Personal Financial Planning 14th Edition Ebook PDF

Personal Financial Planning 14th
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Chapter 5 Making Automobile and Housing Decisions, 163
Buying an Automobile, 164
Leasing a Car, 173
Worksheet 5.1 Comparing Mary Dixon’s Automobile Lease versus Purchase Costs, 176
Meeting Housing Needs: Buy or Rent?, 177
Worksheet 5.2 Rent-or-Buy Cost Comparison, 183
How Much Housing Can you Afford?, 184
Worksheet 5.3 Home Affordability Analysis for the Goulet Family, 192
The Home-Buying Process, 194
Financing the Transaction, 199
Worksheet 5.4 Mortgage Refinancing Analysis for the Varela Family, 206
Part 3 Managing Credit, 215
Chapter 6 Using Credit, 216

The Basic Concepts of Credit, 217
©seyomedo/Shutterstock.com
Credit Cards and Other Types of Open Account Credit, 223
Worksheet 6.1 Evaluating Your Credit, 224
Obtaining and Managing Open Forms of Credit, 238
Using Credit Wisely, 248
Chapter 7 Using Consumer Loans, 260

Basic Features of Consumer Loans, 261
Managing Your Credit, 271
Single-Payment Loans, 275
Worksheet 7.1 Tracking Your Consumer Debt, 275
Installment Loans, 282
Worksheet 7.2 To Borrow or Not to Borrow, 289
Part 4 Managing Insurance Needs, 299
Chapter 8 Insuring Your Life, 300

Basic Insurance Concepts, 301
© STOCKLITE/SHUTTERSTOCK.COM
Why Buy Life Insurance?, 303
How Much Life Insurance Is Right for You?, 305
Worksheet 8.1 Determining the Brewers’ Need for Life Insurance, 310
What Kind of Policy Is Right for You?, 311
Buying Life Insurance, 323
Key Features of Life Insurance Policies, 329
Chapter 9 Insuring Your Health, 340

The Importance of Health Insurance Coverage, 341
Health Insurance Plans, 343
Health Insurance Decisions, 351
Medical Expense Coverage and Policy Provisions, 355
Worksheet 9.1 Health Insurance Checklist, 356
Long-Term-Care Insurance, 363
Disability Income Insurance, 368
Worksheet 9.2 Estimating Disability Income Insurance Needs, 369
vi Contents
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 10 Protecting Your Property, 379
Basic Principles of Property Insurance, 380
Homeowner’s Insurance, 384
Automobile Insurance, 394
Other Property and Liability Insurance, 402
Buying Insurance and Settling Claims, 403
Part 5 Managing Investments, 411
Chapter 11 Investment Planning, 412

The Objectives and Rewards of Investing, 413
©wavebreakmedia/Shutterstock.com
Worksheet 11.1 Determining the Amount of Investment Capital, 418
Securities Markets, 422
Making Transactions in the Securities Markets, 429
Becoming an Informed Investor, 436
Online Investing, 444
Managing Your Investment Holdings, 447
Worksheet 11.2 Keeping Tabs on Your Investment Holdings, 452
Chapter 12 Investing in Stocks and Bonds, 461

The Risks and Rewards of Investing, 462
Investing in Common Stock, 470
Investing in Bonds, 484
Chapter 13 Investing in Mutual Funds, ETFs, and Real Estate, 508

Mutual Funds and Exchange-Traded Funds: Some Basics, 509
Types of Funds and Fund Services, 522
Making Mutual Fund and ETF Investments, 531
Investing in Real Estate, 541
Part 6 Retirement and Estate Planning, 555
Chapter 14 Planning for Retirement, 556

An Overview of Retirement Planning, 557
Worksheet 14.1 Estimating Future Retirement Needs, 561
Social Security, 566
Pension Plans and Retirement Programs, 571
Annuities, 585
Chapter 15 Preserving Your Estate, 598 ©Dean Mitchell/Shutterstock.com
Principles of Estate Planning, 599

Thy Will Be Done . . ., 606
Worksheet 15.1 A Checklist of Items to Keep in a Safe-Deposit Box, 613
Trusts, 617
Federal Unified Transfer Taxes, 622
Calculating Estate Taxes, 626
Estate Planning Techniques, 627
Worksheet 15.2 Computing Federal Estate Tax Due, 628
Contents vii
Appendix A Table of Future Value Factors, 637
Appendix B Table of Future Value Annuity Factors, 638
Appendix C Table of Present Value Factors, 639
Appendix D Table of Present Value Annuity Factors, 640
Appendix E Using a Financial Calculator, 641
Index, 643
viii Contents
Preface
• Why can’t I budget more effectively and what should I do about it?
• How much money should I set aside for emergencies?
• How do I pick the best credit card and best manage it?
• Would I be better off renting or buying a home?
• How much of a mortgage can I afford?
• What are the implications of the Affordable Care Act for my health insurance?
• What features do I need in car and homeowner’s insurance and how do I get the
best prices?
• What do I need to know about stocks and bonds to make good investments?
• How do I choose the best mutual funds and exchange traded funds (ETFs)?
• How do I plan for retirement?
• How do tax-deferred investment vehicles work and what should I do about them?
• Do I really need a will if I’m young and just getting started?
• Isn’t estate planning just for rich people?
So many questions about managing our personal finances—and the stakes are so
high! Personal Financial Planning, 14th edition, provides a framework for answering
these questions and more. Careful planning allows us to best adapt to changes in the
financial environment and the associated changes in our own lives. This book p rovides
tools for preparing personal financial plans that serve as road maps for achieving
goals. It emphasizes the dynamics of the financial planning process by considering the
impact of life changes—birth, marriage, divorce, job and career, and death.
Personal Financial Planning addresses all of the major financial planning issues
and problems that individuals and families encounter. It links together all of the ma-
jor elements of effective money management. All of the latest financial planning tools
and techniques are discussed. This comprehensive text is written in a personal style
that uses state-of-the-art pedagogy to present the key concepts and procedures used
in sound personal financial planning and effective money management. The roles
of various financial decisions in the overall personal financial planning process are
clearly delineated.
The book serves individuals who are, or will be, actively developing their own
personal financial plans. It meets the needs of instructors and students in a first
course in personal financial planning (often called “personal finance”) offered at col-
leges and universities, junior and community colleges, professional certification pro-
grams, and continuing education courses. The experiences of individuals and families
are used to demonstrate successes and failures in various aspects of personal financial
planning. A conversational style and liberal use of examples and worksheets guide
students through the material and emphasize important points. The benefits of the
book’s readability accrue not only to students but also to their instructors.
Organization of the Book

Personal Financial Planning is divided into six parts. Part 1 presents the founda-
tions of personal financial planning, beginning with the financial planning process
and then covering financial statements and budgets and also taxes. Part 2 concerns
the management of basic assets, including cash and savings instruments, automobiles,
Preface ix
and housing. Part 3 covers credit management, including the various types of open
account borrowing and consumer loans. Part 4 deals with managing insurance needs
and considers life insurance, health care insurance, and property insurance. Part 5
covers investments—including stocks, bonds, mutual funds, ETFs, and real estate—
and how to make transactions in securities markets. Part 6 is devoted to retirement
and estate planning.
Pedagogy
Each chapter opens with six learning goals that link the material covered to spe-
cific learning outcomes and anchor the text’s integrated learning system. The learning
goal numbers are tied to major chapter headings and restated and reviewed point
by point in the end-of-chapter summary. New to the 14th edition, each chapter also
opens with a series of statements presented as Financial Fact or Fantasy in the re-
lated chapter material. Each statement is critically evaluated as fact or fantasy in
the context of the relevant material. Then, at the end of each of the major sections,
Test Yourself questions allow readers to reinforce their understanding of the material
before moving on to the next section. As students read through the chapters, these
Test Yourself questions allow them to test their understanding of the material in each
section. Students can find the answers to the Test Yourself questions on the book’s
companion website by going to www.cengagebrain.com and searching for this book
by its author or ISBN, and then adding it to the dashboard. They’re also found in the
instructor’s manual. Also new to the 14th edition, at the end of select chapters is a
summary of all key financial relationships along with a problem set illustrating their
application.
Each chapter contains several Financial Planning Tips and Financial Road Signs,
which provide important hints or suggestions to consider when implementing certain
parts of a financial plan. Worksheets are included to simplify demonstration of vari-
ous calculations and procedures and to provide students with helpful materials that
they can use in managing their own personal finances. The worksheets are numbered
for convenient reference in end-of-chapter problems, and they include descriptive
captions. Numerous exhibits, each including a descriptive caption, are used through-
out to more fully illustrate key points in the text. Also included in each chapter is
a running glossary that appears in the margin and provides brief definitions of all
highlighted terms in the accompanying text. Most chapters discuss how the Internet
can be used in various phases of personal financial planning. End-of-chapter mate-
rial includes a Summary, which restates each learning goal and follows it with a brief
paragraph that summarizes the material related to it. The next element is the new
Financial Impact of Personal Choices feature, which presents a personal financial
planning decision related to an important topic in each chapter and evaluates the
outcome. Selected chapters also provide a new feature, Key Financial Relationships,
which concisely summarizes the analytical frameworks used and provides related
practice problems and their solutions. Then each chapter provides Financial Planning
Exercises, which include questions and problems that students can use to test their
grasp of the material. Following this feature is Applying Personal Finance, which
generally involves some type of outside project or exercise. Two Critical Thinking
Cases that highlight the important analytical topics and concepts are also provided.
Major Changes in the 14th Edition

The 14th edition has been thoroughly updated to consider the most up-to-date tech-
niques of contemporary personal financial planning. We emphasize that the key prin-
ciples of personal financial planning remain valid: save, diversify your investments,
watch your expenditures, and borrow carefully. This edition reflects feedback from
past users, practicing financial planners, finance industry experts, students, and our
own research. It provides helpful new approaches, expanded coverage in certain areas,
streamlined coverage in others, and enhanced pedagogy anchored by a state-of-the-art
x Preface
integrated learning system. The basic organizational structure, topical coverage, supe-
rior readability, and useful instructional aids that marked the success of the first 13 edi-
tions have been retained and extended. Important changes in this edition are d escribed
below, first as general changes and then as specific chapter-by-chapter changes.
General Changes and Hallmark Features

• The 14th edition includes in each chapter a series of highlighted practical examples
illustrating everyday applications of the covered material. The featured examples
include “The Sooner You Start an IRA, the Better” (Chapter 1), “Determining the
Value of an Investment” and Keeping Track of Loans” (Chapter 2), “Applying Tax
Rates” and “Determining the Amount Owed or Refunded” (Chapter 3), “Determin-
ing the Extent of FDIC Insurance Protection” (Chapter 4), “Calculating the Maxi-
mum Affordable Mortgage Loan” (Chapter 5), “Credit Card Choice Trade-offs”
and “Paying Only the Minimum on Your Credit Card” (Chapter 6), “Calculating
the Total Finance Charge and Payment on a Simple Interest Loan” (Chapter 7),
“Appropriate Use of Term Life Insurance” and “Using Low-Load Whole Life
Insurance—Building Cash Value” (Chapter 8), “Effect of Per-Illness, Per-Accident
Deductible” (Chapter 9), “Effect of Co-insurance,” and “Homeowner’s Policy Cov-
erage Limits” (Chapter 10), “Limit Orders” and “Using Margin Trades to Magnify
Returns” (Chapter 11), “Inflation-Adjustment of TIPS Bonds” and “Calculating the
Approximate Yield to Maturity” (Chapter 12), “Calculating a Mutual Fund’s NAV”
and “Calculating the Value of Income-Producing Property” (Chapter 13), “Effect of
Inflation on Future Retirement Needs” and “Measuring the Benefits of a Roth IRA
Over a Taxable Account” (Chapter 14), and “Disadvantage of Joint Tenancy with
the Right of Survivorship” and “Use of Life Insurance in an Estate” (Chapter 15).
• The 14th edition includes a new feature in each chapter, You Can Do It Now,
which allows the reader to act on the presented material on the spot. The You Can
Do It Now features include “Start a List of Your Financial Goals” and “Recognize
that YOU are Your Most Important Asset” (Chapter 1), “Track Your Expenses”
and “Save Automatically” (Chapter 2), “Tax Planning” (Chapter 3), “Shop for the
Best Short-Term Rates” and “Reconcile Your Checkbook” (Chapter 4), “What’s
Your Car Worth?” and “Rent vs. Buy a Home?” (Chapter 5), “How Does Your
Credit Report Look?” and “Is Your Credit Card a Good Deal?” (Chapter 6),
“Current Auto Loan Rates” (Chapter 7), “Shop for a Customized Life Insur-
ance Policy” and “Check Out the Best Life Insurance Companies” (Chapter 8),
“Compare Policies on an ACA Health Insurance Exchange” (Chapter 9), “Check
Out the Best Homeowner’s Insurance Companies” and “Evaluate the Best Auto
insurance Companies” (Chapter 10), “How’s the Market Doing Right Now?” and
“Get a Quick Perspective on Your Asset Allocation” (Chapter 11), “What’s the
Market P/E Ratio Telling You?” and “How Do Stock and Bond Market Returns
Compare This Year?” (Chapter 12), “Objective Mutual Fund Resources” and
“How to Choose the Best ETF for You” (Chapter 13), “Get a Rough Estimate
of Your F uture Social Security Benefits” and “Calculating the Benefits of a Tradi-
tional IRA” (Chapter 14), and “Estate Planning Conversations” and “Importance
of Naming Alternative Beneficiaries” (Chapter 15).
• New to the 14th edition is the Financial Impact of Personal Choices feature,
which presents a personal financial planning decision related to an important
topic in each chapter and evaluates the outcome. The Financial Impact of Personal
Choices feature includes “Bob Cuts Back on Lunch Out and Lattes” (Chapter 1),
“No Budget, No Plan: Sean Bought a Boat!” (Chapter 2), “Angela and Tim’s Tax
Management Strategy” (Chapter 3), “Stella Likes Cash—Too Much?” (Chapter 4),
“Vivian Wants to Buy a House but Doesn’t Want a Roommate Now” (Chapter 5),
“Stan Has Had It and Files for Bankruptcy” (Chapter 6), “John and Mary Calcu-
late Their Auto Loan Backwards” (Chapter 7), “Matt and Jan Consider ‘Buying
Term and Investing the Rest’ ” (Chapter 8), “Josh Expands His Health Insurance
Preface xi
Coverage” (Chapter 9), “Wade Saves on His Car Insurance” (Chapter 10), “Trey
and April Get Serious About Their Retirement Asset Allocation” (Chapter 11),
“Landon and Kirsten Like High Flying Stocks” (Chapter 12), “Virginia Finds a
Simple Retirement Investment Plan” (Chapter 13), “Carl and Brian’s Different
Approaches to a Traditional IRA” (Chapter 14), and “The (Un)intended Effects of
Corbin’s Beneficiary Designations” (Chapter 15).
• The 14th edition adds a summary of Key Financial Relationships at the end of
selected chapters. Practice problems illustrating the application of these key ana-
lytical frameworks are also provided.
• The highly regarded Worksheets are provided in a user-friendly Excel® format
that students can download from the book’s companion Internet site. Students
have the option of using the Worksheets multiple times and having some of the
calculations within the Worksheets completed electronically.
• The book has been completely updated and redesigned to allow improved presen-
tation of each of the text’s pedagogical features.
• The 14th edition continues to place emphasis on using the Internet. Included are
a number of features that either link students to relevant Internet sites or describe
how the Internet can be incorporated into the personal financial planning process.
• Step-by-step use of a handheld financial calculator to make time value calcula-
tions continues to be integrated into relevant discussions in this edition. To im-
prove understanding, relevant keystrokes are highlighted in these demonstrations.
Basics of the time value of money are introduced in Chapter 2, “Using Financial
Statements and Budgets,” and Appendix E now explains how financial calculators
can be used to make time value calculations. The use of a financial calculator is
reinforced in later chapters, where the time value techniques are applied. For ex-
ample, using a calculator to find the future value of a deposit given various com-
pounding periods is shown in Chapter 4, “Managing Your Cash and Savings,” and
calculating estimates of future retirement needs is demonstrated in Chapter 14,
“Planning for Retirement.” The inclusion of calculator keystrokes should help the
reader learn how to develop financial plans more effectively by using this impor-
tant tool of the trade.
• The 14th edition continues and updates the well-received Behavior Matters, which
relates each chapter’s topic to the reader’s everyday behavior and shows how read-
ers might adapt their behavior to become more financially savvy. The Behavior
Matters features show how all-too-common behavioral biases can adversely affect
how we process financial information and make financial decisions. The feature
helps link the text discussions to actual financial planning ideas, experiences, and
practices—all intended to fully engage readers in the personal financial planning
process. The Behavior Matters features include “Practicing Financial Self-Aware-
ness” (Chapter 1), “Don’t Fool Yourself . . . Pessimistic Budgeting Wins” (Chapter 2),
“Do We Really Value Paying Taxes After All?” (Chapter 3), “Why Can’t I Save
More—And What Can I Do About It?” (Chapter 4), “Watch Out for ‘Anchoring’:
The Case of the Used Car Salesperson Strategy,” (Chapter 5), “Behavioral Biases
and Credit Card Use” (Chapter 6), “The Paradox of More Financial Choices”
(Chapter 7), “Whole Life vs. Term Life Insurance and Behavioral Biases” (Chap-
ter 8), “Behavioral Biases in Making Health Insurance Decisions” (Chapter 9),
“Behavioral Tips in Buying Property Insurance” (Chapter 10), “Do We Live in
the Present Too Much? Looking for Patterns That Aren’t There . . .” (Chapter 11),
“Dealing with Investor Overreaction” (Chapter 12), “Behavioral Biases in Mu-
tual Fund Investing” (Chapter 13), “Behavioral Biases in Retirement Planning”
(Chapter 14), and “Recognizing and Overcoming Aversion to Ambiguity in Estate
Planning” (Chapter 15).
• Exhibits and Worksheets, and end-of-chapter Financial Planning Exercises and
Critical Thinking Cases—have been retained and improved as part of the inte-
grated learning system. The Planning Over a Lifetime feature continues to high-
light how the chapter’s topic is important to readers in different life stages.
xii Preface
Specific Chapter-by-Chapter Changes and Summaries
Because instructors often like to know where new material appears, the significant
changes that have been made in the 14th edition are summarized next.
Chapter 1 on understanding the financial planning process, has been carefully

revised to focus on the most important themes in the book. Emphasis is placed on
setting realistic goals for your finances, helpful ways to save money by changing
everyday habits, and being more financially self-aware.
Chapter 2 on using your financial statements and budgeting has been restruc-
tured, streamlined, and updated. Calculator keystrokes and time lines continue to
appear in discussions of the time value of money. There are new discussions on
setting realistic budgeting plans and avoiding potential budgeting mistakes, how to
choose the right personal finance software, and practical ways to change your be-
havior to spend less.
Chapter 3 on preparing your taxes has been updated to reflect the changes in tax
laws, rates, procedures, and forms in effect at the time we revised the chapter. The
material emphasizes current tax practices and explains the nature of progressive tax
rates, average tax rates, itemized deductions, individual retirement accounts (IRAs),
and other types of tax issues. The chapter continues to provide readers with sidebar
advice on finding commonly missed tax deductions, avoiding common tax-form er-
rors, tax tips, and audit triggers. There are new features about what documents you’ll
need to collect to prepare for tax time, effective ways to reduce your tax liability, and
tips for choosing the most appropriate tax preparer for you.
Chapter 4 on managing your cash and savings, has been revised to reflect up-to-
date capital market conditions. The potential use of I bonds to manage inflation risk
is emphasized. There are practical explanations of why you should start saving now,
what to look for when choosing a new bank, planning tips for when and when not
to use your debit card, and tips for what you should and shouldn’t store in a safety
deposit box.
Chapter 5 on making automobile and housing decisions considers new market

developments and sources of information. The chapter discusses when it makes sense
to lease a car, when to buy versus rent a house, how to know when it’s time to buy
your first home, how to tell what kind of house you need (prioritizing your needs and
being practical), and the top ten home improvement projects based on the percentage
of the investment recovered at the sale of a home.
Chapter 6 on consumer credit and credit cards, focuses on the positive a spects of
using credit and what it takes to build and maintain a strong credit history. The chap-
ter explores the dangers of making only the minimum payment on your credit cards
and why “mental accounting” can be dangerous, tips for choosing the right credit
card, risky situations for using your debit card, protecting yourself from identity
theft, and how to use credit through the different stages of your life.
Chapter 7 on using consumer loans, analyzes the benefits and uses of consumer
credit for both single-payment and installment loans. The discussion concentrates on
the key issues surrounding loan provisions, finance charges, and other credit con-
siderations. There are suggested questions to ask before you loan money to family
and friends, a discussion about 0 percent annual percentage rate (APR) loans and
their potential limitations, and a discussion of what lenders are looking at when you
Preface xiii
submit a loan application—your credit report, debt history, employment history, and
savings.
Chapter 8 on insuring your life, discusses how to choose the right life insurance,
the benefits of buying a whole-life policy, the differences between whole life and term
life insurance, knowing what to expect during your life insurance medical exam, po-
tential conflicts of interest in dealing with insurance agents, and key considerations
for life insurance use in each stage of life.
Chapter 9 on insuring your health, has been updated and includes a discussion of
the new rules and guidelines for student health care, Medicare Advantage plans, how
to save on health insurance, and how to choose the right plan for you. There’s also a
new discussion about the rationale for health-care reform and the controversy over
the Affordable Health Care Act of 2010. The chapter also includes tips on buying dis-
ability income insurance, buying long-term care insurance, and health-care apps for
your smart phone.
Chapter 10 on protecting your property, discusses behavioral biases when buying

property insurance, how to handle a denied insurance claim, and buying auto insur-
ance—getting multiple quotes, how the car itself affects the price of the policy, and how
much auto insurance you need. We continue to emphasize practical advice for reducing
homeowner’s insurance premiums, filing auto insurance claims, preventing auto theft,
strategies to avoid liability, and obtaining discounts for auto safety and good driving.
Chapter 11 on investment planning has been revised and updated with discussions
of why people are more likely to make short-term investments (and why you might
want to avoid this tendency), the importance of saving for retirement, and how to
begin investing online.
Chapter 12 on investing in stocks and bonds continues to emphasize the risk–re-

turn characteristics of these securities. As part of the revision process, we present new
information on successful stock and bond investing, analysis of Apple’s financial per-
formance and valuation, tips for avoiding common investing mistakes, properly in-
terpreting overly optimistic equity analysis, how accrued interest affects bond prices,
and how to invest in stocks and bonds at each stage of life.
Chapter 13 on investing has been updated and discusses target-date mutual funds,
choosing the best mutual funds, avoiding “dog” funds, choosing between exchange
traded funds (ETFs) and mutual funds, and a lengthy new discussion and exhibit
about how to evaluate ETF performance. There’s also a Behavior Matters feature
about behavioral biases in mutual fund investing—how educating yourself can help
you break harmful investing tendencies.
Chapter 14 on planning for retirement, has several valuable features discussing be-
havioral biases in retirement planning, an app for your smart phone that will help
you plan for retirement, a discussion about protecting private-sector defined benefit
retirement plans, tips for managing your 401(k) account, and coverage about con-
verting a traditional IRA to a Roth IRA and the implications of doing so.
Chapter 15 on preserving your estate, has been updated to reflect the most recent
estate tax laws and tax rates. The chapter discusses online estate planning resources,
the details of choosing a suitable guardian for minor children in case of death, tips
for writing a will, reasons to use a trust, and a feature about recognizing and over-
coming aversion to ambiguity in estate planning.
xiv Preface
Supplementary Materials
Because we recognize the importance of outstanding support materials to the in-
structor and the student, we have continued to improve and expand our supplements
package.
Instructor Supplements
Cengagenow
CengageNOW is a powerful course management and online homework tool that
provides robust instructor control and customization to optimize the student learning
experience and meet desired outcomes. CengageNOW offers:
• Auto-graded homework (static and algorithmic varieties), a test bank, and an e Book,
all in one resource.
• Easy-to-use course management options offering flexibility and continuity from
one semester to another.
• New! Expanded post-submission feedback explains each problem to students.
The instructor decides when this solution is delivered to the students. The 14th
edition of Personal Financial Planning is the first to offer post-submission feed-
back to students using CengageNOW.
• The most robust and flexible assignment options in the industry.
• The ability to analyze student work from the gradebook and generate reports on
learning outcomes. Each problem is tagged to Business Program (AACSB) and
Bloom’s Taxonomy outcomes so that you can measure student performance.
• Contact your sales representative for more details if you are interested in offering
CengageNOW to your students.
Instructor’s Manual and Test Bank

A comprehensive Instructor’s Manual has been prepared to assist the instructor.
For each chapter, the manual includes:
• An outline
• Discussion of major topics
• A list of key concepts
• Solutions to all Test Yourself questions, end-of-chapter Financial Planning Exer-
cises, and Critical Thinking Cases
The Test Bank has been revised, updated, and expanded, and all solutions have
been checked for accuracy. It includes true–false and multiple-choice questions, as well
as four to six short problems for nearly every chapter. Each question is tagged with
the corresponding learning objective and learning outcomes. The Instructor’s Manual
has been revised by Professor Sam Hicks, CPA, of VirginiaTech.
Testing with Cognero

Cengage Learning Testing Powered by Cognero is a flexible, online system that
allows you to author, edit, and manage test bank content, create multiple test ver-
sions in an instant, and deliver tests from your LMS, in your classroom or through
CengageNOW.
Microsoft PowerPoint®
Enhance lectures and simplify class preparation. Chapter PowerPoint® presenta-
tions are available to instructors both on the Instructor’s Resource CD and on the
text’s instructor Web site. Each presentation consists of a general outline of key con-
cepts from the book. The PowerPoints were revised by Professor Sam Hicks, CPA, of
VirginiaTech.
Preface xv
Student Supplements
Interactive Worksheets
Interactive Worksheets identical to those presented in the text can be downloaded
from this text’s student companion Internet site. Each Worksheet provides a logical
format for dealing with some aspect of personal financial planning, such as preparing
a cash budget, assessing home affordability, or deciding whether to lease or purchase
an automobile. Providing worksheets electronically in Excel® format allows students
to complete them multiple times for mastery, and many of the worksheets can actu-
ally be used to calculate figures needed to make financial decisions.
Acknowledgments
In addition to the many individuals who made significant contributions to this
book by their expertise, classroom experience, guidance, general advice, and reassur-
ance, we also appreciate the students and faculty who used the book and provided
valuable feedback, confirming our conviction that a truly teachable personal finan-
cial planning text could be developed.
Of course, we are indebted to all the academicians and practitioners who have
created the body of knowledge contained in this text. We particularly wish to thank
several people who gave the most significant help in developing and revising it. They
include Professor John Brozovsky, CPA, of VirginiaTech, for assistance in the chapter
on taxes; Professor Sam Hicks, CPA, of VirginiaTech, for his thorough review of the
entire book; Thomas C. Via Jr., CLU, for his help in the chapters on life and prop-
erty insurance; Kent Dodge for his help in the chapter on health insurance; Professor
Hongbok Lee, of Western Illinois University, for helpful observations, and Marlene
Bellamy of Writeline Associates for her help with the real estate material.
Cengage Learning shared our objective of producing a truly teachable text and
relied on the experience and advice of numerous excellent reviewers for the 14th
edition:
Ed Anthony, Trevecca Nazarene University
John Bedics, DeSales University
Omar Benkato, Ball State University
Ross E. Blankenship, State Fair Community College
Tim Chesnut, Mt. Vernon Nazarene University
Joseph C. Eppolito, Syracuse University
Jonathan Fox, Ohio State University
Laurie Hensley, Cornell University
John Guess, Delgado Community College
Dianne Morrison, University of Wisconsin—La Crosse
Kathy Mountjoy, Illinois State University
Eric Munshower, University of Dubuque
Muhammad Mustafa, South Carolina State University
Thomas Paczkowski, Cayuga Community College
Ohaness Paskelian, University of Houston—Downtown
Joan Ryan, Clackamas Community College
Amy Scott, DeSales University
Donna Scarlett, Iowa Western Community College—Clarinda Campus
Rahul Verma, University of Houston—Downtown
We also appreciate the many suggestions from previous reviewers, all of whom
have had a significant impact on the earlier editions of this book. Our thanks go to
the following: Linda Afdahl, Micheal J. Ahern III, Robert J. Angell, H. Kent Baker,
Harold David Barr, Catherine L. Bertelson, Steve Blank, Kathleen K. Bromley, D. Gary
xvi Preface
Carman, Dan Casey, P. R. Chandy, Tony Cherin, Larry A. Cox, Maurice L. Crawford,
Carlene Creviston, Rosa Lea Danielson, William B. Dillon, David Durst, Jeanette A.
Eberle, Mary Ellen Edmundson, Ronald Ehresman, Jim Farris, Stephen Ferris, Sharon
Hatten Garrison, Wayne H. Gawlick, Alan Goldfarb, Carol Zirnheld Green, Joseph
D. Greene, C. R. Griffen, John L. Grimm, Chris Hajdas, James Haltman, Vickie L.
Hampton, Forest Harlow, Eric W. Hayden, Henry C. Hill, Kendall B. Hill, Darrell D.
Hilliker, Arlene Holyoak, Marilynn E. Hood, Frank Inciardi, Ray Jackson, Kenneth
Jacques, Dixie Porter Johnson, Ted Jones, William W. Jones, Judy Kamm, Gordon
Karels, Peggy Keck, Gary L. Killion, Earnest W. King, Karol Kitt, George Klander,
Xymena S. Kulsrud, Carole J. Makela, Paul J. Maloney, David Manifold, Charles
E. Maxwell, Charles W. McKinney, Robert W. McLeod, George Muscal, Robert
Nash, Ed Nelling, Charles O’Conner, Albert Pender, Aaron L. Phillips, Armand Picou,
Franklin Potts, Fred Power, Alan Raedels, Margaret P. Reed, Charles F. Richardson,
Arnold M. Rieger, Vivian Rippentrop, Gayle M. Ross, Kenneth H. St. Clair, Brent
T. Sjaardema, Thomas M. Springer, Frank A. Thompson, Dick Verrone, Rosemary
Walker, Peggy Bergmeier Ward, Tom Warschauer, Gary Watts, Grant J. Wells, Brock
Williams, Janet Bear Wolverton, Betty Wright, and R. R. Zilkowski.
Because of the wide variety of topics covered in this book, we called on many
experts for whose insight on recent developments we are deeply grateful. We would
like to thank them and their firms for allowing us to draw on their knowledge and
resources, particularly Robert Andrews, Willis M. Allen Co. Realtors; Bill Bachrach,
Bachrach & Associates; Mark D. Erwin, Commonwealth Financial Network; Robin
Gitman, Willis M. Allen Co. Realtors; Craig Gussin, CLU, Auerbach & Gussin; Frank
Hathaway, CFA, Chief Economist, NASDAQ; John Markese, former President of the
American Association of Individual Investors; Mark Nussbaum, CFP®, Wells Fargo
Advisors, Inc.; Sherri Tobin, Farmers Insurance Group; and Deila Mangold, Ideal
Homes Realty.
The editorial staff of Cengage Learning has been most helpful in our endeavors.
We wish to thank Joe Sabatino, Senior Product Team Manager; Mike Reynolds, Se-
nior Product Manager; Conor Allen, Content Developer; and Adele Scholtz, Senior
Product Assistant.
Finally, our wives—Bonnie, Robin, and Charlene—have provided needed support
and understanding during the writing of this book. We are forever grateful to them.
Randall S. Billingsley, FRM, CFA

VirginiaTech
Lawrence J. Gitman, CFP®

San Diego State University
Michael D. Joehnk, CFA

Arizona State University
Preface xvii
About the Authors
Randall S. Billingsley is a finance professor at VirginiaTech. He received his bach-

elor’s degree in economics from Texas Tech University and received both an M.S. in
economics and a Ph.D. in finance from Texas A&M University. Professor B illingsley
holds the Chartered Financial Analyst (CFA), Financial Risk Manager (FRM), and
Certified Rate of Return Analyst (CRRA) professional designations. An award-
winning teacher at the undergraduate and graduate levels, his research, consulting,
and teaching focus on investment analysis and issues relevant to practicing financial
advisors. Formerly a vice president at the Association for Investment Management
and Research (now the CFA Institute), Professor Billingsley’s published equity valu-
ation case study of Merck & Company was assigned reading in the CFA curriculum
for several years. In 2006 the Wharton School published his book, Understanding
Arbitrage: An Intuitive Approach to Financial Analysis. In addition, his research
has been published in refereed journals that include the Journal of P ortfolio
M anagement, the Journal of Banking and Finance, Financial Management, the
Journal of Financial Research, and the Journal of Futures Markets. Professor Billing-
sley advises the Student-Managed Endowment for Educational Development (SEED)
at Virginia Tech, which manages an equity portfolio of about $5 million on behalf of
the Virginia Tech Foundation.
Professor Billingsley’s consulting to date has focused on two areas of expertise.
First, he has acted extensively as an expert witness on financial issues. Second, he has
taught seminars and published materials that prepare investment professionals for the
CFA examinations. This has afforded him the opportunity to explore and discuss the
relationships among diverse areas of investment analysis. His consulting endeavors
have taken him across the United States and to Canada, Europe, and Asia. A primary
goal of Professor Billingsley’s consulting is to apply the findings of academic financial
research to practical investment decision making and personal financial planning.
Lawrence J. Gitman is an emeritus professor of finance at San Diego State University.

He received his bachelor’s degree from Purdue University, his M.B.A. from the Univer-
sity of Dayton, and his Ph.D. from the University of Cincinnati. Professor G itman is a
prolific textbook author and has more than 50 articles appearing in v arious finance
journals.
His other major textbooks include Fundamentals of Investing, 12th edition, which
is co-authored with Scott B. Smart and Michael D. Joehnk; and Principles of Mana-
gerial Finance, 7th Brief edition, and Principles of Managerial Finance, 14th edition,
both co-authored with Chad J. Zutter.
An active member of numerous professional organizations, Professor Gitman
is past president of the Academy of Financial Services, the San Diego Chapter of
the F inancial Executives Institute, the Midwest Finance Association, and the
FMA N ational Honor Society. In addition, he is a Certified Financial Planner®
(CFP®). Gitman formerly served as a director on the CFP ® Board of Governors, as
vice-president–financial education for the Financial Management Association, and
as director of the San Diego MIT Enterprise Forum. He has two grown children and
lives with his wife in La Jolla, California, where he is an avid bicyclist.
Michael D. Joehnk is an emeritus professor of finance at Arizona State University

(ASU). In addition to his academic appointments at ASU, Professor Joehnk spent a
xviii About the Authors
year (1999) as a visiting professor of finance at the University of Otago in New Zea-
land. He received his bachelor’s and Ph.D. degrees from the University of Arizona and
his M.B.A. from Arizona State University. A Chartered Financial Analyst (CFA), he
has served as a member of the Candidate Curriculum Committee and of the Council
of Examiners of the Institute of Chartered Financial Analysts. He has also served as a
director of the Phoenix Society of Financial Analysts and as secretary-treasurer of the
Western Finance Association, and he was elected to two terms as a vice-president of
the Financial Management Association. Professor Joehnk is the author or co-author
of some 50 articles, five books, and numerous monographs. His articles have ap-
peared in Financial Management, the Journal of Finance, the Journal of Bank Re-
search, the Journal of Portfolio Management, the Journal of Consumer Affairs, the
Journal of Financial and Quantitative Analysis, the AAII Journal, the Journal of Fi-
nancial Research, the Bell Journal of Economics, the Daily Bond Buyer, Financial
Planner, and other publications.
In addition to co-authoring several books with Lawrence J. Gitman, Professor
Joehnk was the author of a highly successful paperback trade book, Investing for
Safety’s Sake. In addition, Dr. Joehnk was the editor of Institutional Asset Alloca-
tion, which was sponsored by the Institute of Chartered Financial Analysts and pub-
lished by Dow Jones–Irwin. He also was a contributor to the Handbook for Fixed
Income Securities and to Investing and Risk Management, volume 1 of the Library of
Investment Banking. In addition, he served a six-year term as executive co-editor of
the Journal of Financial Research. He and his wife live in Flagstaff, Arizona, where
they enjoy hiking and other activities in the nearby mountains and canyons.
About the Authors xix
Part 1
Foundations of
Financial Planning
Chapters
1 Understanding the Financial Planning Process
2 Using Financial Statements and Budgets
3 Preparing Your Taxes
1
Chapter 1
Understanding the Financial

Planning Process
Learning Goals
LG1 Identify the benefits of using personal financial planning techniques to manage
your finances.
LG2 Describe the personal financial planning process and define your goals.
Explain the life cycle of financial plans, their role in achieving your financial goals,
LG3 how to deal with special planning concerns, and the use of professional financial
planners.
LG4 Examine the economic environment’s influence on personal financial planning.
LG5 Evaluate the impact of age, education, and geographic location on personal income.
Understand the importance of career choices and their relationship to personal

LG6 financial planning.
How Will This Affect Me?

The heart of financial planning is making sure your values line up with how you spend
and save. That means knowing where you are financially and planning on how to get
where you want to be in the future no matter what life throws at you. For example,
how should your plan handle the projection that Social Security costs may exceed reve-
nues by 2037? And what if the government decides to raise tax rates to help cover the
federal deficit? An informed financial plan should reflect such uncertainties and more.
This chapter overviews the financial planning process and explains its context. Topics
include how financial plans change to accommodate your current stage in life and
the role that financial planners can play in helping you achieve your objectives. After
reading this chapter you will have a good perspective on how to organize your over-
all personal financial plan.
2
Financial Fact or Fantasy?
Are the following statements Financial Facts (true) or Fantasies
(false)? Consider these statements as you read through this
chapter.
• An improved standard of living is one of the payoffs of sound personal financial

planning.
• A savings account is an example of a tangible asset because it represents
something on deposit at a bank or other financial institution.
• Personal financial planning involves translating personal financial goals into
specific plans and strategies that put these plans into action.
• Over the long-run, gaining only an extra percent or two on an investment makes
little difference in the amount of earnings generated.
• Inflation generally has little effect on personal financial planning.
• Your income level depends on your age, education, and career choice.
1-1 The Rewards of Sound Financial Planning

What does living “the good life” mean to you? Does it mean having the flexibility
LG1 to pursue your dreams and goals in life? Is it owning a home in a certain part of
town, starting a company, being debt free, driving a particular type of car, taking
luxury vacations, or having a large investment portfolio? Today’s complex, fast-paced
world offers a bewildering array of choices. Rapidly changing economic, political,
technological, and social environments make it increasingly difficult to develop solid
financial strategies that will improve your lifestyle consistently. Moreover, the recent
financial crisis dramatizes the need to plan for financial contingencies. Today, a cou-
ple may need two incomes just to maintain an acceptable standard of living, and they
may have to wait longer to buy a home. Clearly, no matter how you define it, the
good life requires sound planning to turn financial goals into reality.
The best way to achieve financial objectives is through personal financial plan-
ning, which helps define financial goals and develop appropriate strategies to reach
them. We should not depend solely on employee or government benefits—such as
steady salary increases or adequate funding from employer-paid pensions or Social
Security—to retire comfortably. Creating flexible plans and regularly revising them is
the key to building a sound financial future. Successful financial planning also brings
rewards that include greater flexibility, an improved standard of living, wise spending
habits, and increased wealth. Of course, planning alone does not guarantee success;
but having an effective, consistent plan can help you use your resources wisely. Care-
ful financial planning increases the chance that your financial goals will be achieved
and that you will have sufficient flexibility to handle such contingencies as illness, job
loss, and even financial crises.
The goal of this book is to remove the mystery from the personal financial plan-
ning process and replace it with the tools you need to take charge of your personal
finances and your life. To organize this process, the text is divided into six parts as
follows.
• Part 1: Foundations of Financial Planning
• Part 2: Managing Basic Assets
• Part 3: Managing Credit
• Part 4: Managing Insurance Needs
• Part 5: Managing Investments
• Part 6: Retirement and Estate Planning
Chapter 1 | Understanding the Financial Planning Process 3
Financial Planning Tips
Be SMART in Planning Your Financial Goals
Success is most likely if your goals are: Realistic: Am I willing and able to do this?
Specific: What do I want to achieve? What is required Timely: What is my target date? What short-term
of me and what are my constraints? goals must be achieved along the way to achieve my
longer term goals?
Measurable: How much money is needed? How will
I know if I am succeeding?
Attainable: How can I do this? Is this consistent with
my other financial goals?
Source: Inspired by Paul J. Meyer’s, Attitude Is Everything, The Meyer Resource Group, 2003.
Each part explains a different aspect of personal financial planning, as shown in

Exhibit 1.1. This organizational scheme revolves around financial decision making
that’s firmly based on an operational set of financial plans. We believe that sound
financial planning enables individuals to make decisions that will yield their desired
results. Starting with Part 1—where we look at personal financial statements, plans,
and taxes—we move through the various types of decisions you’ll make when imple-
menting a financial plan.
1-1a Improving Your Standard of Living

With personal financial planning we learn to acquire, use, and control our financial
resources more efficiently. It allows us to gain more enjoyment from our income and
standard of living thus to improve our standard of living—the necessities, comforts, and luxuries we
The necessities, comforts, have or desire.
and luxuries enjoyed or
desired by an individual or
Americans view standards of living, and what constitute necessities or luxu-
family. ries, differently depending on their level of affluence. For example, 45 percent of
Americans consider a second or vacation home the ultimate symbol of affluence,
while others see taking two or more annual vacations or living in an exclusive
neighborhood as an indicator of wealth.
So our quality of life is closely tied to our standard of liv-
ing. Although other factors—geographic location, public fa-
cilities, local cost of living, pollution, traffic, and population
Financial
density—also affect quality of life, wealth is commonly viewed
Fact or
as a key determinant. Material items such as a house, car, and
Fantasy?
clothing, as well as money available for health care, educa-
An improved standard of living is tion, art, music, travel, and entertainment, all contribute to our
one of the payoffs of sound quality of life. Of course, many so-called wealthy people live
personal financial planning. Fact: “plain” lives, choosing to save, invest, or support philanthropic
The heart of sound financial plan- organizations with their money rather than indulge themselves
ning and effective money manage- with luxuries.
ment is the greater enjoyment of One trend with a profound effect on our standard of living
the money one makes by improving is the two-income family. What was relatively rare in the early
one’s standard of living. 1970s has become commonplace today, and the incomes of mil-
lions of families have risen sharply as a result. About 75 percent
4 Part 1 | Foundations of Financial Planning
Exhibit 1.1 Organizational Planning Model
This text emphasizes making financial decisions regarding assets, credit, insurance, investments, and retirement
and estates.
Financial Actions
Financial Basic asset decisions Financial

Plans Credit decisions Results
Insurance decisions
Investment decisions
Retirement and estate decisions
of married adults say that they and their mate share all their money, while some
partners admit to having a secret stash of cash. Two incomes buy more, but they also
require greater responsibility to manage the money wisely.
1-1b Spending Money Wisely

Using money wisely is a major benefit of financial planning. Whatever your income,
you can either spend it now or save some of it for the future. Determining your
current and future spending patterns is an important part of personal money man-
agement. The goal, of course, is to spend your money so that you get the most satis-
faction from each dollar.
Current Needs
average propensity Your current spending level is based on the necessities of life and your average pro-
to consume pensity to consume, which is the percentage of each dollar of income, on average,
The percentage of each dol- that is spent for current needs rather than savings. A minimum level of spending
lar of income, on average,
would allow you to obtain only the necessities of life: food, clothing, and shelter.
that a person spends for
current needs rather than Although the quantity and type of food, clothing, and shelter purchased may dif-
savings. fer among individuals depending on their wealth, we all need these items to survive.
Some people with high average propensities to consume earn low incomes and spend
a large portion of it on basic necessities. On the other hand, many “ultra-consumers”
choose to splurge on a few items and scrimp elsewhere; these people also exhibit high
average propensities to consume. Conversely, individuals earning large amounts quite
often have low average propensities to consume, in part because the cost of necessi-
ties represents only a small portion of their income.
Still, two people with significantly different incomes could have the same average
propensity to consume because of differences in their standard of living. The person
making more money may believe it is essential to buy better-quality items or more
items and will thus, on average, spend the same percentage of each dollar of income
as the person making far less.
Future Needs
A carefully developed financial plan should set aside a portion of current income
for deferred, future spending. Placing these funds in various savings and invest-
ment vehicles allows you to generate a return on your funds until you need them.
For example, you may want to build up a retirement fund to maintain a desirable
Financial Planning Tips
Ways to Save More Money
You can save more money by being purposeful in your • Avoid using credit cards with an annual fee.
spending. The number of no-fee cards with reward plans makes it
unnecessary to pay an annual fee.
• Cook at home more. Ease your way in by cooking at
home at least once a week. • Disconnect the landline phone. You may do just
fine with you mobile phones and no landline, which
• Make rather than buy your coffee. While a latte is
would save you some money.
great, we all know that it’s an expensive habit. Don’t stop
cold—just skip it as often as you can and make your cof- • Borrow books from the library and don’t buy
fee at home instead. them. Library cards are free and the book and media
selection is usually up-to-date.
• Take your lunch to work. Lunch with coworkers
may be the norm and a wise way to build helpful rela- • Don’t buy bottled water, bottle your own. Buy
tionships. So it may not be practical to take your lunch bottled water only occasionally just so you can get the
all of the time. But it will save you money to take your bottle to fill with your own water.
lunch at least occasionally.
• Drive your car a long time. Keep your car until the
• Avoid late fees by paying your bills on time. You repair costs and questionable reliability make it necessary
can have many bills like utilities paid automatically so to find a replacement.
there is no reason to pay late fees.
• Avoid ATM fees. Many banks do not waive ATM with-
drawal fees. Be sure to use ATMs that do not charge a fee.
Source: Adapted from Sam Baker of GradMoneyMatters.com, republished June 19, 2011, http://www
.dumblittleman.com/2008/01/30-easy-ways-to-save-money-and-no-you.html, accessed July 2015.
standard of living in your later years. Instead of spending the money now, you defer
actual spending until the future when you retire. Nearly 35 percent of Americans
say retirement planning is their most pressing financial concern. Other examples
of deferred spending include saving for a child’s education, a primary residence or
vacation home, a major acquisition (such as a car or home entertainment center),
or even a vacation.
The portion of current income we commit to future needs de-
pends on how much we earn and also on our average propensity
Financial to consume. About two-thirds of affluent Americans say they need
Fact or at least $5 million to feel rich. The more we earn and the less we
Fantasy? devote to current spending, the more we can commit to meeting fu-
ture needs. In any case, some portion of current income should be
A savings account is an example set aside regularly for future use. This practice creates good saving
of a tangible asset because it rep- habits.
resents something on deposit at a
bank or other financial institution.
Fantasy: A savings account, like
stocks, bonds, and mutual funds, is 1-1c Accumulating Wealth
an example of a financial asset—an In addition to using current income to pay for everyday living ex-
intangible, a “paper” asset. Real as- penses, we often spend it to acquire assets such as cars, a home, or
sets, in contrast, refer to tangibles— stocks and bonds. Our assets largely determine how wealthy we
physical items like houses, cars, and are. Personal financial planning plays a critical role in the accumu-
appliances.
lation of wealth by directing our financial resources to the most
productive areas.
Exhibit 1.2 The Average American, Financially Speaking
This financial snapshot of the “average American” gives you an idea of where you stand in terms of income, net worth,
and other measures. It should help you set some goals for the future.
Income and Assets

What Do We Earn? (median)
All families $ 46,700
What Are We Worth? (median)
All families 81,200
Home Ownership (median)
Value of primary residence 170,000
Mortgage on primary residence 115,000
How Much Savings Do We Have? (median) 80,000
Pooled investment funds (excluding money market) 27,000
Individual stocks 94,500
Bonds20,100
Bank accounts/CDs
Retirement accounts 59,000
Source: Adapted from Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. Hsu, Kevin B. Moore, John
Sabelhaus, Jeffrey Thompson, and Richard A.Windle, “Changes in U.S. Family Finances from 2010 to 2013:
Evidence from the Survey of Consumer Finances,” Board of Governors of the Federal Reserve System, Washington,
DC, (October 24, 2014, data is for 2013), http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf,
Tables 1–4, accessed July 2015.
wealth
The total value of all items
One’s wealth is the net total value of all the items the individual owns. Wealth
owned by an individual, consists of financial and tangible assets. Financial assets are intangible, paper assets,
such as savings accounts, such as savings accounts and securities (stocks, bonds, mutual funds, and so forth).
stocks, bonds, home, and They are earning assets that are held for the returns they promise. Tangible assets,
automobiles.
in contrast, are physical assets, such as real estate and automobiles. These assets can
financial assets be held for either consumption (e.g., your home, car, artwork, or jewelry) or invest-
Intangible assets, such as sav-
ment purposes (e.g., a duplex purchased for rental income). In general, the goal of
ings accounts and securities,
that are acquired for some most people is to accumulate as much wealth as possible while maintaining cur-
promised future return. rent consumption at a level that provides the desired standard of living. To see how
tangible assets you compare with the typical American in financial terms, check out the statistics
Physical assets, such as real in Exhibit 1.2.
estate and automobiles
that can be held for either
consumption or investment
purposes.
Test Yourself
1-1 What is a standard of living? What factors affect the quality of life?
1-2 Are consumption patterns related to quality of life? Explain.
1-3 What is average propensity to consume? Is it possible for two people with very
different incomes to have the same average propensity to consume? Why?
1-4 Discuss the various forms in which wealth can be accumulated.
1-2 The Personal Financial Planning Process
Many people mistakenly assume that personal financial planning is only for the
LG2 wealthy. However, nothing could be further from the truth. Whether you have a
lot of money or not enough, you still need personal financial planning. If you have
enough money, planning can help you spend and invest it wisely. If your income
seems inadequate, taking steps to plan your financial activities will lead to an im-
personal financial proved lifestyle. Personal financial planning is a systematic process that considers the
planning important elements of an individual’s financial affairs and is aimed at fulfilling his or
A systematic process that her financial goals.
considers important ele-
ments of an individual’s Everyone—including recent college graduates, single professionals, young mar-
financial affairs in order to ried couples, single parents, mid-career married couples, and senior corporate ex-
fulfill financial goals. ecutives—needs to develop a personal financial plan. Knowing what you need to
accomplish financially, and how you intend to do it, gives you an edge over someone
who merely reacts to financial events as they unfold. Just think of the example pro-
vided by the recent financial crisis. Do you think that a financial plan would have
helped in weathering the financial storm?
Purchasing a new car immediately after graduation may be an important goal
for you. But buying a car is a major expenditure involving a large initial cash
outlay and additional consumer debt that must be repaid over time. It therefore
warrants careful planning. Evaluating (and possibly even arranging) financing
before your shopping trip, as opposed to simply accepting the financing arrange-
ments offered by an auto dealer, could save you a considerable amount of money.
Moreover, some dealers advertise low-interest loans but charge higher prices for
their cars. Knowing all your costs in advance can help you find the best deal.
Using personal financial planning concepts to reach all your financial goals will
bring similar positive benefits.
Behavior Matters
Practicing Financial Self-Awareness
Are you aware of your financial behavior, its causes, and its consequences? For example, are you
routinely relying too heavily on your credit card, which puts you more in debt? Are you saving enough
to buy a new car or to fund your retirement? And the bottom line: Are you continuing the same financial
behavior you have in the past and yet expecting different results?
The first decisive step in taking control of your life is to be aware of what you’re thinking, feeling, and
doing. Be financially self-aware: observe your own thoughts, feelings, and behavior concerning your
finances. Take notes on things that affect how you feel and what you do about financial decisions.
Watch yourself and be honest about your feelings concerning money and your future.
Then ask yourself two critically important questions:
• Is the way I spend money consistent with what I believe? Financial planning that works is taking
the time to develop a plan that purposely lines up your values and your use of money.
• Have I clearly stated the financial goals that are important to me and, if so, what am I
doing today to make sure I achieve them? The heart of financial planning is determining where
you are today and where you want to be in the future. This implies the need for a financial plan: limited
resources sometimes bring painful trade-offs.
Source: Adapted from Carl Richards, “Practicing Radical Self-Awareness,” Behaviorgap.com. http://us2.campaign-archive1.com/?u=23ce2ac179e8158f
7583c4e3f&id=86f42577bc&e=b50e826a9e, accessed July 2015.
Exhibit 1.3 The Six-Step Financial Planning Process
The financial planning process translates personal financial goals into specific financial plans and strategies, implements
them, and then uses budgets and financial statements to monitor, evaluate, and revise plans and strategies as needed.
This process typically involves the six steps shown in sequence here:
1. Define financial goals.
2. Develop financial plans and strategies to achieve goals.
3. Implement financial plans and strategies.
4. Periodically develop and implement budgets to monitor and control progress toward goals.
5. Use financial statements to evaluate results of plans and budgets, taking corrective action as required.
6. Redefine goals and revise plans and strategies as personal circumstances change.
1-2a Steps in the Financial Planning Process

If you take a closer look at financial planning, you’ll see that the process translates
personal financial goals into specific financial plans, which then helps you implement
those plans through financial strategies. The financial planning process involves the
six steps shown in Exhibit 1.3.
The financial planning process runs full circle. You start with financial goals, for-
mulate and implement financial plans and strategies to reach them, monitor and con-
trol progress toward goals through budgets, and use financial statements to evaluate
the plan and budget results. This leads you back to redefining your goals so that they
better meet your current needs and to revising your financial plans and strategies
accordingly.
Let’s now look at how goal setting fits into the planning process. In Chapters 2
and 3, we’ll consider other information essential to creating your financial plans: per-
sonal financial statements, budgets, and taxes.
1-2b Defining Your Financial Goals

financial goals Financial goals are the results that an individual wants to attain. Examples include
Results that an individual buying a home, building a college fund, or achieving financial independence. What
wants to attain, such as
buying a home, building a
are your financial goals? Have you spelled them out? It’s impossible to effectively
college fund, or achieving manage your financial resources without financial goals. We need to know where we
financial independence. are going, in a financial sense, to effectively meet the major financial events in our
lives. Perhaps achieving financial independence at a relatively early age is important
to you. If so, then saving, investing, and retirement planning will be an important
part of your financial life. Your financial goals or preferences must be stated in mon-
etary terms because money and the satisfaction it can bring are an integral part of
financial planning.
The Role of Money
money About 75 percent of Americans believe that money is freedom. Money is the medium
The medium of exchange of exchange used to measure value in financial transactions. It would be difficult to
used as a measure of value
in financial transactions.
set specific personal financial goals and to measure progress toward achieving them
without the standard unit of exchange provided by the dollar. Money, as we know it
today, is the key consideration in establishing financial goals. Yet it’s not money, as
utility such, that most people want. Rather, we want the utility, which is the amount of sat-
The amount of satisfaction isfaction received from buying quantities of goods and services of a given quality that
received from purchasing
money makes possible. People may choose one item over another because of a special
certain types or quantities
of goods and services. feature that provides additional utility. For example, many people will pay more for
a car with satellite radio than one with only an audio player. The added utility may
result from the actual usefulness of the special feature or from the “status” it’s ex-
pected to provide, or both. Regardless, people receive varying levels of satisfaction
from similar items, and their satisfaction isn’t necessarily directly related to the cost
of the items. We therefore need to consider utility along with cost when evaluating
alternative qualities of life, spending patterns, and forms of wealth accumulation.
The Psychology of Money

Money and its utility are not only economic concepts; they’re also closely linked to the
psychological concepts of values, emotion, and personality. Your personal value sys-
tem—the important ideals and beliefs that guide your life—will also shape your attitude
toward money and wealth accumulation. If you place a high value on family life, you
may choose a career that offers regular hours and less stress or choose an employer who
offers flextime rather than a higher-paying position that requires travel and lots of over-
time. You may have plenty of money but choose to live frugally and do things yourself
rather than hire someone to do them for you. Or you may spend a high proportion of
your current income on acquiring luxuries. Financial goals and decisions should be con-
sistent with your personal values. You can formulate financial plans that provide the
greatest personal satisfaction and quality of life by identifying your values.
Money is an important motivator of personal behavior because it has a strong
effect on self-image. Each person’s unique personality and emotional makeup deter-
mine the importance and role of money in his or her life. Depending on timing and
circumstances, emotional responses to money may be positive (love, happiness, secu-
rity) or negative (fear, greed, insecurity). For example, some people feel satisfaction in
their work when they receive a paycheck. Others feel relief in knowing that they can
pay past-due bills. You should become aware of your own attitudes toward money
because they are the basis of your “money personality” and money management style.
Exhibit 1.4 explores attitudes toward money.
Some questions to ask yourself include: How important is money to me? Why?
What types of spending give me satisfaction? Am I a risk taker? Do I need large finan-
cial reserves to feel secure? Knowing the answers to these questions is a prerequisite
for developing realistic and effective financial goals and plans. For example, if you
prefer immediate satisfaction, then you will find it more difficult to achieve long-term
net worth or savings goals than if you are highly disciplined and primarily concerned
with achieving a comfortable retirement at an early age. Trade-offs between current
and future benefits are strongly affected by values, emotions, and personality. Effec-
tive financial plans are both economically and psychologically sound. They must not
only consider your wants, needs, and financial resources, but must also realistically
reflect your personality and emotional reactions to money.
1-2c Money and Relationships

The average couple spends between 250 and 700 hours planning their wedding.
While most couples spend less than $10,000 on the big day, the average cost has
risen to almost $30,000, depending on where they live. But with all the hoopla sur-
rounding the wedding day, many couples overlook one of the most important aspects
Exhibit 1.4 What’s Your Attitude Toward Money?
Our attitudes toward money influence how we spend, save, and invest. Which of the following attitudes toward
money best describes you? You may be predominately one type or a combination of types.
The Spender: You only live once

Spenders see shopping as entertainment. They would rather have something tangible than something intangible like
savings or an investment. Spenders have a hard time saving money.
The Builder: Make it so

Builders see money as a tool. They use money to achieve their goals and dreams. Examples include self-made
millionaires, entrepreneurs, corporate leaders, and dedicated hobbyists. Builders can miscalculate risks or ignore
the need for a margin of error. They may start projects simply for the challenge but not finish them as the next new
thing beckons.
The Giver: It’s better to give than to receive

Givers enjoy taking care of other people. They volunteer and give to charities. Givers commit their time, energy, and
money to their beliefs. Most givers simply enjoy making other people happy and doing good deeds. Givers sometimes
ignore their own needs, and their long-term financial plans can suffer as a result.
The Saver: A bird in the hand is worth two in the bush

Savers can accumulate significant wealth even on a modest income. They tend to be organized and to avoid money-
wasting activities. Although savers can be good investors, they can be too risk averse and prefer holding too much cash.
Such conservatism means that their investments often grow too slowly.
Source: Adapted from Diane McCurdy, CFP, How Much Is Enough? (John Wiley & Sons, 2005). Copyright © 2005 by John Wiley & Sons. All rights reserved.
Reproduced by permission.
of marriage: financial compatibility. Money can be one of the most emotional issues
in any relationship, including that with a partner, your parents, or children. Most
people are uncomfortable talking about money matters and avoid such discussions,
even with their partners. However, differing opinions on how to spend money may
threaten the stability of a marriage or cause arguments between parents and children.
Learning to communicate with your partner about money is a critical step in develop-
ing effective financial plans.
Your parents should play an important role in your financial planning. As they
age, you may have to assume greater responsibility for their care. Do you know what
health care coverage and financial plans they have in place? Where do they keep
important financial and legal documents? What preferences do they have for health
care should they become incapacitated? Asking these questions may be difficult, but
having the answers will save you many headaches.
The best way to resolve money disputes is to be aware of your partner’s
financial style, consistently communicate openly, and be willing to compromise.
It’s unlikely that you can change your partner’s style, but you can work out your
differences. Financial planning is an especially important part of the conflict reso-
lution process.
1-2d Types of Financial Goals

Financial goals cover a wide range of financial aspirations: controlling living ex-
penses, meeting retirement needs, setting up a savings and investment program,
and minimizing your taxes. Other important financial goals include having enough
money to live as well as possible now, being financially independent, sending children
to college, and providing for retirement.
Exhibit 1.5 Check Your Financial Planning Assumptions
It’s important to make sure that your financial planning assumptions are realistic. Consider these common assumptions.
Assumption 1: Saving a few thousand dollars a year should provide enough to fund my child’s college
education.
Reality: The College Board reports that the average increase in tuition and fees over the last de-
cade has been 5 percent, which is about twice the rate of inflation. If this rate of increase
continues, the average 4-year cost of tuition and fees for a child born in 2014 will be
about $323,900 for a private school and $94,800 for an in-state public education. And that
doesn’t consider the cost of room and board. That’s more than a few thousand dollars to
save each year!
Assumption 2: An emergency fund lasting 3 months should be adequate.
Reality: Tell that to the average unemployed person in the United States in 2011 who looked for
work for over 9 months. While this is the longest average duration of unemployment since
1948, it would be wise to keep an emergency fund that covers 6 to 9 months.
Assumption 3: I will be able to retire at 65 and should have plenty to live on in retirement.
Reality: The average 65-year old man can expect to live to about 84 and a 65-year old woman can
expect to live to about 87. That planning horizon could easily leave you short on funding.
So it would be wise to determine how much you need to set aside to fund a realistic life
expectancy horizon. This might imply saving more now, retiring later, or working part-time
after retirement.
Assumption 4: I’m relying on the rule of thumb that I will need only 70 percent of my pre-retirement in-
come to manage nicely in retirement.
Reality: Like all rules of thumb, one size does not necessarily fit all. While it’s true that you won’t
have work-related expenses in retirement, you’re likely to have much higher health care
costs. And it’s important to consider long-term care insurance to protect against such high
costs. So betting on 70 percent could leave you short.
Sources: Adapted from http://www.savingforcollege.com/tutorial101/the_real_cost_of_higher_education.php, http://economix.blogs.nytimes.com/2011/06/03/

average-length-of-unemployment-at-all-time-high/, accessed July 2015.
Financial goals should be defined as specifically as possible. Saying that you want
to save money next year is not a specific goal. How much do you want to save, and
for what purpose? A goal such as “save 10 percent of my take-home pay each month
to start an investment program” states clearly what you want to do and why.
Because they are the basis of your financial plans, your goals should be real-
istic and attainable. If you set your savings goals too high—for example, 25 per-
cent of your take-home pay when your basic living expenses already account for
85 percent of it—then your goal is unattainable and there’s no way to meet it. But
if savings goals are set too low, you may not accumulate enough for a meaningful
investment program. If your goals are unrealistic, they’ll put the basic integrity of
your financial plan at risk and be a source of ongoing financial frustration. You
must also use realistic assumptions when setting goals. Exhibit 1.5 will help you do
a reality check.
It’s important to involve your immediate family in the goal-setting process. When
family members “buy into” the goals, it eliminates the potential for future conflicts
and improves the family’s chances for financial success. After defining and approv-
ing your goals, you can prepare appropriate cash budgets. Finally, you should assign
priorities and a time frame to financial goals. Are they short-term goals for the next
year, or are they intermediate or long-term goals that will not be achieved for many
Exhibit 1.6 How Financial Goals Change with a Person’s Life Situation
Financial goals are not static; they change continually over a lifetime. Here are some typical long-term, intermediate, and
short-term goals for a number of different personal situations.
Personal Situation Long-Term Goals Intermediate Goals Short-Term Goals

(6+ years) (2–5 years) (1 year)
College senior Begin an investment Repay college loans Find a job
program Trade in car and upgrade Rent an apartment
Buy a townhouse to a nicer model Get a bank credit card
Earn a master’s degree Buy new furniture Buy a new stereo
Single, mid-20s Begin law school Begin regular savings Prepare a budget
Build an investment portfolio program Buy a new flat-screen
Save enough for a down Take a Caribbean vacation television
payment on a home Buy life insurance Get additional job training
Start a retirement fund Build an emergency fund
Reduce expenses by
10 percent
Married couple with Diversify investment Buy a second car Repaint house
children, late 30s portfolio Increase college fund Get braces
Buy a larger home contributions for children
Increase second income Review life and disability
from part-time to full-time insurance
Married couple Decide whether to Take cruise Buy new furniture

with grown relocate when retired Shift investment portfolio Review skills for possible
children, mid-50s Retire at age 62 into income-producing career change
Travel to Europe and the securities
Far East Sell house and buy smaller
residence
more years? For example, saving for a vacation might be a medium-priority short-
term goal, whereas buying a larger home may be a high-priority intermediate goal
and purchasing a vacation home a low-priority long-term goal. Normally, long-term
financial goals are set first, followed by a series of corresponding short-term and
intermediate goals. Your goals will continue to change with your life situation, as
Exhibit 1.6 demonstrates.
1-2e Putting Target Dates on Financial Goals

goal dates Financial goals are most effective when they are set with goal dates. Goal dates are
Target dates in the future target points in the future when you expect to have achieved or completed certain fi-
when certain financial
objectives are expected to
nancial objectives. They may serve as progress checkpoints toward some longer-term
be completed. financial goals and/or as deadlines for others.
Example: Target Dates for Financial Goals

Jim and Stacy Thompson are both 28 and have been married for one year. They have
set financial goals of buying a boat for $3,000 in 2018, accumulate a net worth of
$10,000 by 2022, and accumulate a net worth of $50,000 by 2030.
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DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI
Newala, too, suffers from the distance of its water-supply—at least

the Newala of to-day does; there was once another Newala in a lovely
valley at the foot of the plateau. I visited it and found scarcely a trace
of houses, only a Christian cemetery, with the graves of several
missionaries and their converts, remaining as a monument of its
former glories. But the surroundings are wonderfully beautiful. A
thick grove of splendid mango-trees closes in the weather-worn
crosses and headstones; behind them, combining the useful and the
agreeable, is a whole plantation of lemon-trees covered with ripe
fruit; not the small African kind, but a much larger and also juicier
imported variety, which drops into the hands of the passing traveller,
without calling for any exertion on his part. Old Newala is now under
the jurisdiction of the native pastor, Daudi, at Chingulungulu, who,
as I am on very friendly terms with him, allows me, as a matter of
course, the use of this lemon-grove during my stay at Newala.
FEET MUTILATED BY THE RAVAGES OF THE “JIGGER”
(Sarcopsylla penetrans)
The water-supply of New Newala is in the bottom of the valley,

some 1,600 feet lower down. The way is not only long and fatiguing,
but the water, when we get it, is thoroughly bad. We are suffering not
only from this, but from the fact that the arrangements at Newala are
nothing short of luxurious. We have a separate kitchen—a hut built
against the boma palisade on the right of the baraza, the interior of
which is not visible from our usual position. Our two cooks were not
long in finding this out, and they consequently do—or rather neglect
to do—what they please. In any case they do not seem to be very
particular about the boiling of our drinking-water—at least I can
attribute to no other cause certain attacks of a dysenteric nature,
from which both Knudsen and I have suffered for some time. If a
man like Omari has to be left unwatched for a moment, he is capable
of anything. Besides this complaint, we are inconvenienced by the
state of our nails, which have become as hard as glass, and crack on
the slightest provocation, and I have the additional infliction of
pimples all over me. As if all this were not enough, we have also, for
the last week been waging war against the jigger, who has found his
Eldorado in the hot sand of the Makonde plateau. Our men are seen
all day long—whenever their chronic colds and the dysentery likewise
raging among them permit—occupied in removing this scourge of
Africa from their feet and trying to prevent the disastrous
consequences of its presence. It is quite common to see natives of
this place with one or two toes missing; many have lost all their toes,
or even the whole front part of the foot, so that a well-formed leg
ends in a shapeless stump. These ravages are caused by the female of
Sarcopsylla penetrans, which bores its way under the skin and there
develops an egg-sac the size of a pea. In all books on the subject, it is
stated that one’s attention is called to the presence of this parasite by
an intolerable itching. This agrees very well with my experience, so
far as the softer parts of the sole, the spaces between and under the
toes, and the side of the foot are concerned, but if the creature
penetrates through the harder parts of the heel or ball of the foot, it
may escape even the most careful search till it has reached maturity.
Then there is no time to be lost, if the horrible ulceration, of which
we see cases by the dozen every day, is to be prevented. It is much
easier, by the way, to discover the insect on the white skin of a
European than on that of a native, on which the dark speck scarcely
shows. The four or five jiggers which, in spite of the fact that I
constantly wore high laced boots, chose my feet to settle in, were
taken out for me by the all-accomplished Knudsen, after which I
thought it advisable to wash out the cavities with corrosive
sublimate. The natives have a different sort of disinfectant—they fill
the hole with scraped roots. In a tiny Makua village on the slope of
the plateau south of Newala, we saw an old woman who had filled all
the spaces under her toe-nails with powdered roots by way of
prophylactic treatment. What will be the result, if any, who can say?
The rest of the many trifling ills which trouble our existence are
really more comic than serious. In the absence of anything else to
smoke, Knudsen and I at last opened a box of cigars procured from
the Indian store-keeper at Lindi, and tried them, with the most
distressing results. Whether they contain opium or some other
narcotic, neither of us can say, but after the tenth puff we were both
“off,” three-quarters stupefied and unspeakably wretched. Slowly we
recovered—and what happened next? Half-an-hour later we were
once more smoking these poisonous concoctions—so insatiable is the
craving for tobacco in the tropics.
Even my present attacks of fever scarcely deserve to be taken
seriously. I have had no less than three here at Newala, all of which
have run their course in an incredibly short time. In the early
afternoon, I am busy with my old natives, asking questions and
making notes. The strong midday coffee has stimulated my spirits to
an extraordinary degree, the brain is active and vigorous, and work
progresses rapidly, while a pleasant warmth pervades the whole
body. Suddenly this gives place to a violent chill, forcing me to put on
my overcoat, though it is only half-past three and the afternoon sun
is at its hottest. Now the brain no longer works with such acuteness
and logical precision; more especially does it fail me in trying to
establish the syntax of the difficult Makua language on which I have
ventured, as if I had not enough to do without it. Under the
circumstances it seems advisable to take my temperature, and I do
so, to save trouble, without leaving my seat, and while going on with
my work. On examination, I find it to be 101·48°. My tutors are
abruptly dismissed and my bed set up in the baraza; a few minutes
later I am in it and treating myself internally with hot water and
lemon-juice.
Three hours later, the thermometer marks nearly 104°, and I make
them carry me back into the tent, bed and all, as I am now perspiring
heavily, and exposure to the cold wind just beginning to blow might
mean a fatal chill. I lie still for a little while, and then find, to my
great relief, that the temperature is not rising, but rather falling. This
is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment,
that it has fallen below 98·6°, and I feel perfectly well. I read for an
hour or two, and could very well enjoy a smoke, if I had the
wherewithal—Indian cigars being out of the question.
Having no medical training, I am at a loss to account for this state
of things. It is impossible that these transitory attacks of high fever
should be malarial; it seems more probable that they are due to a
kind of sunstroke. On consulting my note-book, I become more and
more inclined to think this is the case, for these attacks regularly
follow extreme fatigue and long exposure to strong sunshine. They at
least have the advantage of being only short interruptions to my
work, as on the following morning I am always quite fresh and fit.
My treasure of a cook is suffering from an enormous hydrocele which
makes it difficult for him to get up, and Moritz is obliged to keep in
the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy
from somewhere in the bush, knows still less of cooking than Omari;
consequently Nils Knudsen himself has been promoted to the vacant
post. Finding that we had come to the end of our supplies, he began
by sending to Chingulungulu for the four sucking-pigs which we had
bought from Matola and temporarily left in his charge; and when
they came up, neatly packed in a large crate, he callously slaughtered
the biggest of them. The first joint we were thoughtless enough to
entrust for roasting to Knudsen’s mshenzi cook, and it was
consequently uneatable; but we made the rest of the animal into a
jelly which we ate with great relish after weeks of underfeeding,
consuming incredible helpings of it at both midday and evening
meals. The only drawback is a certain want of variety in the tinned
vegetables. Dr. Jäger, to whom the Geographical Commission
entrusted the provisioning of the expeditions—mine as well as his
own—because he had more time on his hands than the rest of us,
seems to have laid in a huge stock of Teltow turnips,[46] an article of
food which is all very well for occasional use, but which quickly palls
when set before one every day; and we seem to have no other tins
left. There is no help for it—we must put up with the turnips; but I
am certain that, once I am home again, I shall not touch them for ten
years to come.
Amid all these minor evils, which, after all, go to make up the
genuine flavour of Africa, there is at least one cheering touch:
Knudsen has, with the dexterity of a skilled mechanic, repaired my 9
× 12 cm. camera, at least so far that I can use it with a little care.
How, in the absence of finger-nails, he was able to accomplish such a
ticklish piece of work, having no tool but a clumsy screw-driver for
taking to pieces and putting together again the complicated
mechanism of the instantaneous shutter, is still a mystery to me; but
he did it successfully. The loss of his finger-nails shows him in a light
contrasting curiously enough with the intelligence evinced by the
above operation; though, after all, it is scarcely surprising after his
ten years’ residence in the bush. One day, at Lindi, he had occasion
to wash a dog, which must have been in need of very thorough
cleansing, for the bottle handed to our friend for the purpose had an
extremely strong smell. Having performed his task in the most
conscientious manner, he perceived with some surprise that the dog
did not appear much the better for it, and was further surprised by
finding his own nails ulcerating away in the course of the next few
days. “How was I to know that carbolic acid has to be diluted?” he
mutters indignantly, from time to time, with a troubled gaze at his
mutilated finger-tips.
Since we came to Newala we have been making excursions in all
directions through the surrounding country, in accordance with old
habit, and also because the akida Sefu did not get together the tribal
elders from whom I wanted information so speedily as he had
promised. There is, however, no harm done, as, even if seen only
from the outside, the country and people are interesting enough.
The Makonde plateau is like a large rectangular table rounded off
at the corners. Measured from the Indian Ocean to Newala, it is
about seventy-five miles long, and between the Rovuma and the
Lukuledi it averages fifty miles in breadth, so that its superficial area
is about two-thirds of that of the kingdom of Saxony. The surface,
however, is not level, but uniformly inclined from its south-western
edge to the ocean. From the upper edge, on which Newala lies, the
eye ranges for many miles east and north-east, without encountering
any obstacle, over the Makonde bush. It is a green sea, from which
here and there thick clouds of smoke rise, to show that it, too, is
inhabited by men who carry on their tillage like so many other
primitive peoples, by cutting down and burning the bush, and
manuring with the ashes. Even in the radiant light of a tropical day
such a fire is a grand sight.
Much less effective is the impression produced just now by the
great western plain as seen from the edge of the plateau. As often as
time permits, I stroll along this edge, sometimes in one direction,
sometimes in another, in the hope of finding the air clear enough to
let me enjoy the view; but I have always been disappointed.
Wherever one looks, clouds of smoke rise from the burning bush,
and the air is full of smoke and vapour. It is a pity, for under more
favourable circumstances the panorama of the whole country up to
the distant Majeje hills must be truly magnificent. It is of little use
taking photographs now, and an outline sketch gives a very poor idea
of the scenery. In one of these excursions I went out of my way to
make a personal attempt on the Makonde bush. The present edge of
the plateau is the result of a far-reaching process of destruction
through erosion and denudation. The Makonde strata are
everywhere cut into by ravines, which, though short, are hundreds of
yards in depth. In consequence of the loose stratification of these
beds, not only are the walls of these ravines nearly vertical, but their
upper end is closed by an equally steep escarpment, so that the
western edge of the Makonde plateau is hemmed in by a series of
deep, basin-like valleys. In order to get from one side of such a ravine
to the other, I cut my way through the bush with a dozen of my men.
It was a very open part, with more grass than scrub, but even so the
short stretch of less than two hundred yards was very hard work; at
the end of it the men’s calicoes were in rags and they themselves
bleeding from hundreds of scratches, while even our strong khaki
suits had not escaped scatheless.
NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAHUTA
I see increasing reason to believe that the view formed some time
back as to the origin of the Makonde bush is the correct one. I have
no doubt that it is not a natural product, but the result of human
occupation. Those parts of the high country where man—as a very
slight amount of practice enables the eye to perceive at once—has not
yet penetrated with axe and hoe, are still occupied by a splendid
timber forest quite able to sustain a comparison with our mixed
forests in Germany. But wherever man has once built his hut or tilled
his field, this horrible bush springs up. Every phase of this process
may be seen in the course of a couple of hours’ walk along the main
road. From the bush to right or left, one hears the sound of the axe—
not from one spot only, but from several directions at once. A few
steps further on, we can see what is taking place. The brush has been
cut down and piled up in heaps to the height of a yard or more,
between which the trunks of the large trees stand up like the last
pillars of a magnificent ruined building. These, too, present a
melancholy spectacle: the destructive Makonde have ringed them—
cut a broad strip of bark all round to ensure their dying off—and also
piled up pyramids of brush round them. Father and son, mother and
son-in-law, are chopping away perseveringly in the background—too
busy, almost, to look round at the white stranger, who usually excites
so much interest. If you pass by the same place a week later, the piles
of brushwood have disappeared and a thick layer of ashes has taken
the place of the green forest. The large trees stretch their
smouldering trunks and branches in dumb accusation to heaven—if
they have not already fallen and been more or less reduced to ashes,
perhaps only showing as a white stripe on the dark ground.
This work of destruction is carried out by the Makonde alike on the
virgin forest and on the bush which has sprung up on sites already
cultivated and deserted. In the second case they are saved the trouble
of burning the large trees, these being entirely absent in the
secondary bush.
After burning this piece of forest ground and loosening it with the
hoe, the native sows his corn and plants his vegetables. All over the
country, he goes in for bed-culture, which requires, and, in fact,
receives, the most careful attention. Weeds are nowhere tolerated in
the south of German East Africa. The crops may fail on the plains,
where droughts are frequent, but never on the plateau with its
abundant rains and heavy dews. Its fortunate inhabitants even have
the satisfaction of seeing the proud Wayao and Wamakua working
for them as labourers, driven by hunger to serve where they were
accustomed to rule.
But the light, sandy soil is soon exhausted, and would yield no
harvest the second year if cultivated twice running. This fact has
been familiar to the native for ages; consequently he provides in
time, and, while his crop is growing, prepares the next plot with axe
and firebrand. Next year he plants this with his various crops and
lets the first piece lie fallow. For a short time it remains waste and
desolate; then nature steps in to repair the destruction wrought by
man; a thousand new growths spring out of the exhausted soil, and
even the old stumps put forth fresh shoots. Next year the new growth
is up to one’s knees, and in a few years more it is that terrible,
impenetrable bush, which maintains its position till the black
occupier of the land has made the round of all the available sites and
come back to his starting point.
The Makonde are, body and soul, so to speak, one with this bush.
According to my Yao informants, indeed, their name means nothing
else but “bush people.” Their own tradition says that they have been
settled up here for a very long time, but to my surprise they laid great
stress on an original immigration. Their old homes were in the
south-east, near Mikindani and the mouth of the Rovuma, whence
their peaceful forefathers were driven by the continual raids of the
Sakalavas from Madagascar and the warlike Shirazis[47] of the coast,
to take refuge on the almost inaccessible plateau. I have studied
African ethnology for twenty years, but the fact that changes of
population in this apparently quiet and peaceable corner of the earth
could have been occasioned by outside enterprises taking place on
the high seas, was completely new to me. It is, no doubt, however,
correct.
The charming tribal legend of the Makonde—besides informing us
of other interesting matters—explains why they have to live in the
thickest of the bush and a long way from the edge of the plateau,
instead of making their permanent homes beside the purling brooks
and springs of the low country.
“The place where the tribe originated is Mahuta, on the southern
side of the plateau towards the Rovuma, where of old time there was
nothing but thick bush. Out of this bush came a man who never
washed himself or shaved his head, and who ate and drank but little.
He went out and made a human figure from the wood of a tree
growing in the open country, which he took home to his abode in the
bush and there set it upright. In the night this image came to life and
was a woman. The man and woman went down together to the
Rovuma to wash themselves. Here the woman gave birth to a still-
born child. They left that place and passed over the high land into the
valley of the Mbemkuru, where the woman had another child, which
was also born dead. Then they returned to the high bush country of
Mahuta, where the third child was born, which lived and grew up. In
course of time, the couple had many more children, and called
themselves Wamatanda. These were the ancestral stock of the
Makonde, also called Wamakonde,[48] i.e., aborigines. Their
forefather, the man from the bush, gave his children the command to
bury their dead upright, in memory of the mother of their race who
was cut out of wood and awoke to life when standing upright. He also
warned them against settling in the valleys and near large streams,
for sickness and death dwelt there. They were to make it a rule to
have their huts at least an hour’s walk from the nearest watering-
place; then their children would thrive and escape illness.”
The explanation of the name Makonde given by my informants is
somewhat different from that contained in the above legend, which I
extract from a little book (small, but packed with information), by
Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my
results agree exactly with the statements of the legend. Washing?
Hapana—there is no such thing. Why should they do so? As it is, the
supply of water scarcely suffices for cooking and drinking; other
people do not wash, so why should the Makonde distinguish himself
by such needless eccentricity? As for shaving the head, the short,
woolly crop scarcely needs it,[49] so the second ancestral precept is
likewise easy enough to follow. Beyond this, however, there is
nothing ridiculous in the ancestor’s advice. I have obtained from
various local artists a fairly large number of figures carved in wood,
ranging from fifteen to twenty-three inches in height, and
representing women belonging to the great group of the Mavia,
Makonde, and Matambwe tribes. The carving is remarkably well
done and renders the female type with great accuracy, especially the
keloid ornamentation, to be described later on. As to the object and
meaning of their works the sculptors either could or (more probably)
would tell me nothing, and I was forced to content myself with the
scanty information vouchsafed by one man, who said that the figures
were merely intended to represent the nembo—the artificial
deformations of pelele, ear-discs, and keloids. The legend recorded
by Pater Adams places these figures in a new light. They must surely
be more than mere dolls; and we may even venture to assume that
they are—though the majority of present-day Makonde are probably
unaware of the fact—representations of the tribal ancestress.
The references in the legend to the descent from Mahuta to the
Rovuma, and to a journey across the highlands into the Mbekuru
valley, undoubtedly indicate the previous history of the tribe, the
travels of the ancestral pair typifying the migrations of their
descendants. The descent to the neighbouring Rovuma valley, with
its extraordinary fertility and great abundance of game, is intelligible
at a glance—but the crossing of the Lukuledi depression, the ascent
to the Rondo Plateau and the descent to the Mbemkuru, also lie
within the bounds of probability, for all these districts have exactly
the same character as the extreme south. Now, however, comes a
point of especial interest for our bacteriological age. The primitive
Makonde did not enjoy their lives in the marshy river-valleys.
Disease raged among them, and many died. It was only after they
had returned to their original home near Mahuta, that the health
conditions of these people improved. We are very apt to think of the
African as a stupid person whose ignorance of nature is only equalled
by his fear of it, and who looks on all mishaps as caused by evil
spirits and malignant natural powers. It is much more correct to
assume in this case that the people very early learnt to distinguish
districts infested with malaria from those where it is absent.
This knowledge is crystallized in the
ancestral warning against settling in the
valleys and near the great waters, the
dwelling-places of disease and death. At the
same time, for security against the hostile
Mavia south of the Rovuma, it was enacted
that every settlement must be not less than a
certain distance from the southern edge of the
plateau. Such in fact is their mode of life at the
present day. It is not such a bad one, and
certainly they are both safer and more
comfortable than the Makua, the recent
intruders from the south, who have made USUAL METHOD OF
good their footing on the western edge of the CLOSING HUT-DOOR
plateau, extending over a fairly wide belt of
country. Neither Makua nor Makonde show in their dwellings
anything of the size and comeliness of the Yao houses in the plain,
especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a
Makonde hamlet not far from Newala, on the road to Mahuta, is the
most important settlement of the tribe I have yet seen, and has fairly
spacious huts. But how slovenly is their construction compared with
the palatial residences of the elephant-hunters living in the plain.
The roofs are still more untidy than in the general run of huts during
the dry season, the walls show here and there the scanty beginnings
or the lamentable remains of the mud plastering, and the interior is a
veritable dog-kennel; dirt, dust and disorder everywhere. A few huts
only show any attempt at division into rooms, and this consists
merely of very roughly-made bamboo partitions. In one point alone
have I noticed any indication of progress—in the method of fastening
the door. Houses all over the south are secured in a simple but
ingenious manner. The door consists of a set of stout pieces of wood
or bamboo, tied with bark-string to two cross-pieces, and moving in
two grooves round one of the door-posts, so as to open inwards. If
the owner wishes to leave home, he takes two logs as thick as a man’s
upper arm and about a yard long. One of these is placed obliquely
against the middle of the door from the inside, so as to form an angle
of from 60° to 75° with the ground. He then places the second piece
horizontally across the first, pressing it downward with all his might.
It is kept in place by two strong posts planted in the ground a few
inches inside the door. This fastening is absolutely safe, but of course
cannot be applied to both doors at once, otherwise how could the
owner leave or enter his house? I have not yet succeeded in finding
out how the back door is fastened.
MAKONDE LOCK AND KEY AT JUMBE CHAURO

This is the general way of closing a house. The Makonde at Jumbe
Chauro, however, have a much more complicated, solid and original
one. Here, too, the door is as already described, except that there is
only one post on the inside, standing by itself about six inches from
one side of the doorway. Opposite this post is a hole in the wall just
large enough to admit a man’s arm. The door is closed inside by a
large wooden bolt passing through a hole in this post and pressing
with its free end against the door. The other end has three holes into
which fit three pegs running in vertical grooves inside the post. The
door is opened with a wooden key about a foot long, somewhat
curved and sloped off at the butt; the other end has three pegs
corresponding to the holes, in the bolt, so that, when it is thrust
through the hole in the wall and inserted into the rectangular
opening in the post, the pegs can be lifted and the bolt drawn out.[50]
MODE OF INSERTING THE KEY
With no small pride first one householder and then a second

showed me on the spot the action of this greatest invention of the
Makonde Highlands. To both with an admiring exclamation of
“Vizuri sana!” (“Very fine!”). I expressed the wish to take back these
marvels with me to Ulaya, to show the Wazungu what clever fellows
the Makonde are. Scarcely five minutes after my return to camp at
Newala, the two men came up sweating under the weight of two
heavy logs which they laid down at my feet, handing over at the same
time the keys of the fallen fortress. Arguing, logically enough, that if
the key was wanted, the lock would be wanted with it, they had taken
their axes and chopped down the posts—as it never occurred to them
to dig them out of the ground and so bring them intact. Thus I have
two badly damaged specimens, and the owners, instead of praise,
come in for a blowing-up.
The Makua huts in the environs of Newala are especially
miserable; their more than slovenly construction reminds one of the
temporary erections of the Makua at Hatia’s, though the people here
have not been concerned in a war. It must therefore be due to
congenital idleness, or else to the absence of a powerful chief. Even
the baraza at Mlipa’s, a short hour’s walk south-east of Newala,
shares in this general neglect. While public buildings in this country
are usually looked after more or less carefully, this is in evident
danger of being blown over by the first strong easterly gale. The only
attractive object in this whole district is the grave of the late chief
Mlipa. I visited it in the morning, while the sun was still trying with
partial success to break through the rolling mists, and the circular
grove of tall euphorbias, which, with a broken pot, is all that marks
the old king’s resting-place, impressed one with a touch of pathos.
Even my very materially-minded carriers seemed to feel something
of the sort, for instead of their usual ribald songs, they chanted
solemnly, as we marched on through the dense green of the Makonde
bush:—
“We shall arrive with the great master; we stand in a row and have
no fear about getting our food and our money from the Serkali (the
Government). We are not afraid; we are going along with the great
master, the lion; we are going down to the coast and back.”
With regard to the characteristic features of the various tribes here
on the western edge of the plateau, I can arrive at no other
conclusion than the one already come to in the plain, viz., that it is
impossible for anyone but a trained anthropologist to assign any
given individual at once to his proper tribe. In fact, I think that even
an anthropological specialist, after the most careful examination,
might find it a difficult task to decide. The whole congeries of peoples
collected in the region bounded on the west by the great Central
African rift, Tanganyika and Nyasa, and on the east by the Indian
Ocean, are closely related to each other—some of their languages are
only distinguished from one another as dialects of the same speech,
and no doubt all the tribes present the same shape of skull and
structure of skeleton. Thus, surely, there can be no very striking
differences in outward appearance.
Even did such exist, I should have no time
to concern myself with them, for day after day,
I have to see or hear, as the case may be—in
any case to grasp and record—an
extraordinary number of ethnographic
phenomena. I am almost disposed to think it
fortunate that some departments of inquiry, at
least, are barred by external circumstances.
Chief among these is the subject of iron-
working. We are apt to think of Africa as a
country where iron ore is everywhere, so to
speak, to be picked up by the roadside, and
where it would be quite surprising if the
inhabitants had not learnt to smelt the
material ready to their hand. In fact, the
knowledge of this art ranges all over the
continent, from the Kabyles in the north to the
Kafirs in the south. Here between the Rovuma
and the Lukuledi the conditions are not so
favourable. According to the statements of the
Makonde, neither ironstone nor any other
form of iron ore is known to them. They have
not therefore advanced to the art of smelting
the metal, but have hitherto bought all their
THE ANCESTRESS OF
THE MAKONDE
iron implements from neighbouring tribes.
Even in the plain the inhabitants are not much
better off. Only one man now living is said to
understand the art of smelting iron. This old fundi lives close to
Huwe, that isolated, steep-sided block of granite which rises out of
the green solitude between Masasi and Chingulungulu, and whose
jagged and splintered top meets the traveller’s eye everywhere. While
still at Masasi I wished to see this man at work, but was told that,
frightened by the rising, he had retired across the Rovuma, though
he would soon return. All subsequent inquiries as to whether the
fundi had come back met with the genuine African answer, “Bado”
(“Not yet”).
BRAZIER
Some consolation was afforded me by a brassfounder, whom I

came across in the bush near Akundonde’s. This man is the favourite
of women, and therefore no doubt of the gods; he welds the glittering
brass rods purchased at the coast into those massive, heavy rings
which, on the wrists and ankles of the local fair ones, continually give
me fresh food for admiration. Like every decent master-craftsman he
had all his tools with him, consisting of a pair of bellows, three
crucibles and a hammer—nothing more, apparently. He was quite
willing to show his skill, and in a twinkling had fixed his bellows on
the ground. They are simply two goat-skins, taken off whole, the four
legs being closed by knots, while the upper opening, intended to
admit the air, is kept stretched by two pieces of wood. At the lower
end of the skin a smaller opening is left into which a wooden tube is
stuck. The fundi has quickly borrowed a heap of wood-embers from
the nearest hut; he then fixes the free ends of the two tubes into an
earthen pipe, and clamps them to the ground by means of a bent
piece of wood. Now he fills one of his small clay crucibles, the dross
on which shows that they have been long in use, with the yellow
material, places it in the midst of the embers, which, at present are
only faintly glimmering, and begins his work. In quick alternation
the smith’s two hands move up and down with the open ends of the
bellows; as he raises his hand he holds the slit wide open, so as to let
the air enter the skin bag unhindered. In pressing it down he closes
the bag, and the air puffs through the bamboo tube and clay pipe into
the fire, which quickly burns up. The smith, however, does not keep
on with this work, but beckons to another man, who relieves him at
the bellows, while he takes some more tools out of a large skin pouch
carried on his back. I look on in wonder as, with a smooth round
stick about the thickness of a finger, he bores a few vertical holes into
the clean sand of the soil. This should not be difficult, yet the man
seems to be taking great pains over it. Then he fastens down to the
ground, with a couple of wooden clamps, a neat little trough made by
splitting a joint of bamboo in half, so that the ends are closed by the
two knots. At last the yellow metal has attained the right consistency,
and the fundi lifts the crucible from the fire by means of two sticks
split at the end to serve as tongs. A short swift turn to the left—a
tilting of the crucible—and the molten brass, hissing and giving forth
clouds of smoke, flows first into the bamboo mould and then into the
holes in the ground.
The technique of this backwoods craftsman may not be very far
advanced, but it cannot be denied that he knows how to obtain an
adequate result by the simplest means. The ladies of highest rank in
this country—that is to say, those who can afford it, wear two kinds
of these massive brass rings, one cylindrical, the other semicircular
in section. The latter are cast in the most ingenious way in the
bamboo mould, the former in the circular hole in the sand. It is quite
a simple matter for the fundi to fit these bars to the limbs of his fair
customers; with a few light strokes of his hammer he bends the
pliable brass round arm or ankle without further inconvenience to
the wearer.
SHAPING THE POT
SMOOTHING WITH MAIZE-COB
CUTTING THE EDGE

FINISHING THE BOTTOM
LAST SMOOTHING BEFORE

BURNING
FIRING THE BRUSH-PILE

LIGHTING THE FARTHER SIDE OF
THE PILE
TURNING THE RED-HOT VESSEL
NYASA WOMAN MAKING POTS AT MASASI

Pottery is an art which must always and everywhere excite the
interest of the student, just because it is so intimately connected with
the development of human culture, and because its relics are one of
the principal factors in the reconstruction of our own condition in
prehistoric times. I shall always remember with pleasure the two or
three afternoons at Masasi when Salim Matola’s mother, a slightly-
built, graceful, pleasant-looking woman, explained to me with
touching patience, by means of concrete illustrations, the ceramic art
of her people. The only implements for this primitive process were a
lump of clay in her left hand, and in the right a calabash containing
the following valuables: the fragment of a maize-cob stripped of all
its grains, a smooth, oval pebble, about the size of a pigeon’s egg, a
few chips of gourd-shell, a bamboo splinter about the length of one’s
hand, a small shell, and a bunch of some herb resembling spinach.
Nothing more. The woman scraped with the
shell a round, shallow hole in the soft, fine
sand of the soil, and, when an active young
girl had filled the calabash with water for her,
she began to knead the clay. As if by magic it
gradually assumed the shape of a rough but
already well-shaped vessel, which only wanted
a little touching up with the instruments
before mentioned. I looked out with the
MAKUA WOMAN closest attention for any indication of the use
MAKING A POT. of the potter’s wheel, in however rudimentary
SHOWS THE a form, but no—hapana (there is none). The
BEGINNINGS OF THE embryo pot stood firmly in its little
POTTER’S WHEEL
depression, and the woman walked round it in
a stooping posture, whether she was removing
small stones or similar foreign bodies with the maize-cob, smoothing
the inner or outer surface with the splinter of bamboo, or later, after
letting it dry for a day, pricking in the ornamentation with a pointed
bit of gourd-shell, or working out the bottom, or cutting the edge
with a sharp bamboo knife, or giving the last touches to the finished
vessel. This occupation of the women is infinitely toilsome, but it is
without doubt an accurate reproduction of the process in use among
our ancestors of the Neolithic and Bronze ages.
There is no doubt that the invention of pottery, an item in human
progress whose importance cannot be over-estimated, is due to
women. Rough, coarse and unfeeling, the men of the horde range
over the countryside. When the united cunning of the hunters has
succeeded in killing the game; not one of them thinks of carrying
home the spoil. A bright fire, kindled by a vigorous wielding of the
drill, is crackling beside them; the animal has been cleaned and cut
up secundum artem, and, after a slight singeing, will soon disappear
under their sharp teeth; no one all this time giving a single thought
to wife or child.
To what shifts, on the other hand, the primitive wife, and still more
the primitive mother, was put! Not even prehistoric stomachs could
endure an unvarying diet of raw food. Something or other suggested
the beneficial effect of hot water on the majority of approved but
indigestible dishes. Perhaps a neighbour had tried holding the hard
roots or tubers over the fire in a calabash filled with water—or maybe
an ostrich-egg-shell, or a hastily improvised vessel of bark. They
became much softer and more palatable than they had previously
been; but, unfortunately, the vessel could not stand the fire and got
charred on the outside. That can be remedied, thought our
ancestress, and plastered a layer of wet clay round a similar vessel.
This is an improvement; the cooking utensil remains uninjured, but
the heat of the fire has shrunk it, so that it is loose in its shell. The
next step is to detach it, so, with a firm grip and a jerk, shell and
kernel are separated, and pottery is invented. Perhaps, however, the
discovery which led to an intelligent use of the burnt-clay shell, was
made in a slightly different way. Ostrich-eggs and calabashes are not
to be found in every part of the world, but everywhere mankind has
arrived at the art of making baskets out of pliant materials, such as
bark, bast, strips of palm-leaf, supple twigs, etc. Our inventor has no
water-tight vessel provided by nature. “Never mind, let us line the
basket with clay.” This answers the purpose, but alas! the basket gets
burnt over the blazing fire, the woman watches the process of
cooking with increasing uneasiness, fearing a leak, but no leak
appears. The food, done to a turn, is eaten with peculiar relish; and
the cooking-vessel is examined, half in curiosity, half in satisfaction
at the result. The plastic clay is now hard as stone, and at the same
time looks exceedingly well, for the neat plaiting of the burnt basket
is traced all over it in a pretty pattern. Thus, simultaneously with
pottery, its ornamentation was invented.
Primitive woman has another claim to respect. It was the man,
roving abroad, who invented the art of producing fire at will, but the
woman, unable to imitate him in this, has been a Vestal from the
earliest times. Nothing gives so much trouble as the keeping alight of
the smouldering brand, and, above all, when all the men are absent
from the camp. Heavy rain-clouds gather, already the first large
drops are falling, the first gusts of the storm rage over the plain. The
little flame, a greater anxiety to the woman than her own children,
flickers unsteadily in the blast. What is to be done? A sudden thought
occurs to her, and in an instant she has constructed a primitive hut
out of strips of bark, to protect the flame against rain and wind.
This, or something very like it, was the way in which the principle
of the house was discovered; and even the most hardened misogynist
cannot fairly refuse a woman the credit of it. The protection of the
hearth-fire from the weather is the germ from which the human
dwelling was evolved. Men had little, if any share, in this forward
step, and that only at a late stage. Even at the present day, the
plastering of the housewall with clay and the manufacture of pottery
are exclusively the women’s business. These are two very significant
survivals. Our European kitchen-garden, too, is originally a woman’s
invention, and the hoe, the primitive instrument of agriculture, is,
characteristically enough, still used in this department. But the
noblest achievement which we owe to the other sex is unquestionably
the art of cookery. Roasting alone—the oldest process—is one for
which men took the hint (a very obvious one) from nature. It must
have been suggested by the scorched carcase of some animal
overtaken by the destructive forest-fires. But boiling—the process of
improving organic substances by the help of water heated to boiling-
point—is a much later discovery. It is so recent that it has not even
yet penetrated to all parts of the world. The Polynesians understand
how to steam food, that is, to cook it, neatly wrapped in leaves, in a
hole in the earth between hot stones, the air being excluded, and
(sometimes) a few drops of water sprinkled on the stones; but they
do not understand boiling.
To come back from this digression, we find that the slender Nyasa
woman has, after once more carefully examining the finished pot,
put it aside in the shade to dry. On the following day she sends me
word by her son, Salim Matola, who is always on hand, that she is
going to do the burning, and, on coming out of my house, I find her
already hard at work. She has spread on the ground a layer of very
dry sticks, about as thick as one’s thumb, has laid the pot (now of a
yellowish-grey colour) on them, and is piling brushwood round it.
My faithful Pesa mbili, the mnyampara, who has been standing by,
most obligingly, with a lighted stick, now hands it to her. Both of
them, blowing steadily, light the pile on the lee side, and, when the
flame begins to catch, on the weather side also. Soon the whole is in a
blaze, but the dry fuel is quickly consumed and the fire dies down, so
that we see the red-hot vessel rising from the ashes. The woman
turns it continually with a long stick, sometimes one way and
sometimes another, so that it may be evenly heated all over. In
twenty minutes she rolls it out of the ash-heap, takes up the bundle
of spinach, which has been lying for two days in a jar of water, and
sprinkles the red-hot clay with it. The places where the drops fall are
marked by black spots on the uniform reddish-brown surface. With a
sigh of relief, and with visible satisfaction, the woman rises to an
erect position; she is standing just in a line between me and the fire,
from which a cloud of smoke is just rising: I press the ball of my
camera, the shutter clicks—the apotheosis is achieved! Like a
priestess, representative of her inventive sex, the graceful woman
stands: at her feet the hearth-fire she has given us beside her the
invention she has devised for us, in the background the home she has
built for us.
At Newala, also, I have had the manufacture of pottery carried on
in my presence. Technically the process is better than that already
described, for here we find the beginnings of the potter’s wheel,
which does not seem to exist in the plains; at least I have seen
nothing of the sort. The artist, a frightfully stupid Makua woman, did
not make a depression in the ground to receive the pot she was about
to shape, but used instead a large potsherd. Otherwise, she went to
work in much the same way as Salim’s mother, except that she saved
herself the trouble of walking round and round her work by squatting
at her ease and letting the pot and potsherd rotate round her; this is
surely the first step towards a machine. But it does not follow that
the pot was improved by the process. It is true that it was beautifully
rounded and presented a very creditable appearance when finished,
but the numerous large and small vessels which I have seen, and, in
part, collected, in the “less advanced” districts, are no less so. We
moderns imagine that instruments of precision are necessary to
produce excellent results. Go to the prehistoric collections of our
museums and look at the pots, urns and bowls of our ancestors in the
dim ages of the past, and you will at once perceive your error.
MAKING LONGITUDINAL CUT IN
BARK
DRAWING THE BARK OFF THE LOG
REMOVING THE OUTER BARK

BEATING THE BARK
WORKING THE BARK-CLOTH AFTER BEATING, TO MAKE IT

SOFT
MANUFACTURE OF BARK-CLOTH AT NEWALA

To-day, nearly the whole population of German East Africa is
clothed in imported calico. This was not always the case; even now in
some parts of the north dressed skins are still the prevailing wear,
and in the north-western districts—east and north of Lake
Tanganyika—lies a zone where bark-cloth has not yet been
superseded. Probably not many generations have passed since such
bark fabrics and kilts of skins were the only clothing even in the
south. Even to-day, large quantities of this bright-red or drab
material are still to be found; but if we wish to see it, we must look in
the granaries and on the drying stages inside the native huts, where
it serves less ambitious uses as wrappings for those seeds and fruits
which require to be packed with special care. The salt produced at
Masasi, too, is packed for transport to a distance in large sheets of
bark-cloth. Wherever I found it in any degree possible, I studied the
process of making this cloth. The native requisitioned for the
purpose arrived, carrying a log between two and three yards long and
as thick as his thigh, and nothing else except a curiously-shaped
mallet and the usual long, sharp and pointed knife which all men and
boys wear in a belt at their backs without a sheath—horribile dictu!
[51]
Silently he squats down before me, and with two rapid cuts has
drawn a couple of circles round the log some two yards apart, and
slits the bark lengthwise between them with the point of his knife.
With evident care, he then scrapes off the outer rind all round the
log, so that in a quarter of an hour the inner red layer of the bark
shows up brightly-coloured between the two untouched ends. With
some trouble and much caution, he now loosens the bark at one end,
and opens the cylinder. He then stands up, takes hold of the free
edge with both hands, and turning it inside out, slowly but steadily
pulls it off in one piece. Now comes the troublesome work of
scraping all superfluous particles of outer bark from the outside of
the long, narrow piece of material, while the inner side is carefully
scrutinised for defective spots. At last it is ready for beating. Having
signalled to a friend, who immediately places a bowl of water beside
him, the artificer damps his sheet of bark all over, seizes his mallet,
lays one end of the stuff on the smoothest spot of the log, and
hammers away slowly but continuously. “Very simple!” I think to
myself. “Why, I could do that, too!”—but I am forced to change my
opinions a little later on; for the beating is quite an art, if the fabric is
not to be beaten to pieces. To prevent the breaking of the fibres, the
stuff is several times folded across, so as to interpose several
thicknesses between the mallet and the block. At last the required
state is reached, and the fundi seizes the sheet, still folded, by both
ends, and wrings it out, or calls an assistant to take one end while he
holds the other. The cloth produced in this way is not nearly so fine
and uniform in texture as the famous Uganda bark-cloth, but it is
quite soft, and, above all, cheap.
Now, too, I examine the mallet. My craftsman has been using the
simpler but better form of this implement, a conical block of some
hard wood, its base—the striking surface—being scored across and
across with more or less deeply-cut grooves, and the handle stuck
into a hole in the middle. The other and earlier form of mallet is
shaped in the same way, but the head is fastened by an ingenious
network of bark strips into the split bamboo serving as a handle. The
observation so often made, that ancient customs persist longest in
connection with religious ceremonies and in the life of children, here
finds confirmation. As we shall soon see, bark-cloth is still worn
during the unyago,[52] having been prepared with special solemn
ceremonies; and many a mother, if she has no other garment handy,
will still put her little one into a kilt of bark-cloth, which, after all,
looks better, besides being more in keeping with its African
surroundings, than the ridiculous bit of print from Ulaya.
MAKUA WOMEN

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Personal Financial Planning 14th

Edition, (Ebook PDF)

Part 3 Managing Credit, 215

Chapter 6 Using Credit, 216

Chapter 7 Using Consumer Loans, 260

Part 4 Managing Insurance Needs, 299

Chapter 8 Insuring Your Life, 300

Chapter 9 Insuring Your Health, 340

Part 5 Managing Investments, 411

Chapter 11 Investment Planning, 412

Chapter 12 Investing in Stocks and Bonds, 461

Chapter 13 Investing in Mutual Funds, ETFs, and Real Estate, 508

Part 6 Retirement and Estate Planning, 555

Chapter 14 Planning for Retirement, 556

Chapter 15 Preserving Your Estate, 598 ©Dean Mitchell/Shutterstock.com

Principles of Estate Planning, 599

Organization of the Book

Major Changes in the 14th Edition

General Changes and Hallmark Features

Chapter 1 on understanding the financial planning process, has been carefully

Chapter 5 on making automobile and housing decisions considers new market

Chapter 10 on protecting your property, discusses behavioral biases when buying

Chapter 12 on investing in stocks and bonds continues to emphasize the risk–re-

Instructor’s Manual and Test Bank

Testing with Cognero

Randall S. Billingsley, FRM, CFA

Lawrence J. Gitman, CFP®

Michael D. Joehnk, CFA

Randall S. Billingsley is a finance professor at VirginiaTech. He received his bach-

Lawrence J. Gitman is an emeritus professor of finance at San Diego State ­University.

Michael D. Joehnk is an emeritus professor of finance at Arizona State University

xviii About the Authors

About the Authors xix

Understanding the Financial

LG4 Examine the economic environment’s influence on personal financial planning.

Understand the importance of career choices and their relationship to personal

How Will This Affect Me?

• An improved standard of living is one of the payoffs of sound personal financial

1-1 The Rewards of Sound Financial Planning

Chapter 1 | Understanding the Financial Planning Process 3

Each part explains a different aspect of personal financial planning, as shown in

1-1a Improving Your Standard of Living

4 Part 1 | Foundations of Financial Planning

Financial Basic asset decisions Financial

1-1b Spending Money Wisely

Chapter 1 | Understanding the Financial Planning Process 5

6 Part 1 | Foundations of Financial Planning

Income and Assets

1-2 Are consumption patterns related to quality of life? Explain.

1-4 Discuss the various forms in which wealth can be accumulated.

Chapter 1 | Understanding the Financial Planning Process 7

8 Part 1 | Foundations of Financial Planning

1. Define financial goals.

2. Develop financial plans and strategies to achieve goals.

3. Implement financial plans and strategies.

1-2a Steps in the Financial Planning Process

1-2b Defining Your Financial Goals

Chapter 1 | Understanding the Financial Planning Process 9

The Psychology of Money

1-2c Money and Relationships

10 Part 1 | Foundations of Financial Planning

The Spender: You only live once

The Builder: Make it so

Lawrence J. Gitman is an emeritus professor of finance at San Diego State University.

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