presented in the book. It gives students a chance to construct finan-cial statements, analyze a changing finan-cial situation, calculate taxes, measure risk exposure, and develop a financial plan.◆◆ Behavioral Insights—Principle 9: Mind Games, Your Financial Personality, and Your Money. Each chapter has a new section devoted to examining the impact of various behavioral traits and biases that we all share and that contribute to an individual’s “financial personality.” This exploration of patterns of thought and behavior offers insights as to why and how people sometimes make illogical or irrational personal finance decisions.

◆◆ Stop and Think. These short boxes pro-vide students with insights as to what the material actually means—its implications and the big picture.

CHAPTER 4 • Tax Planning and Strategies 129

Other medical expenses $3,600Charitable contributions $3,500Moving expenses $3,000Austin’s unreimbursed business expenses $2,300Qualified adoption expenses $6,700State taxes withheld and owed $4,000

Remember that Anya has some special tax expense deductions because she is self-employed. Be sure to include them when estimating their 2017 taxes.

Questions1. Calculate Anya’s Social Security and Medicare taxes. Calculate how much of these taxes

are deductible.

2. Calculate the Goulds’ total income and adjusted gross income for the year.

3. Are the moving expenses deductible? Why or why not?

4. Should the Goulds take the standard deduction or should they itemize? What is the amount of their deduction?

5. What tax form will the Goulds use? Why?

6. What credits might the Goulds use to reduce their tax liability?

Continuing Case: Cory and Tisha DumontPART I: Financial PlanningThe objective of the Continuing Case is to help you synthesize and integrate the various financial planning concepts you have been learning. The case will help you apply your knowledge of constructing financial statements, assessing financial data and resources, calculating taxes, measuring risk exposures, creating specific financial plans for accu-mulating assets, and analyzing strengths and weaknesses in financial situations.

At the end of each book part, you’ll be asked to help Cory and Tisha Dumont answer their personal finance questions. By the end of the book, you’ll know more about Cory and Tisha than you can imagine. Who knows—maybe you have encoun-tered, or will encounter, the same issues that the Dumonts face. After helping the Dumonts answer their questions, perhaps you will be better equipped to achieve your own financial goals!

BackgroundCory and Tisha Dumont recently read an article on personal financial planning in Money. The article discussed common financial dilemmas that families face through-out the life cycle. After reading the article, Cory and Tisha realized they have a lot to learn. They are considering enrolling in a personal finance course at their local university but feel they need more urgent help right now. Based on record-keeping suggestions in the Money article, Cory and Tisha have put together the following information to help you answer their personal finance questions.

1. Family: Cory and Tisha met in college when they were in their early 20s. They continued to date after graduation, and 6 years ago they got married. Cory is 31 years old. Tisha is 30 years old. Their son, Chad, just turned 4 years old, and their daughter, Haley, is 2 years old. They also have a very fat tabby cat named Ms. Cat.

2. Employment: Cory works as a store manager and makes $45,000 a year. Tisha works as an accountant and earns $53,000 a year.

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198 PART 2 • Managing your Money

Discussion Case 1This case is available in MyLab Finance.

Maria will be a college sophomore next year, and she is determined to have her own credit card. She will not be employed during the school year but is convinced that she can pay for credit card expenses based on her summer earnings. Maria’s parents have read a number of articles about the problems of credit cards and college students, including examples of students leaving school after a downward spiral of obtaining credit cards, overspending, working to pay bills, worrying about bills, working more hours to pay bills, and eventually withdrawing from school. When Maria showed up with a handful of applications, including Visa, a Gold Master-Card, Discover, a Visa sponsored by her university, an American Express, a secured MasterCard, and a gas company card, her parents were overwhelmed. Maria admitted she didn’t want them all. “I’m not stupid,” she declared. Since Maria obviously needed to learn about credit cards, her parents agreed to cosign her application on one condition. She had to approach her choice just as she would a class project and research the following questions.

Questions1. Assuming Maria does not really care about her parents’ approval and ignores their assign-

ment, will she be able to receive a credit card without their help? Would your answer change if Maria was a graduating senior?

2. Why would an unemployed college student need a credit card? What are the advantages of having a credit card? What are the disadvantages?

3. Should Maria have more than one card? What is the recommended number of credit cards for the average consumer?

4. Shopping for credit can be compared to shopping for any other consumer product— consider the product’s cost, features, advantages, and disadvantages. In other words, does the product meet the user’s needs? Help Maria compare her credit choices, given the applications she has collected.

5. Based on the analysis in Question 4, what class(es) of credit cards, if any, should Maria seri-ously consider? What other products, if any, might she consider applying for?

6. List and summarize the basic factors that affect credit card costs. Rank these factors in terms of importance and relevance based on Maria’s situation.

7. While comparing the applications she had collected, Maria was thrilled to receive a “preapproved” offer for a standard card. What precautions should Maria be alert to when considering this offer?

8. If Maria uses her card only for her books this fall and next fall, how will these purchases affect her monthly payments if she still wants to eliminate her balance and be debt free in 24 months? (Assume that her book purchases are for $600 and are 3 months and 15 months away.)

9. To avoid credit abuse problems, what are the most important rules for Maria to follow when using a credit card?

10. How might Maria’s credit card use impact her future job search? What should she do to avoid any problems?

11. To avoid credit card fraud or identity theft problems, what are the most important rules for Maria to follow when using a credit card?

Discussion Case 2This case is available in MyLab Finance.

Garth was amazed to hear that his friend Lindsey always pays off her credit card balance each month. Garth just assumed that everyone used credit cards the same way—buy now, pay

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CHAPTER 14 • Mutual Funds and Exchange Traded Funds: An Easy Way to Diversify 479

For example, let’s assume we have a fund with

beginning NAV = $19.45

ending NAV = $23.59

dividends distributed = $ 0.60

capital gains distributed = $ 0.47

We can calculate our return as follows:

total return =+0.60 + +0.47 + (+23.59 - +19.45)

+19.45

=+0.60 + +0.47 + +4.14

+19.45

=+5.21+19.45

= 26.79,

The return is 26.79 percent.If you automatically reinvest any distributions, your return is a result of both the

increase in the NAV of the shares and the increased number of shares you hold. As you automatically reinvest any distributions, the number of shares that you hold increases. As a result, you can calculate your return by taking the value of your ending holdings minus your initial investment and divide this by the value of your initial investment.

total return =

(number of ending shares * ending price) -(number of beginning shares * beginning price)

number of beginning shares * beginning price

Thus, if you initially purchase 500 shares at an NAV of $19.45 and, as a result of auto-matically reinvesting any distributions, you end up with 585 shares with an NAV of $23.59, you can calculate your return as follows:

total return =(585 * $23.59) - (500 * $19.45)

500 * $19.45

=$13,800.15 - $9,725.00

$9,725.00

=$4,075.15$9,725.00

= 41.90,

The return is 41.9 percent. Keep in mind, though, that these formulas don’t take taxes into account.

Calculating a fund’s return should help you spot funds that have been consistent winners over time and avoid those that have performed poorly. Once you’ve found a fund that fits your objectives, keep a close eye on expenses and fees, and try to keep them to a minimum. After that, you might as well go for past winners and avoid losers. There is strong evidence that minimizing fees and expenses can put you on a path toward better returns. There is also evidence that strong performers over the past 3 years remain strong performers for the following 3 years.

S T O P & T H I N KLook closely at the expenses and fees charged for man-aging a mutual fund before investing—their impact can be significant. Look, for example, at a mutual fund with an expense ratio of 1.3 percent (the average expense ratio for an actively managed equity fund—that is, a non-index mutual fund—is around 1.25 percent) versus one with an expense ratio of 0.05 percent. If you put $25,000 in both of these funds, each returning 10 percent com-pounded over the next 25 years, you’d end up with a not so insignificant $64,000 more in the lower-expense fund. In choosing a mutual fund, what would you look for?

M14_KEOW0363_08_SE_C14.indd 479 22/11/17 10:11 AM

◆◆ Discussion Cases. Each chapter closes with a set of at least two mini-cases that pro-vide students with real-life problems that tie together the chapter topics and require a practical financial decision.


xviii Preface

◆◆ Action Plan—Principle 10: Just Do It! Each chapter ends with concise directions encour-aging students to put into play the personal finance lessons learned in that chapter.◆◆ Ten Financial Life Events. The concepts and tools in this book are all tied together in Chapter 17, the final chapter, by examining

CHAPTER 15 • Retirement Planning 531

resolutions. It is for this reason that many employers enroll their new employees automatically into a retirement plan.

For those companies that don’t have automatic enrollment in a defined-contribution plan, employees must actively change their status quo from “not saving” to “joining and contributing.” And we know how the status quo bias strengthens our preference for keeping things the way they are and makes us resistant to change—especially when a change will cost us some money.

Choice Overload and the Complexity of the Decision Studies have shown that as the num-ber of retirement options increases, participation actually decreases. The task of choosing a retirement plan simply becomes overwhelming. This tendency to freeze up when there are too many choices has also been demonstrated in other areas. Take, for example, one well-known study where shoppers in a gourmet food store had to pass by a large selec-tion of speciality jams and jellies. It was found that although they spent more time look-ing at them, fewer shoppers actually made a purchase. But when a small display with only four choices was presented, almost everyone who stopped to look also bought a jar.

When it comes to retirement planning, the behavioral problems go beyond the problem of too many choices. Individuals are also thrown off by the complexity and importance of the decision—their reaction many times is to simply try to get it over with. In fact, a survey of the University of Southern California faculty and staff found that 58 percent of the respondents took less than 1 hour to determine both their contribution rate and their investment elections. If you think about it, you probably spend a lot more time than that planning for Spring Break.

Inertia in Contributions and Investment Choices or Decision Paralysis Many individuals start out with relatively low contribution levels—which are usually in line with their begin-ning salary—and never change them as their salary level increases. They also never change their investment choices. For example, if they initially sign up for the retirement plan with a default contribution rate of 2 or 3 percent, they never change this contribu-tion rate. In addition, if they initially put their retirement money in a money market fund, they don’t change that either. Today, there are roughly 8,000 publicly traded stock and bond funds, and for many workers, the prospect of choosing among them is paralyzing.

One proposed solution to this problem is the Save More Tomorrow (or SmarT) pro-gram.3 Under this program, plan participants precommit to increasing their retirement saving rates when their salary increases or on a regularly scheduled basis—for exam-ple, on their anniversary date with the company. This solution avoids self-control prob-lems by allowing for precommitment, and since workers sign up for the program when they join the company, no future decision is required, so inertia works to their benefit.

When it comes to saving for your retirement, you often hear this argument: “Well, what if I don’t live long enough to enjoy retirement?” The simple answer is another question: “What if you do?” Be prepared.

ACTION PLAN

Principle 10: Just Do It! It may seem like a long way off, but now is the time to begin saving for retirement. Here are some tips.

◆◆ Don’t procrastinate. Remember how the time value of money works: The longer your investment time horizon is, the more your money grows. For example, if you’re 22 and plan on retiring at 67, you could begin funding your Roth IRA at

principle

10

3 Richard Thaler and Shlomo Benartzi, “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving,” Journal of Political Economy 112, no. 1, pt. 2 (2004): S164.

M15_KEOW0363_08_SE_C15.indd 531 22/11/17 10:12 AM

76 PART 1 • Financial Planning

you’ll notice that PV is input with a negative sign. In effect, the $7,752 is a cash outflow (the money is leaving your hands), whereas the $20,000 is money that you will receive. If you don’t give one of these values a negative sign, you can’t solve the problem, and if you have a TI BAII Plus calculator, you’ll receive an “Error 5” message.

Calculator Clues Solving for N—the Number of PaymentsSolving for the number of payments using a financial calculator is simple. To solve for N, enter the known variables and solve. In this example, how many years will it take for $7,752 to grow to $20,000 at 9 percent?

MyLab Finance Video

MyLab Finance Video

Enter 9 -7,752 0 20,000

N I/Y PV PMT FV

Solve for 10.998

The answer is 10.998, or about 11 years. You’ll notice we gave the present value, $7,752, a negative sign and the future value, $20,000, a positive sign. Why? Because a calculator looks at cash flows as if it were a bank. You deposit your money in the bank (and the sign is negative because the money “leaves your hands”); then later you take your money out of the bank (and the sign is positive because the money “returns to your hands”). As a result, every problem will have a positive and a negative sign on the cash flows.

Now let’s solve for the compound annual growth rate. In 10 years, you’d really like to have $20,000 to buy a new MINI Cooper convertible, but you have only $11,167. At what rate must your $11,167 be compounded annually for it to grow to $20,000 in 10 years?

Once again you have to remember that at least one of the dollar value variables, PV, PMT, or FV, must take on a negative value. In this case, we will enter $11,167 as a negative value, since that money will “leave your hands” and later you will receive $20,000.

Calculator Clues Solving for I/Y—the Rate of ReturnFinding a rate of return using a financial calculator is simple. To solve for I/Y, enter the known variables and solve. For example, what is the growth rate of an initial investment of $11,167 that grew to $20,000 in 10 years?

Enter 10 -11,167 0 20,000

N I/Y PV PMT FV

Solve for 6.0009

The answer is 6.0009—about 6 percent. Just as when you solved for N, you gave the present value, $11,167, which was your initial investment, a negative sign, and you gave the future value, $20,000, a positive sign.

AnnuitiesUp to this point, we’ve been examining single deposits—moving them back and forth in time. Now we’re going to examine annuities. Most people deal with a great number of annuities. Mortgage payments, pension funds, insurance obligations, and interest received from bonds all involve annuities. An annuity is a series of equal dollar payments coming at the end of each time period for a specified number of

Explain what an annuity is and calculate its com-pound or future value.

LO4

AnnuityA series of equal dollar payments coming at the end of each time period for a specified number of time periods.

M03_KEOW0363_08_SE_C03.indd 76 22/11/17 9:59 AM

ten financial life events. Here students will gain a broad perspective on and an overview of the ways personal finance affects almost all parts of their lives. Stu-dents will clearly see that in the course of a lifetime they will experience many events that will change their goals, affect their financial resources, and create new financial obligations or opportunities. While there are many life-changing events, we focus on ten of the most common, such as getting married, having a child, and retiring. With each one, we present a comprehensive, step-by-step discussion of how to respond to it—pulling material from throughout the book and tying it all together into an action plan.

◆◆ Author Videos. Author videos help students master difficult material while ensuring that the material provides a long-lasting impact. To this end, when Calculator Clues and other mathemati-cal topics are presented in the book, they are accompanied by videos that present the calculations in a very delib-erate and intuitive way. These videos are identified in the text with MyLab Finance Video and can be accessed in MyLab Finance at http://www.pearson .com/mylab/finance.

MyLab FinanceReach every student by pairing this text with MyLab Finance MyLab is the teaching and learning platform that empowers you to reach every student. By combining trusted author content with digital tools and a flexible platform, MyLab person-alizes the learning experience and improves results for each student. Learn more about MyLab Finance at http://www.pearson.com/mylab/finance.

Deliver trusted content You deserve teaching materials that meet your own high stan-dards for your course. That’s why Pearson partners with highly respected authors to develop interactive content and course-specific resources that you can trust—and that keep your students engaged.

Empower each learner Each student learns at a different pace. Personalized learning pinpoints the precise areas where each student needs practice, giving all students the support they need—when and where they need it—to be successful.

Teach your course your way Your course is unique. So whether you’d like to build your own assignments, teach multiple sections, or set prerequisites, MyLab gives you the flexibility to easily create your course to fit your needs.

Improve student results When you teach with MyLab, student performance improves. That’s why instructors have chosen MyLab for over 15 years, touching the lives of over 50 million students.


Preface xix

Developing Financial Life and Employability SkillsThere is no question that everyone needs strong personal finance skills to thrive in today’s world. This book is intended to provide you with those skills. While your newly acquired personal finance skills will help you achieve the retirement you want, they also may help you find a job and move up the ladder. A recent study conducted by the Society for Human Research Management found that 47 percent of U.S. companies run credit background checks on potential employees, and the skills acquired from this book will help you to pass that background check with fly-ing colors. In addition, studies have shown that employees with financial problems have difficulties performing on the job. So while at first glance you may not think this book will help you get a job and then advance in your career, you’re wrong. This book will do it all in a sense, help you in both your personal and professional life.

Table of Contents OverviewPersonal Finance, Turning Money into Wealth provides students with a fundamental background in financial planning and investments with an emphasis on intuitive understanding of the concepts and tools so that when financial decisions have to be made in the future, the student has a strong conceptual framework from which to make those decisions.

Part 1 Financial Planning

1 The Financial Planning Process Introduces the financial planning process; discusses its importance; describes the steps of personal financial planning; how to set your goals; how career management and education can determine your income; and how the skills acquired in this course will help you get a job and advance in it.

2 Measuring Your Financial Health and Making a Plan

Examines the budgeting and planning process which involves measuring our wealth using a personal balance sheet; using a personal income statement to track where money comes from and where it goes; using ratios to monitor our financial health and setting up and implement a cash budget.

3 Understanding and Appreciat-ing the Time Value of Money

Introduces the concept of the time value of money, both providing the student with an intui-tive understanding of it and the ability to move money through time with applications to personal finance.

4 Tax Planning and Strategies Provides an understanding of how taxes are imposed; what strategies can be used to reduce them; and what role tax planning plays in personal financial planning. In addition, while the tax documentation in this chapter was current at the time of publication, it can change at any time. To deal with any possible changes in the tax code, updates are provided at www.pearsonhighered.com/keown. In addition, the author-produced videos called out in this chapter (available at www.pearson.com/mylab/finance) and included in the etext version of the book will explain any tax changes as well as the implications of those changes.

Part 2 Managing Your Money

5 Cash or Liquid Asset Management

Examines cash management; how to automate your savings; choosing a financial institution; deciding among the various cash management alternatives; comparing rates; establishing a checking account; and how ETFs work.

6 Using Credit Cards: The Role of Open Credit

Examines how credit cards work; the cost of credit; the different types of credit cards; deter-mining your credit card worthiness; and how to manage your credit cards.

7 Student and Consumer Loans: The Role of Planned Borrowing

Provides a clear understanding of your choices and costs with respect to consumer loans; how to get the best rate on your consumer loans; controlling your debt; and using student loans and paying for college.

8 The Home and Automobile Decision

Analyzes smart buying and the home and auto decision.

Part 3 Protecting Yourself with Insurance

9 Life and Health Insurance Demonstrates the importance of insurance; determining life insurance needs; major types of insurance coverage; the health insurance decision; how disability insurance works; and the purpose of long-term care insurance.

10 Property and Liability Insurance Introduces homeowner’s and automobile insurance and how to file a claim and recover on a loss.


xx Preface

Part 4 Managing Your Investments

11 Investment Basics Provides an overview of investing by examining setting goals; the intuition behind risk and return and asset allocation; efficient markets; primary and secondary markets; and finding investment information.

12 Investing in Stocks Introduces common stocks and how to value them along with a look at their historical risks and returns.

13 Investing in Bonds and Other Alternatives

Describes bonds; bond valuation and yields; why bonds fluctuate in value; preferred stock and its valuation; and investing in real estate.

14 Mutual Funds: An Easy Way to Diversify

Introduces mutual funds, ETFs, and investment trusts; the calculation of their returns; and how to select a mutual fund that is right for you.

Part 5 Life Cycle Issues

15 Retirement Planning Develops an understanding of the challenges of retirement planning; the steps in setting up a retirement plan; the different types of retirement plans; payment choices; and how to put a plan together and monitor it.

16 Estate Planning: Saving Your Heirs Money and Headaches

Examines the estate planning process; drafting a will; and avoiding probate.

17 Financial Life Events—Fitting the Pieces Together

Ties things to together by examining the importance of starting to plan and save early; recog-nizing different financial life events with strategies to deal with them; understanding the keys to financial success; and dealing with debt in the real world.

Instructor Teaching ResourcesThis program comes with the following teaching resources.

Supplements available to instructors at www.pearsonhighered.com/irc

Features of the Supplement

Instructor’s Manualauthored by Sonya Britt of Kansas State University

◆● Chapter-by-chapter summaries◆● Chapter Context, offering insight into how the chapter integrates with the other chapters in that part and the entire text

◆● Chapter Outlines of the concepts and terms to assist with chapter reviews◆● Applicable Principles, offering an explanation of the principles in the order they appear in the chapter◆● Suggested Projects, offering a sampling of projects that can be assigned as in-class group activities or as homework to increase the applied understanding of key concepts from the chapter

◆● Sample solutions for all end-of-chapter questions, problems, and cases.

Test Bankauthored by Brian Hart of Virginia Poly-technic Institute and State University

50 to 75 multiple-choice, true/false, short- answer, and essay questions per chapter with these annotations:

◆● Difficulty level (1 for straight recall, 2 for some analysis, 3 for complex analysis)◆● Type (Multiple-choice, true/false, short-answer, essay)◆● Topic (The term or concept the question supports)◆● Learning outcome◆● AACSB learning standard (Ethical Understanding and Reasoning; Analytical Thinking Skills; Information Technology; Diverse and Multicultural Work; Reflective Thinking; Application of Knowledge)

Computerized TestGen TestGen allows instructors to:◆● Customize, save, and generate classroom tests◆● Edit, add, or delete questions from the Test Item Files◆● Analyze test results◆● Organize a database of tests and student results.

PowerPointsauthored by Sonya Britt of Kansas State University

Slides include all the graphs and tables from the textbook.

PowerPoints meet accessibility standards for students with disabilities. Features include, but not limited to:

◆● Keyboard and Screen Reader access◆● Alternative text for images◆● High color contrast between background and foreground colors


Preface xxi

AcknowledgmentsI gratefully acknowledge the assistance, support, and encouragement of those indi-viduals who have contributed to Personal Finance: Turning Money into Wealth. Spe-cifically, I wish to recognize the extremely helpful insights provided by many of my colleagues. For their careful comments and helpful reviews of this edition, I would like to thank:

Brenda Eichelberger, Portland State University

Christine Haririan, Bloomsburg University

Amelia Karraker, Iowa State UniversityErika Lipka, Epicenter St Petersburg

College

Olga McAtee, Ball State University

Tammi Metz, Mississippi State University

Ron Pearson, Bay CollegeTyler Smith, Baylor University

I would also like to thank those who have provided very helpful insights in past editions. For their comments and reviews, I would like to thank:

Allen Arnold, University of Central Oklahoma

Mike Barry, Boston CollegeKarin Bonding, University of VirginiaCraig Bythewood, Florida Southern

CollegeRonald J. Cereola, James Madison

UniversityStephen Chambers, Johnson County

Community CollegeLynda S. Clark, Maple Woods Community

CollegeMichael Collins, University of

Wisconsin–MadisonBobbie D. Corbett, Northern Virginia

Community CollegeCharles P. Corcoran, University of

Wisconsin–River FallsJulie Cumbie, University of Central

OklahomaKathy J. Daruty, Los Angeles Pierce

CollegeHoward Davidoff, Brooklyn CollegeCaitlin DeSoye, Bentley University and

University of New HampshireRichard A. Deus, Sacramento City

CollegeYuhong Fan, Weber State UniversityBeverly Fuller, Portland State University

Caroline S. Fulmer, University of Alabama

Michael Gordinier, Washington Univer-sity in St. Louis

Ramon Griffin, Metropolitan State College of Denver

Jack Griggs, Abilene Christian University

Carolyn M. Hair, Wake Tech. Community College

Neil D. Holden, Ohio UniversityMarilynn E. Hood, Texas A&M

UniversityJoe Howell, Salt Lake Community

CollegeRandal Ice, University of Central

OklahomaRobert Jensen, Metropolitan Commu-

nity CollegesErnest W. King, University of Southern

MississippiKatherine Kocher, University of Central

OklahomaSophie Kong, Western Washington Uni-

versityKaren Korins, University of Northern

ColoradoEdward Krohn, Miami–Dade Commu-

nity College


xxii Preface

Thomas Krueger, Texas A&M Univer-sity–Kingsville

Karen Lahey, University of AkronFrances Lawrence, Louisiana State

UniversityK. T. Magnusson, Salt Lake Community

CollegeJames E. Mallett, Stetson UniversityAbbas Mamoozadeh, Slippery Rock

University of PennsylvaniaRobert B. McCalla, University of

Wisconsin–MadisonJames A. Milanese, University of North

Carolina, GreensboroMitch Mokhtari, University of MarylandDiann Moorman, University of GeorgiaDianne R. Morrison, University of

Wisconsin–LaCrosseJames Muckell, Nyack CollegeFrederick H. Mull, Fort Lewis CollegeDavid W. Murphy, Madisonville

Community CollegeDavid Overbye, Keller School of

ManagementJames E. Parco, Colorado CollegeEve Pentecost, University of AlabamaOscar J. Solis, Virginia TechTed Pilger, Southern Illinois University

Jack Popovich, Columbus State Commu-nity College

Robert Rencher, Liberty UniversityIrving E. Richards, Cuyahoga Commu-

nity CollegeGreg Richey, California State University,

San BernardinoBill Rives, Ohio State UniversityClarence Rose, Radford UniversityPat Rudolph, American UniversityNick Sarantakes, Austin Community

CollegeDaniel L. Schneid, Central Michigan

UniversityThomas M. Springer, Florida Atlantic

UniversityKevin Sullivan, Virginia TechJames C. Thomas, Indiana University

NorthwestShafi Ullah, Broward Community

CollegeSam E. Veit, University of Wisconsin–

MadisonDick Verrone, University of North Caro-

lina WilmingtonSally Wells, Columbia CollegeAlex White, Virginia TechMartha A. Zenns, Jamestown Community

College

I would like to thank a wonderful group of people at Pearson Education. I must thank the Vice President of Business Publishing, Donna Battista, who has provided leadership from the top and has kept all the parts moving. Donna has transformed the finance list at Pearson, making it the best in the industry, and in doing so has helped make this book live up to its potential. I would also like to thank Kate Fernandes, my editor, who has been great to work with. Under Kate’s guidance, I believe we have produced the finest possible textbook and supplements package. Kate is truly creative, insightful, and demanding—never settling for anything but the best. I also thank Mer-edith Gertz, who served as the content producer on this revision. She has been great to work with, continuously offering insights and direction and often serving as a sounding board for revisions and new ideas. Meredith was fun to work with, always keeping me on task. It seemed that a day did not go by when I didn’t call her for advice or help on something. In addition, I owe a debt of gratitude to Alison Kalil, managing producer—business publishing, who made this a much better book. Miguel Leonarte, who worked on MyLab Finance, also deserves a word of thanks for making MyLab Finance flow so seamlessly with the book. He has continued to refine and improve MyLab Finance, and as a result of his efforts, it has become a learning tool without equal.

I should also thank Paul Donnelly and David Cohen. Paul is a past editor and good friend, without whom this project would never have been started. Dave once served as the developmental editor and helped mold this book into a text that is


Preface xxiii

fun to read. My thanks also go to Heidi Allgair of Cenveo® Publisher Services, who teamed with Pearson as project manager to oversee the book’s complex production process while keeping it all on schedule and maintaining extremely high quality.

My appreciation to the people at Pearson would be incomplete without mention of the highly professional Pearson field sales staff and their managers. In my opinion, they are the best in the business, and I am honored to work with them. In particular, I must single out Bill Beville, retired national editorial advisor. He is one of the most dogged and delightful people I have ever met. Bill pursued me relentlessly until I agreed to do this book. I will always owe Bill a debt of gratitude. Bill, I’m glad you’re on my side.

I also owe a great debt to Sonya Britt, an assistant professor of family studies and human services at Kansas State University and founding president of the Financial Ther-apy Association. In addition to preparing the PowerPoint slides and revising the Instruc-tor’s Manual, Sonya oversaw the revision of the end-of-chapter material. In doing so, she went well beyond the call of duty by refining, revising, and simplifying the end-of-chap-ter material and thereby greatly improving it. Her efforts made a meaningful impact on the book—strengthening it and making it more user friendly—and, as a result, she has improved the student experience. In addition, Sonya was always there to provide advice and opinions, which greatly improved this edition of the book. Moreover, she’s one of the nicest and hardest-working individuals I have ever worked with. I am hoping this is a relationship that will carry on long into the future.

I must also thank Brian Hart at Virginia Tech. He not only prepared the Test Bank but also provided excellent insights into the behavioral aspects of personal finance that were incorporated into the book. In addition, Alex White at Virginia Tech provided excellent comments and help with the ethics cases.

I also express sincere gratitude to the accuracy checker, Brian Nethercutt, who meticulously reviewed the Eighth Edition textbook and the Test Bank.

Finally, I must extend my thanks to my friend and colleague Ruth Lytton. While her role on this edition was limited, her efforts in the past helped produce the out-standing cases and end-of-chapter material currently in the book. Because she is a per-fectionist and an award-winning teacher, her efforts result in a pedagogy that works. When working with Ruth, I am constantly in awe of her effortless grasp of the many aspects of personal finance and of her ability to make complex concepts accessible to any student. She is truly one of the “gifted ones.” Her suggestions and insights made a profound impact on the book, from start to finish, and greatly added to its value.

In past editions, Derek Klock joined Ruth in working on the case and end-of-chapter material. Derek is exceptional! If you can think of a trait you would like a coworker to have, Derek has it. On top of all that, he is one of the nicest people I have ever had the opportunity to work with.

As a final word, I express my sincere thanks to those using Personal Finance: Turning Money into Wealth in the classroom. I thank you for making me a part of your team.

Arthur J. Keown

