Focus on Personal Finance, 7th Edition

: An Active Approach to Help You

Develop Successful Financial Skills
Jack R. Kapoor
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Focus on Personal
Finance
An Active Approach to Help You Achieve
Financial Literacy

SEVENTH EDITION
The McGraw Hill Series in Finance, Insurance, and Real Estate

FINANCIAL MANAGEMENT Ross, Westerfield, and Jordan INTERNATIONAL FINANCE

Fundamentals of Corporate Finance
Block, Hirt, and Danielsen Eun and Resnick
Thirteenth Edition
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Tenth Edition Bodie, Kane, and Marcus
Investments FINANCIAL PLANNING AND INSURANCE
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Hirt and Block Retirement Plans: 401(k)s, IRAs, and Other
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Case Studies in Finance: Managing for Corporate Value
Tenth Edition Twelfth Edition
Creation
Eighth Edition Jordan, Miller, and Dolvin Altfest
Cornett, Adair, and Nofsinger Fundamentals of Investments: Valuation and Personal Financial Planning
Finance: Applications and Theory Management Second Edition
Fifth Edition Eighth Edition
Harrington and Niehaus
Cornett, Adair, and Nofsinger Stewart, Piros, and Heisler Risk Management and Insurance
M: Finance Running Money: Professional Portfolio Second Edition
Fifth Edition Management
Kapoor, Dlabay, Hughes, and Hart
First Edition
DeMello Focus on Personal Finance: An Active Approach
Cases in Finance Sundaram and Das to Help You Achieve Financial Literacy
Third Edition Derivatives: Principles and Practice Seventh Edition
Second Edition
Grinblatt (editor) Kapoor, Dlabay, Hughes, and Hart
Stephen A. Ross, Mentor: Influence through Generations Personal Finance
FINANCIAL INSTITUTIONS Thirteenth Edition
Grinblatt and Titman AND MARKETS
Financial Markets and Corporate Strategy Walker and Walker
Rose and Hudgins
Second Edition Personal Finance: Building Your Future
Bank Management and Financial Services Second Edition
Higgins Ninth Edition
Analysis for Financial Management
Twelfth Edition Rose and Marquis
Financial Institutions and Markets
Ross, Westerfield, Jaffe, and Jordan Eleventh Edition
Corporate Finance
Thirteenth Edition Saunders and Cornett
Financial Institutions Management: A Risk
Ross, Westerfield, Jaffe, and Jordan Management Approach
Corporate Finance: Core Principles and Applications Tenth Edition
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Ross, Westerfield, and Jordan Financial Markets and Institutions
Essentials of Corporate Finance Eighth Edition
Tenth Edition
Focus on Personal
Finance
An Active Approach to Help You Achieve
Financial Literacy

SEVENTH EDITION

Jack R. Kapoor
C O L L E G E O F D U PAG E

Les R. Dlabay
LAKE FOREST COLLEGE

Robert J. Hughes
DALLAS COUNTY COMMUNITY COLLEGES

Melissa M. Hart
N O R T H C A R O L I N A S TAT E U N I V E R S I T Y
 Final PDF to printer

FOCUS ON PERSONAL FINANCE

Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10121. Copyright © 2022 by
McGraw Hill LLC. All rights reserved. Printed in the United States of America. No part of this publication may
be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without
the prior written consent of McGraw Hill LLC, including, but not limited to, in any network or other electronic
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Some ancillaries, including electronic and print components, may not be available to customers outside the
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This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LWI 24 23 22 21

ISBN 978-1-265-52197-4
MHID 1-265-52197-2

Cover Image: YinYang/Getty Images

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
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mheducation.com/highered

kap21972_fm_ise iv 10/13/20 07:53 PM

Dedication
To my grandchildren, Joshua, Audra, and Hannah Tucker; and
Veda and Asha Kapoor

To my wife, Linda Dlabay; my children, Carissa and Kyle;

their spouses, Doug Erickson and Anne Jaspers; and my
grandchildren Lucy Dlabay and Caleb Erickson

To my wife, Robin, and the memory of my mother, Barbara Y.

Hughes

To my husband, David Hart, and my children, Alex and Madelyn

v
 Brief Table of Contents
CHAPTER 1 Personal Financial Planning in Action 2
CHAPTER 1 APPENDIX Time Value of Money 37
CHAPTER 2 Money Management Skills 50
CHAPTER 2 APPENDIX Developing a Career Strategy 81
CHAPTER 3 Taxes in Your Financial Plan 94
CHAPTER 4 Financial Services: Savings Plans and Payment
Accounts 126
CHAPTER 5 Consumer Credit: Advantages, Disadvantages,
Sources, and Costs 160
CHAPTER 5 APPENDIX Education Financing, Loans, and
Scholarships 206
CHAPTER 6 Consumer Purchasing and Wise Buying
Strategies 216
CHAPTER 6 APPENDIX Consumer Agencies and
Organizations 246
CHAPTER 7 Selecting and Financing Housing 250
CHAPTER 8 Home and Automobile Insurance 282
CHAPTER 9 Health and Disability Income Insurance 318
CHAPTER 10 Financial Planning with Life Insurance 352
CHAPTER 11 Investing Basics and Evaluating Bonds 380
CHAPTER 12 Investing in Stocks 420
CHAPTER 13 Investing in Mutual Funds 456
CHAPTER 14 Starting Early: Retirement and Estate Planning 494
INDEX 528

Focus on . . . the Cover

How do you feel when you look at this cover? We hope the image on the book
conveys a feeling of relaxation and overall peace of mind—both achieved, in
part, by developing a solid financial plan. From cover to cover, this text’s goal
is to help you gain the financial literacy and personal finance skills you need to
make sound financial decisions for life. Use this book as a tool to help you plan
for a successful financial future!
YinYang/Getty Images

vi
Focus on . . . the Authors

Jack R. Kapoor, EdD, College of DuPage

Jack Kapoor has been a professor of business and economics in the Business and Tech-
nology Division of the College of DuPage, Glen Ellyn, Illinois, where he taught Personal
Finance, Introduction to Business, Marketing, Management, and Economics for more than
40 years. Professor Kapoor is a recipient of the Business and Technology Division’s Out-
standing Professor Award. He received his BA and MS from San Francisco State College
and his EdD in Business and Economic Education from Northern Illinois University. He
previously taught at Illinois Institute of Technology’s Stuart School of Management, San
Francisco State University’s School of World Business, and other colleges. He served as an
assistant national bank examiner for the U.S. Treasury Department and has been an inter-
national trade consultant to Bolting Manufacturing Co., Ltd., Mumbai, India.
Dr. Kapoor is known internationally as a co-author of several textbooks, including
­Business: A Practical Approach (Rand McNally), Business (Cengage Learning), Business
and Personal Finance (Glencoe), and Personal Finance (McGraw Hill). He served as a
content consultant for two popular national television series, The Business File: An Intro-
duction to Business and Dollars and Sense: Personal Finance for the 21st Century; and
he developed two full-length audio courses in Business and Personal Finance. He has been
quoted in many national newspapers and magazines, including USA Today, U.S. News &
World Report, the Chicago Sun-Times, Crain’s Small Business, the Chicago Tribune, and
other publications.
Dr. Kapoor has traveled around the world and has studied business practices in capital-
ist, socialist, and communist countries.

Les R. Dlabay, EdD, Lake Forest College

“Learning for a life worth living” is the teaching emphasis of Les Dlabay, professor of
business emeritus, who taught at Lake Forest College, Lake Forest, Illinois, for 35 years. In
an effort to prepare students for diverse economic settings, he makes extensive use of field
research projects and interactive learning related to food, water, health care, and education.
He believes our society can improve global business development through volunteering,
knowledge sharing, and financial support. Dr. Dlabay has authored or has adaptations of
more than 40 textbooks in the United States, Canada, India, and Singapore. He has taught
more than 30 different courses during his career and has presented over 300 workshops
and seminars to academic, business, and community organizations. Professor Dlabay has a
collection of cereal packages from more than 100 countries and banknotes from 200 coun-
tries, which are used to teach about economic, cultural, and political elements of interna-
tional business environments.
His research involves informal and alternative financial services in cross-cultural and
global business settings. Dr. Dlabay serves on the board of Andean Aid (www.andeanaid.
org), which provides tutoring assistance and spiritual guidance to school-age children in
Colombia and Venezuela, and teaches community-based money management and work-
force readiness classes for Love INC of Lake County (Illinois), which mobilizes local
churches to transform lives and communities. Professor Dlabay has a BS (Accounting)
from the University of Illinois, Chicago; an MBA from DePaul University; and an EdD in
Business and Economic Education from Northern Illinois University. He has received The
Great Teacher award at Lake Forest College three times.

vii
viii Focus on . . . the Authors

Robert J. Hughes, EdD, Dallas County

Community Colleges
Financial literacy! Only two words, but Bob Hughes, professor of business at Dallas County
Community Colleges, believes that these two words can change your life. Whether you
want to be rich or just manage the money you have, the ability to analyze financial deci-
sions and gather financial information are skills that can always be improved. Dr. Hughes
has taught personal finance, introduction to business, business math, small business man-
agement, small business finance, and accounting for over 35 years. In addition to Focus
on Personal Finance and Personal Finance, published by McGraw Hill, he has authored
college textbooks for Introduction to Business, Business Mathematics, and Small Business
Management. He also served as a content consultant for two popular national television
series, Dollars & Sense: Personal Finance for the 21st Century and It’s Strictly Business,
and he is the lead author for a business math project utilizing artificial intelligence instruc-
tion funded by the ALEKS Corporation. He received his BBA from Southern Nazarene
University and his MBA and EdD from the University of North Texas. His hobbies include
writing, investing, collecting French antiques, art, and travel.

Melissa M. Hart, CPA, North Carolina State University

Melissa Hart is a senior lecturer in the Poole College of Management at North ­Carolina
State University. She teaches courses in personal and corporate finance. She is a mem-
ber of the Academy of Outstanding Teachers. She has been nominated for the Gertrude
Cox Award for Innovative Excellence in Teaching with Technology for developing unique
approaches to introduce technology into the classroom and the ­distance education envi-
ronment. Spreading the word about financial literacy has always been a ­passion of hers.
It doesn’t stop at the classroom. Each year she shares her ­commonsense approach of “No
plan is a plan” to various student groups, clubs, high schools, and other organizations. She
is a member of the North Carolina Association of Certified Public Accountants and the
American Institute of Certified Public Accountants. She received her BBA from the Uni-
versity of Maryland and an MBA from North Carolina State University. Prior to obtaining
an MBA, she worked eight years in public ­accounting in auditing, tax compliance, and
consulting. Her hobbies include keeping up with her f­amily’s many extracurricular activ-
ities. She travels extensively with her family to enjoy the many cultures and beauty of the
country and the world.
Dear Personal Finance Students
and Professors
Today everyone has a story about how the coronavirus pandemic affected their life.
Did you quarantine with family members, friends, or alone? Did you drive around
for hours trying to get basic necessities—the last roll of toilet paper or bottle of
hand sanitizer? Were you laid off from your job? Did you worry about how to pay
your bills and pay for food and medicines? All good questions that describe how a
pandemic can affect both your health and your financial security. For many people,
it was a wake-up call that they needed money and a personal financial plan.

While there are no guarantees there won’t be hardships ahead, we can provide you with
the information you need to weather the next crisis. The material in this new edition
of Focus on Personal Finance will help you answer important questions including:

∙ How much should you have in an emergency fund?

∙ Why does your ratio of cash and liquid assets to monthly expenses matter in a crisis?
∙ What happens if you skip a monthly payment or can’t pay your bills?
∙ If you get sick, will your health insurance cover treatment?
∙ What portion of your income should you save each month?
∙ What is your risk tolerance for investing in a volatile market?
∙ Will you have to delay retirement?

What’s Next?
For both students and professors, the pandemic led to new problems. Many stu-
dents and professors quickly found their schedule change from on-campus classes
to online delivery in a matter of days. As authors, we realized our textbook mate-
rials and our digital package were an even more important component that could
help students learn. As we prepared this edition of the text and digital package, we
worked hard to include important content in every chapter you can use to develop
your own plan to build financial security and to weather another pandemic, an
unexpected job loss, or unexpected life situations.

As we emerge from this crisis, ask yourself what financial lessons you have learned.
As you think about the answer, keep in mind the decisions that we all make every
day can lead to effective money management and help build financial security. That’s
what this course, this text, and the digital package are all about: learning how to
make better financial decisions and managing your money, even in a time of crisis.

Text (Or eBook Option)

The new seventh edition of Focus on Personal Finance provides current content,
examples, exhibits, and features in each chapter to illustrate concepts that can be

ix
x Dear Personal Finance Students and Professors

used to build financial health. Our new FinTech for Financial Literacy feature is
designed to help you use technology to improve financial decisions. Another new
feature of this edition is the Financial Literacy Portfolio that appears at the end
of each chapter. These features are designed to introduce students to the many
resources that promote financial competencies, action research, and outcomes. In
addition, as always, we have reviewed and revised websites and apps throughout
the text to provide you with up-to-date sources of information.

Digital Package
As teachers and authors, we are acutely aware of the importance of having a robust
digital package—especially now as more and more classes are taught online. We
are proud of the tools we have created to facilitate student learning. For students,
our digital package includes an interactive e-book, practice quizzes, and short vid-
eos along with assignable and auto-graded questions. We also offer auto-graded
Your Personal Financial Plan sheets that are built around the cases in the text and
an electronic version of the Daily Spending Diary sheets. For instructors, our dig-
ital resources include a comprehensive instructor manual, computerized test bank,
and PowerPoint presentations for each chapter. In short, should you need digital
resources at any time, we have those covered.

New Normal
While we don’t know how the events surrounding coronavirus pandemic will
change the future, we do believe the basic principles in a personal finance course
can help your students through a crisis and beyond. We are happy to join you on
this journey! We invite you to begin by reading Chapter 1, Personal Financial
Planning in Action.

Welcome to the new, seventh edition of Focus on Personal Finance!

Jack Kapoor
kapoorj@att.net

Les Dlabay
dlabay@lakeforest.edu

Bob Hughes
Hughespublishing@outlook.com

Melissa Hart
mmhart@ncsu.edu
New to This Edition

The seventh edition of Focus on Personal Finance contains new and updated boxed fea-
tures, exhibits and tables, articles, and end-of-chapter material. The following grid high-
lights just some of the significant content revisions made to Focus on Personal Finance, 7e.
Global changes for all chapters
∙ New FinTech for Financial Literacy margin feature.
∙ New Digital Financial Literacy with. . . feature in each chapter.
∙ Revised Road Map–Dashboard feature at the end of each chapter.
∙ Revised and updated problems throughout.
∙ New Financial Literacy Portfolio activity at the end of the chapter.
∙ Updated websites and apps on Your Personal Financial Plan sheets.

CHAPTER 1 ∙ New definition of financial literacy.

Personal Financial Plan-
ning in Action
∙ New Exhibit 1-1, Planning for Personal Financial Literacy.
∙ New CAUTION! feature on avoiding lifestyle inflation.
∙ Expanded Financial Literacy in Practice feature for creating financial goals.
∙ New FinTech for Financial Literacy feature discussing automated systems for
banking and personal finance activities.
∙ New Digital Financial Literacy with. . . feature with resources available at
kiplinger.com.
∙ New coverage of school funding sources.
∙ New Financial Literacy Portfolio feature to help students develop financial goals
using the S-M-A-R-T format.
∙ Relocation of Daily Spending Diary instructions and sample sheets to the end of
Chapter 1.

CHAPTER 2 ∙ New FinTech for Financial Literacy feature on using robo-advisors to guide finan-
Money Management cial planning.
Skills ∙ New CAUTION! feature on having an accurate record of spending and reduced
financial stress.
∙ New Money Minute Focus feature on unused educational grants and scholarships.
∙ New Money Minute Focus feature on kakeibo, a system used in Japan for manag-
ing personal finances.
∙ An updated Money Minute Focus feature on how most households can have an
additional $500 or more a month.
∙ New Digital Financial Literacy with. . . feature on clark.com.
∙ New Financial Literacy Portfolio feature teaching students how to effectively orga-
nize their financial records.
∙ Relocation of Developing a Career Search Strategy appendix to the end of Chapter 2
with new coverage of human-centered design, the use of artificial intelligence in the
hiring process, and a checklist for interview success.

xi
xii New to This Edition

CHAPTER 3 ∙ New FinTech for Financial Literacy feature on cryptocurrency.

Taxes in Your Financial ∙ Coverage of TCJA tax information throughout with updated content on how to file
Plan taxes online.
∙ Updated figures with revised tax brackets, rates, and calculations.
∙ Revised Exhibit 3-3, showing up-to-date tax forms.
∙ Revised Exhibit 3-4, showing up-to-date deduction schedule.
∙ Revised Exhibit 3-5, showing up-to-date tax tables and rates.
∙ New Digital Financial Literacy with. . . feature showing students how to use
thebalance.com to help find the latest information to guide their financial decision making.
∙ New Financial Literacy Portfolio feature guiding students on how to prepare to file
a federal income tax return.

CHAPTER 4 ∙ New FinTech for Financial Literacy feature on neobanks.

Financial Services: Sav-
ings Plans and Payment
Accounts
∙ Revised and expanded Exhibit 4-4 for assessing and selecting a financial institution.
∙ Updated CAUTION! feature on unnecessary bank fees.
∙ New CAUTION! feature on potential payment deceptions.
∙ New Money Minute Focus feature on education savings plans.
∙ New Money Minute Focus feature on the use of varied savings accounts to effec-
tively manage finances.
∙ Updated FinTech for Financial Literacy feature on cybercurrencies.
∙ New Digital Financial Literacy with. . . feature on nerdwallet.com.
∙ New Financial Literacy Portfolio feature on potential payment deceptions.

CHAPTER 5 ∙ Updated Exhibit 5-2 showing the volume of consumer credit.

Consumer Credit
Advantages, Disad-
vantages Sources, and
Costs
∙ Revised and updated Exhibit 5-10 covering consumer bankruptcy filings in the
United States.
∙ New Money Minute Focus feature explaining how a security freeze on your credit
report can stop identity thieves from opening new accounts in your name.
∙ New and updated content in What is Consumer Credit?, Credit Cards, Home Equity
Loans, Applying for Credit, FICO and VantageScore, and Bankruptcy sections.
∙ New FinTech for Financial Literacy feature on the Fair Credit Reporting Act.
∙ Updated Home Equity Loans example.
∙ New Digital Financial Literacy with. . . feature covering selecting and using a
retail credit card.
∙ New Smart Money Minute feature revealing how to obtain free credit reports.
∙ New Financial Literacy Portfolio feature on how to research and compare alterna-
tive credit sources.

CHAPTER 6 ∙ New Money Minute Focus feature on avoiding financial difficulties when mixing
Consumer Purchas- needs and wants.
ing and Wise Buying ∙ New Money Minute Focus feature on the buying habits of minimalists and frugal
Strategies people.
∙ New Money Minute Focus feature on the financial benefits of driving an older car.
∙ New Digital Financial Literacy with. . . feature with motor vehicle testing and
product information from consumerreports.org.
 New to This Edition xiii

CHAPTER 6 ∙ New Money Minute Focus feature on renting or borrowing rather than owning
(Continued) motor vehicles, clothing, cameras, power tools, and home appliances.
∙ Updated Money Minute Focus feature on common consumer complaints and
scams.
∙ New CAUTION! feature on avoiding scams of online used-car sellers.
∙ New CAUTION! feature on scholarship and financial aid scams.
∙ New FinTech for Financial Literacy feature on retail technology trends.
∙ New Financial Literacy Portfolio feature guiding students on how to plan for a
consumer purchase.
∙ Relocation of Consumer Agencies and Organizations appendix to the end of
Chapter 6 with updated links and contact information.

CHAPTER 7 ∙ New FinTech for Financial Literacy feature on digital innovations connecting buy-
Selecting and Financ- ers, sellers, brokers, lenders, and landlords.
ing Housing ∙ New Digital Financial Literacy with. . . feature with home ownership, mortgage,
and other housing information at money.com.
∙ Revised and updated coverage of factory-built houses, prefabricated homes, modu-
lar homes, mobile homes, and manufactured homes.
∙ New Money Minute Focus feature on planning for home buying costs.
∙ New Money Minute Focus feature on iBuyers.
∙ Updated Money Minute Focus feature on shorter mortgages and paying an addi-
tional amount each month.
∙ Revised CAUTION! feature on e-mail hacking, identity theft, and wire fraud related
to home buying.
∙ Updated Exhibit 7-9 on common closing costs.
∙ New Financial Literacy Portfolio feature on comparing housing alternatives.

CHAPTER 8 ∙ New Personal Finance in Practice feature on flood facts.

Home and Automobile ∙ New FinTech for Financial Literacy feature explaining InsurTech.
Insurance ∙ New FinTech for Financial Literacy feature covering global positioning systems
and the auto insurance industry.
∙ New Money Minute Focus feature on seat belt usage.
∙ New and revised content in the Property and Liability Insurance in Your Finan-
cial Plan section.
∙ New and revised content in the Automobile Insurance Coverages section.
∙ New Digital Financial Literacy with. . . feature explaining usage-based auto
insurance.
∙ New Financial Literacy Portfolio feature guiding students on researching and
selecting home and auto insurance coverage.

CHAPTER 9 ∙ New Money Minute Focus feature on the Families First Coronavirus Response Act.
Health and Disability ∙ New Money Minute Focus feature covering COVID-19 testing coverage.
Income insurance ∙ New Money Minute Focus feature on the Family Leave and Medical Act.
∙ New Money Minute Focus feature on insuring Americans through private insurers.
∙ New FinTech for Financial Literacy feature explaining crowd funding websites.
xiv New to This Edition

CHAPTER 9 ∙ New Caution! feature on HSA contributions.

(Continued) ∙ New Digital Financial Literacy with. . . feature covering Medicare’s BlueButton
and BlueButton 2.0.
∙ Revised Financial Literacy in Practice feature covering HSAs.
∙ Expanded discussion of out-of-pocket limits, dental expense insurance, and Medi-
care coverage in the What Is Not Covered by Medicare section.
∙ New content covering health insurance options for the unemployed and a new dis-
cussion on exclusive provider organizations.
∙ New content discussing nurse lines, virtual visits, retail clinics, and urgent care.
∙ Updated content within the Major Medical Expense Insurance Coverage, Health
Care Costs, and Long-Term Care Insurance sections.
∙ Revised Exhibit 9-1 outlining health insurance must-haves.
∙ Revised Exhibit 9-2 comparing managed health care plans.
∙ Revised Exhibit 9-5 examining U.S. national health expenditures.
∙ New Financial Literacy Portfolio feature covering how to research and select
health and disability insurance.

CHAPTER 10 ∙ New What Would You Do? feature on choosing types of insurance.
Financial Planning with ∙ New What Would You Do? feature on examining types and amounts of insurance.
Life Insurance ∙ New What Would You Do? feature on choosing the right insurance policy.
∙ New FinTech for Financial Literacy feature outlining how insurers turn vision into
reality.
∙ New FinTech for Financial Literacy feature examining the Insurance Barometer Study.
∙ New Money Minute Focus feature covering individual life insurance policies.
∙ Revised content within the Financial Planning with Annuities section.
∙ Updated discussion on the nonworking spouse method of determining life insurance
needs.
∙ Revised How Long Will You Live? subsection.
∙ Updated Exhibit 10-1 covering life expectancy across all races.
∙ New Digital Financial Literacy with. . . feature with Kiplinger.com on how to
shop for life insurance.
∙ New Financial Literacy Portfolio feature guiding students on how to determine the
type and amount of life insurance coverage they may need.

CHAPTER 11 ∙ New example of the time value of money.

Investing Basics and ∙ New example explaining how the time value of money can help people obtain their
Evaluating Bonds long-term investment goals.
∙ Many new examples highlighting financial points of interest for Coca-Cola, Ama-
zon, Facebook, Payless ShoeSource, J. C. Penney, Walmart, McDonald’s, Square
Inc., and Pacific Gas & Electric.
∙ New Digital Financial Literacy with. . . describing how the Motley Fool website
can educate, amuse, and enrich an investor’s experience.
∙ Revised Money Minute Focus feature providing yields for investment-grade bonds.
∙ New Money Minute Focus feature on the 50/20/30 rule.
∙ Revised Figure It Out feature on determining the time value of money.
 New to This Edition xv

CHAPTER 11 ∙ New risk tolerance quiz in Exhibit 11-2 providing a way for students to measure
(Continued) their risk tolerance.
∙ Revised Exhibit 11-6 with up-to-date information about Treasury bills, Treasury
notes, Treasury bonds, and TIPs.
∙ New Exhibit 11-7 covering bond information available by accessing the Financial
Investment Regulatory Authority website.
∙ Revised Exhibit 11-8 examining the description of bond ratings provided by
Moody’s Investors Service and Standard & Poor’s Corporation.
∙ New discussion on how the business cycle and financial markets are affected by
political and economic developments and pandemics such as the coronavirus.
∙ New FinTech for Financial Literacy feature covering using an asset allocation cal-
culator to construct an investment portfolio.
∙ New Caution! feature pointing out questions students may want to ask in job inter-
views about employee health care and retirement match programs.
∙ Revised What Would You Do? feature on preparing for a downturn in the economy
or a potential job loss
∙ Revised Figure It Out feature and tryout problem illustrating how to use a financial
calculator to determine the time value of money.
∙ New Real Personal Finance case asking students to choose between an investment
in CDs or corporate bonds.
∙ New Financial Literacy Portfolio feature guiding students to create an investment
start-up plan.

CHAPTER 12 ∙ New examples providing information about utility firms that provide above-average
Investing in Stocks dividends.
∙ New example describing how Casper Sleep used an IPO to raise over $100 million.
∙ New examples in the Common and Preferred Stock, Buying Stock on Margin,
and Selling Short sections.
∙ Revised Exhibit 12-1 showing how the record date is determined for a Microsoft
dividend payment.
∙ New Exhibit 12-2 describing how investors make money from dividends and
appreciation of value.
∙ New Exhibit 12-4 providing information students can use to evaluate an investment
in Walmart stock.
∙ New Exhibit 12-5 offering detailed information for Microsoft provided by Value
Line.
∙ Revised Exhibit 12-6 outlining typical commission charges for stock transactions.
∙ Revised Exhibit 12-7 providing an example of dollar cost averaging for Johnson &
Johnson.
∙ New FinTech for Financial Literacy feature discussing using the Internet to obtain
historical information for dividends and stock prices.
∙ New FinTech for Financial Literacy feature describing the TD Ameritrade mobile
app.
∙ New Digital Financial Literacy with. . . feature examining information available at
the Investor.gov website.
∙ Revised Money Minute Focus feature providing current and historical data for the
Dow Jones Average.
xvi New to This Edition

CHAPTER 12 ∙ New Money Minute Focus feature revealing how students can use simulations or
(Continued) virtual stock market games to practice their investment skills.
∙ New and revised calculations for companies in the Numerical Measures That
Influence Investment Decisions section.
∙ New and expanded discussion in the Commission Charges section.
∙ New Real Personal Finance case asking students to use Value Line information to
evaluate an investment.
∙ New Financial Literacy Portfolio feature showing students how to research poten-
tial stock investments.

CHAPTER 13 ∙ Revised definition for mutual fund.

Investing in Mutual ∙ New Exhibit 13-1 detailing the type of holdings in the Fidelity Balanced Fund.
Funds ∙ New Exhibit 13-2 providing information about sales loads, annual fund operating
expenses, and other fees.
∙ New Exhibit 13-4 providing data investors can use to evaluate the Fidelity
Contrafund.
∙ New Exhibit 13-5 showing mutual fund research information for the T. Rowe Price
Dividend Growth Fund.
∙ Updated Exhibit 13-6 providing information about Kiplinger’s 25 favorite no-load funds.
∙ Revised Money Minute Focus feature on why investors purchase mutual funds.
∙ New Money Minute Focus feature describing the number of households that own
funds in each generation.
∙ New information about the J.P. Morgan Large Cap Growth Fund illustrating the
cost of investing in a load fund.
∙ New information about the Alger Mid-Cap Growth Fund illustrating the cost of
investing in a fund with a contingent deferred sales load.
∙ New material explaining the objective of the Dodge and Cox Stock Fund.
∙ New data on the number and percentages of closed-end, exchange-traded, and open-
end funds.
∙ New material and statistics in the Other Funds, Why Investors Purchase Mutual
Funds, and Professional Advisory Services sections.
∙ New Digital Financial Literacy with. . . feature describing the type of information
investors can obtain on the Kiplinger.com website.
∙ New FinTech for Financial Literacy feature on using the Fund Analyzer app to
analyze and compare fund costs.
∙ New FinTech for Financial Literacy feature on using the Personal Capital app to
track the value of investments.
∙ New Real Personal Finance case asking students to use Morningstar research
information to evaluate an investment in the T. Rowe Price Dividend Growth Fund.
∙ New Financial Literacy Portfolio feature asking students to construct their own
investment portfolio.

CHAPTER 14 ∙ Updated Exhibit 14-5 outlining various types of IRAs.

Starting Early: Retire- ∙ Revised Financial Literacy in Practice feature covering “The Psychology of Plan-
ment and Estate ning for Retirement While You Are Young.”
Planning ∙ New FinTech for Financial Literacy feature outlining Kiplinger.com’s retiree tax map.
 New to This Edition xvii

CHAPTER 14 ∙ New Money Minute Focus feature discussing drawing Social Security at age 62
(Continued) versus age 70.
∙ Revised Money Minute Focus feature showing the average monthly Social Security
benefits in 2020.
∙ New What Would You Do? feature discussing what to do with lump-sum 401(k)
plan money.
∙ Updated IRA, Roth IRA, and SEP contribution limits for 2020 as well as the Credit
Shelter Trust exemption and gift tax amounts.
∙ New discussion covering the required minimum distribution and the Secure Act of 2019.
∙ Expanded the Social Security Retirement Benefits section.
∙ New Financial Literacy Portfolio feature guiding students to develop their own
retirement/estate planning guide plan.
 Focus on . . . Learning
Confirming Pages
GET INSIDE THE BOOK 3 Steps to Financial Literacy
Getting your finances in order is simpler than you think, and
we’re here to show students how. These chapter opening features

1
break down key action items students need to take to address the
Personal Financial
most important ­personal finance issues from the chapter, as part

Planning in Action
of the book’s emphasis on ­taking action. These steps connect
with the Road Map to Financial Literacy and Your Personal
Dashboard at the end of each chapter.
FinancePages
Confirming

3 Steps to Financial Literacy . . .

Building an Emergency Fund
CHAPTER 1 LEARNING OBJECTIVES
In this chapter, you will learn to:
1 Determine the desired amount of your
emergency fund based on monthly
financial needs and income volatility.
Most financial advisors recommend three
LO1.1 Identify social and economic influences on financial literacy and personal
to six months, or more.
financial decisions. Website: money.com
LO1.2 Develop personal financial goals.
LO1.3 Calculate time value of money situations to analyze personal financial
decisions. 2 Monitor your daily spending to identify
possible areas of reduced spending and
increased savings.
LO1.4 Implement a plan for making personal financial and career decisions. App: BUDGT or Mint

3
Decide where to keep your emergency
fund. Your choices include a bank, credit
union, and other financial institutions.
Website: www.depositaccounts.com

What are the financial benefits of an

YOUR PERSONAL FINANCIAL PLAN SHEETS emergency fund?
You will be able to avoid or minimize a
1. Personal Financial Data financial crisis due to job loss, unexpected
Gulcin Ragiboglu/
2. Setting Personal Financial Goals expenses, or other unforeseen situation.
Getty Images At the end of the chapter, Your Personal
3. Achieving Financial Goals Using Time Value of Money

Copyright © 2022 by McGraw Hill

Finance Road Map and Dashboard will
4. Planning Your Career provide guidelines for measuring the
progress of your emergency fund along

Learning Objective
with suggested actions to improve your
personal financial activities.

Making Financial Decisions LO1.1

Identify social and economic
References
Every person has some money. However, the amount, along with needs, financial choices, influences on financial
and unexpected situations, will vary from person to person. In this book, you will have the literacy and personal
opportunity to assess your current situation, learn about varied financial paths, and move financial decisions. Citations in the margins next to the
forward toward future financial security.
Financial literacy is the use of knowledge and skills for earning, saving, spending, and
­relevant text refer to corresponding chapter
investing money to achieve personal, family, and community goals. The process includes objectives listed at the beginning of each
developing attitudes, behaviors, and competencies to meet current and future financial
chapter.
Gulcin Ragiboglu/Getty Images
obligations. Financial literacy leads to financial well-being and a lifetime of financial secu-
rity, adapting to changing personal and economic circumstances. As shown in Exhibit 1-1,
financial literacy is the result of information and knowledge, attitudes and abilities, and ACTION ITEM

Action Items
actions and behaviors.
Do you have an
Typical financial goals may include buying a new car or a larger home, pursuing
emergency fund for
advanced career training, contributing to charity, traveling extensively, and gaining finan- unexpected expenses?
cial self-sufficiency. To achieve these and other goals, people need to identify and set
Yes 2 No
priorities. Financial and personal satisfaction are the result of an organized processkap72373_ch01_002-049
is commonly referred to as personal money management or personal financial planning.
that As part of the emphasis on taking action 07/17/20 05:41 PM

personal financial to gain financial skills, Action Items are

planning The process of
Your Life Situation and Financial Planning managing your money to posted at the start of each main section
achieve personal economic
Personal financial planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to control your financial situation.
satisfaction. of a chapter. These are designed to get
Every person, family, or household has a unique situation; therefore, financial decisions
must be planned to meet specific needs and goals.
students thinking about what daily actions
they can be taking to achieve financial lit-
eracy and independence.

xviii
kap72373_ch01_002-049 3 07/17/20 05:41 PM
 An interactive and engaging chapter opener gets students
organized and demonstrates the relevance of the material to their
own lives.

Learning Objectives
Learning objectives highlight the goals of Confirming Pages
each chapter for easy reference. Through-
out the book, in the end-of-chapter mate-
rial and even in the supplement materials,
Confirming Pages
these objectives provide a valuable foun-
dation for assessment. CHAPTER 2 LEARNING OBJECTIVES
In this chapter, you will learn to:
LO2.1 Identify the main components of wise money management.
LO2.2 Create a personal balance sheet and cash flow statement.
CHAPTER 2 LEARNING OBJECTIVES LO2.3 Develop and implement a personal budget.

In this chapter, you will learn to: LO2.4 Connect money management activities with saving for personal financial
goals.
LO2.1 Identify the main components of wise money management.
LO2.2 Create a personal balance sheet and cash flow statement.
LO2.3 Develop and implement a personal budget.
LO2.4 Connect money management activities with saving for personal financial
goals.

YOUR PERSONAL FINANCIAL PLAN SHEETS

5. Financial Documents and Records
6. Creating a Personal Balance Sheet
7. Creating a Personal Cash Flow Statement
8. Developing a Personal Budget
YOUR PERSONAL FINANCIAL PLAN SHEETS
5. Financial Documents and Records LO2.1
6. Creating a Personal Balance Sheet A Successful Money Management Plan Identify the main components
7. Creating a Personal Cash Flow Statement “Each month, I have too many days and not enough money. If the month were only 20 days of wise money management.
8. Developing a Personal Budget long, budgeting would be easy.”
Daily spending and saving decisions are the focus of financial planning. You must
coordinate these actions with your needs, goals, and personal situation. Maintaining
LO2.1
A Successful Money Management Plan financial records and planning your spending are essential for successful personal finan-
cial management. The time and effort you devote to these activities will yield benefits.
Identify the main components ACTION ITEM
“Each month, I have too many days and not enough money. If the month were only 20 days Money management refers to the day-to-day financial activities necessary to manage
of wise money management.
My money management
long, budgeting would be easy.” current personal economic resources while working toward long-term financial security.
strategy involves:
Daily spending and saving decisions are the focus of financial planning. You must
coordinate these actions with your needs, goals, and personal situation. Maintaining Components of Money Management no spending plan.
tracking my spending.
Copyright © 2022 by McGraw Hill

financial records and planning your spending are essential for successful personal finan- Three main money management activities are interrelated, as shown here:
cial management. The time and effort you devote to these activities will yield benefits. using savings to pay
ACTION ITEM current bills.
Money management refers to the day-to-day financial activities necessary to manage
My money management
current personal economic resources while working toward long-term financial security.
strategy involves:
3. BUDGETING – creating and implementing
Components of Money Management no spending plan. a plan for spending and saving.
tracking my spending.
Copyright © 2022 by McGraw Hill

Three main money management activities are interrelated, as shown here: using savings to pay 2. FINANCIAL STATEMENTS – preparing a
current bills. Balance Sheet and Cash Flow Statement

3. BUDGETING – creating and implementing

a plan for spending and saving.
Your Personal Financial
on a regular basis.
1. FINANCIAL DOCUMENTS – storing and Money management Day-

Plan Sheets
maintaining personal financial records and to-day financial activities
necessary to manage current
documents.
2. FINANCIAL STATEMENTS – preparing a personal economic resources
Balance Sheet and Cash Flow Statement while working toward long-
on a regular basis. term financial security.

Money management Day-

A list of the Your Personal Financial Plan
1. FINANCIAL DOCUMENTS – storing and
maintaining personal financial records and to-day financial activities
necessary to manage current
worksheets for each chapter is presented at
documents.
personal economic resources
while working toward long- the start of the chapter for easy reference.
term financial security.kap72373_ch02_050-093 51 07/16/20 10:52 AM

xix
kap72373_ch02_050-093 51 07/16/20 10:52 AM
 184 Chapter 5 Consumer Credit: Advantages, Disadvantages, Sources, and Costs

simple interest Interest
computed on principal only
and without compounding.
SIMPLE INTEREST Simple interest is the interest computed on principal only and
without compounding; it is the dollar cost of borrowing money. This cost is based on three
elements: the amount borrowed, which is called the principal; the rate of interest; and the
amount of time for which the principal is borrowed.
You can use the following formula to find simple interest:
Interest = Principal × Rate of interest × Time
or
I=P×r×T

EXAMPLE: Using the Simple Interest Formula

Examples
Suppose you have persuaded a relative to lend you $1,000 to purchase a laptop
computer. Your relative agreed to charge only 5 percent interest, and you agreed to
repay the loan at the end of one year. Using the simple interest formula, the interest
will be 5 percent of $1,000 for one year, or $50, since you have the use of $1,000 for
the entire year:
Worked-out examples featuring key concepts and I = $1,000 × 0.05 × 1
calculations appear throughout the text, a valuable = $50
Using the APR formula discussed earlier,
feature for students to see how personal finance 2×n×I 2 × 1 × $50 $100
APR = ________ = ___________ = ______ = 0.05, or 5%
works in practice. P(N + 1) $1,000(1 + 1) $2,000

Note that the stated rate, 5 percent, is also the annual percentage rate.

SIMPLE INTEREST ON THE DECLINING BALANCE When simple interest is paid

back in more than one payment, the method of computing interest is known as the declin-
Confirming Pages ing balance method. You pay interest only on the amount of principal that you have not yet
repaid. The more often you make payments, the lower the interest you’ll pay. Most credit
unions use this method.

EXAMPLE: Using the Simple Interest Formula on the

Chapter 5 Consumer Credit: Advantages, Disadvantages, Sources, and Costs 165
Declining Balance
Using simple interest on the declining balance to compute interest charges, the inter-
est on a 5 percent, $1,000 loan repaid in two payments, one at the end of the first
1,686.2
Exhibit 5–2 half-year and another at the end of the second half-year, would be $37.50, as follows:
1,871.9 Volume of Consumer First payment:
1,984.1 Credit I=P×r×T
2,078.3 All economists now recog- = $1,000 × 0.05 × 1 / 2
nize consumer credit as a = $25interest plus $500, or $525
2,219.4 major force in the American
economy. Second payment:
2,313.9
Source: Federal Reserve, I=P×r×T
2,418.3
Consumer Credit-G.19, current = $500 × 0.05 × 1 / 2
2,551.9 release. Accessed February 6, = $12.50interest plus the remaining balance of $500, or $512.50
2020.
2,595.9 Total payment on the loan:
2,553.5 $525 + $512.50 = $1,037.50
2,648.1 Using the APR formula,
2,757.0 2 × n × I 2 × 2 × $37.50 $150
APR = ________ = _____________ = ______ = 0.05, or 5%
P(N + 1) $1,000(2 + 1) $3,000
2,924.3

3,099.2

3,312.5

3,411.0

3,644.1

3,828.3
kap72373_ch05_160-215 184 09/18/20 08:42 AM
4,009.7

4,176.0*

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
Billions of Dollars
As of November, 2019

may have to pay interest, a periodic charge for the use of credit, or other finance interest A periodic charge
es. Usually, you have the option to pay the bill in full within 30 days without interest for the use of credit.
es or to make set monthly installments based on the account balance plus interest.
creditors allow you a grace period of 20 to 25 days to pay a bill in full before you

Key Terms
any interest charges.
any banks extend revolving check credit. Also called a bank line of credit, this is a revolving check credit A
anged loan for a specified amount that you can use by writing a special check. prearranged loan from a
yment is made in installments over a set period. The finance charges are based on the bank for a specified amount;
also called a bank line of
nt of credit used during the month and on the outstanding balance.
credit. Key terms appear in bold type within the
dit Cards text and are defined in the margins. A
t cards are extremely popular. The average cardholder has more than nine credit list of key terms and page references is
including bank, retail, and gasoline cards. Cardholders who pay off their balances
l each month are often known as convenience users. Cardholders who do not pay off located at the end of each chapter.
balances every month are known as borrowers.
ost credit card companies offer a grace period, a time period during which no finance
es will be added to your account. A finance charge is the total dollar amount you pay finance charge The total
e credit. Usually, if you pay your entire balance before the due date stated on your dollar amount paid to use
hly bill, you will not have to pay a finance charge. Borrowers carry balances beyond credit.
race period and pay finance charges. Many credit cards offer “teaser rates.” These

xx
_ch05_160-215 165 08/25/20 07:58 PM
 than they need life insurance. Yet research reveals that most people have adequate life
insurance but few have disability insurance.

INVESTING (CHAPTERS 11, 12, 13) Although many types of investments are
Rev. Confirming
available, people Pages
invest for two primary reasons. Those interested in current income select
investments that pay regular dividends or interest. In contrast, investors who desire long-
term growth choose stocks, mutual funds, real estate, and other investments with potential
for increased future value. You can achieve investment diversification by creating a portfo-
lio with varied assets, such as stocks, bond mutual funds, real estate, and collectibles such
as rare coins.
8 Chapter 1 Personal Financial Planning in Action
RETIREMENT AND ESTATE PLANNING (CHAPTER 14) Most people desire
financial security upon completion of full-time employment; however, retirement planning
BORROWING (CHAPTER 5) Wise use of creditalso caninvolves
contribute to your
thinking financial
about your housing situation, your recreational activities, and possi-
goals. In contrast, the overuse and misuse of credit will
blelikely result
part-time in aorperson’s
work debts
volunteering.
bankruptcy A set of federal exceeding the resources available to pay those debts. Bankruptcy
Transfersisofa money
set of federal laws to others should be timed, if possible, to minimize the
or property
laws allowing you to either allowing you to either restructure your debts or remove certain
taxes debts. The
and maximize thepeople who
benefits for those receiving the financial resources. Knowledge of
restructure your debts or declare bankruptcy may have avoided this trauma with property
wise spending and careful can
borrow-
transfer methods help you select the best course of action for funding current
remove certain debts.

Your Personal Financial

ing decisions. Chapter 5 discusses bankruptcy in detail.and future living costs, educational expenses, and retirement needs of dependents.

SPENDING (CHAPTERS 6, 7) Financial planning is not designed to prevent enjoy-

Plan Sheet References ment of life but to help you obtain what you want. Too often purchases are made without
considering the financial consequences. Some people shop compulsively, creating financial
Sheet 1 Personal Financial Data
PRACTICE QUIZ 1–1
difficulties. Use a spending plan to control your living expenses and other financial obliga-
tions. Spending less than you earn is the only way to achieve long-term financial security.
The integrated use of the Your Personal
1. How 8,do 9,
personal and economic factors affect the operation of the financial system and personal financial
Financial Plan sheets isMANAGING
highlighted RISK (CHAPTERS
with decisions?
area for financial planning decisions.
10) Adequate insurance coverage
Some types of insurance are commonly overlooked.
is another

an icon. This visual helps connect

For example, this of people
the number 2. For who
each suffer
greater than the number who die (Circle
of the disabling
at that your
injuries orindicate
following situations,
age, answer)
diseasesif at
theage
so people may need disability insurance more
50 iswould tend to “suffer” or to “benefit” from inflation.
person

study resource into the learning

than they needprocess
life insurance. Yet research reveals that most people have adequate life
A person with money in a savings account. suffer benefit
insurance but few have disability insurance.
and continue to track personal financial A person who is borrowing money. suffer benefit
INVESTING (CHAPTERS 11, 12, 13)
A person who isAlthough many types of investments
lending money. sufferare benefit
habits. available, people invest for two primary
A personreasons. Those
receiving interested
a fixed-income in current income
amount. select
suffer benefit
investments that pay regular dividends or interest. In contrast, investors who desire long-
3. What
term growth choose stocks, mutual are the
funds, realadvantages
estate, andofother
effective personalwith
investments financial planning?
potential
for increased future value. You can achieve investment diversification by creating a portfo-
lio with varied assets, such as stocks, bond mutual funds, real estate, and collectibles such
as rare coins.

RETIREMENT AND ESTATE PLANNING (CHAPTER 14) Most people desire

financial security upon completion of full-time employment; however, retirement planning
also involves thinking about your housing situation, your recreational activities, and possi-
ble part-time work or volunteering.
Transfers of moneykap72373_ch01_002-049
or property to others
8 should be timed, if possible, to minimize the 09/18/20 08:25 AM

taxes and maximize the benefits for those receiving the financial resources. Knowledge of
property transfer methods can help you select the best course of action for funding current
and future living costs, educational expenses, and retirement needs of dependents.

Sheet 1 Personal Financial Data

PRACTICE QUIZ 1–1 Practice Quizzes
1. How do personal and economic factors affect the operation of the financial system and personal financial
decisions?

2. For each of the following situations, indicate if the person would tend to “suffer” or to “benefit” from inflation.
Practice Quizzes at the end of each major
(Circle your answer) section provide questions and exercises
A person with money in a savings account.
A person who is borrowing money.
suffer
suffer
benefit
benefit
to assess knowledge of the main ideas.
A person who is lending money. suffer benefit These will determine whether concepts
A person receiving a fixed-income amount. suffer benefit
have been mastered or if additional study
3. What are the advantages of effective personal financial planning?
is needed on certain topics.

Confirming Pages

kap72373_ch01_002-049 8 09/18/20 08:25 AM

20 Chapter 1 Personal Financial Planning in Action

Exhibit 1–4 Financial Planning in Action

More Than a
Now Within a Year Year from Now
Assess your Short-Term Financial
current situation Strategies
Create and implement
a budget
Pay off credit card debts
Obtain adequate Long-Term Financial

Exhibits and Tables

Develop financial insurance Strategies
Establish a regular Invest in financial
goals
savings program instrument for long-term
Invest in safe, income- growth
producing financial Select tax-deferred
instruments investments
Use rental housing; Pay off consumer debts
Select appropriate
save for home purchase and home mortgage
plans of action

Throughout the text, exhibits and tables Examples Now Within a Year More Than a
Year from Now

visually illustrate important personal Life situation: Single parent

Make regular deposits to a Obtain life insurance for

finance concepts and processes.

1. Goal: Provide $20,000 college fund savings plan such as dependent care in case of
in 10 years certificates of deposit premature death

Life situation: Young couple

Create and implement budget to Continue investment program
2. Goal: Save for down payment allow regular deposits to savings to provide for expanded housing
for home purchase or investment program needs for emergencies

Life situation: Middle-aged person

or couple Make monthly payments to
Purchase life insurance with
3. mutual funds investment
Goal: Provide for financial needs parents as beneficiaries
program
of parents

STEP 6: Review and Revise Your Plan

Financial planning is an ongoing process that does not end when you take action.
You need to regularly assess your financial decisions. You should do a review of your xxi
finances at least once a year. Changing personal, social, and economic factors may require
a more frequent review.
When life events affect your financial needs, this financial planning process will help
you adapt to changes. A regular review of this process will help you adjust priorities to
McGraw Hill

bring your financial goals and activities in line with your current life situation.

Focus on . . .
Personal Finance in Real Life
Margin Features
Each chapter contains several Money Minute
Focus, and CAUTION! boxes. The Money Minute
Focus boxes contain fun facts, ­information, and
financial planning assistance for wise personal
financial actions. The CAUTION! boxes highlight
opportunities where students
Inflation rates can be take
is based on certain items. Many people face hidden infla-
think a decision through.
tion since the cost of necessities (food, gas, health care) on
Financial Literacy in Practice
Copyright © 2022 by McGraw Hill
Creating Goals and Assessing
Using the S-M-A-R-T format, create a financial goal that you would like to accomplish regarding saving, spending, or sharing
your time,
What are your next actions to achieve this financial goal?
(1)
(2)
(3)
To evaluate your current financial activities for achieving goals, respond with a YES or NO answer to the following items:
xxii
Confirming Pages
16 Chapter 1 Personal Financial Planning in Action
EXAMPLE: Step 1 - Determine Your Current Situation
Carla Elliot plans to complete her college degree in the next two years. She works
two part-time jobs in an effort to pay her educational expenses. Currently, Carla has
$700 in a savings account and existing debt that includes a $640 balance on her
credit card and $2,300 in student loans. What additional information should Carla
have available when planning her personal finances?
Example from Your Life
What actions have you taken to determine your current financial situation?
money minute focus STEP 2: Develop Your Financial
To develop financial literacy among children:
Goals
(1) have a payday for chores, not an allowance;
(2) explain opportunity cost, needs vs. wants;
You should periodically analyze your financial values and
Rev. Confirming Pages
goals. The purpose of this action is to clarify your needs
(3) start a savings jar or bank account for
unexpected situations; (4) create a budgeting chart
and wants. Specific financial goals are vital to financial
planning. Others can suggest financial goals for you,
to show family spending; (5) sign an agreement with but you must decide which goals to pursue. Your finan-
payment dates for money borrowed from parents; cial goals can range from spending all of your current
(6) have them buy shampoo, toothpaste, snacks to income to developing an extensive savings and investment
Chapter 1 Personal Financial Planning in Action 7
prepare them to be on their own. program for your future financial security.
EXAMPLE: Step 2 - Develop Financial Goals
should
deceptive pause
since theand
price index Carla Elliot’s main financial goals for the next two years are to complete her college
CAUTIONdegree ! and to reduce the amounts owed. What other goals might be appropriate
for Carla?
which they spend the greatest proportion of their money Don’t become a victim of lifestyle inflation.
may rise at a higher rate than that of nonessential items, When receiving a salary Example
increase,from Your Life
overspending
which could be dropping in price. This results in a reported and increased debt may occur.some
Describe Maintain your
short-term or long-term goals that might be appropriate for your life
inflation rate much lower than the actual cost-of-living situation.
existing spending at a frugal level. Instead of
increase being experienced by consumers. buying a bigger house or new car, pay off debts
Copyright © 2022 by McGraw Hill
Deflation, a decline in prices, can also have damaging and save for future needs. Keep living expenses
economic effects. As prices drop, consumers expect they STEP
and housing costs low; 3: Identify
upgrade, maintain,Alternative
and Courses of Action
will go even lower. As a result, consumers cut their spend- improve your currentIdentifying
home. Increase your
alternatives auto- when making decisions. Although many factors can
is crucial
ing, which causes damaging economic conditions. While matic savings amounts.
influence available alternatives, possible courses of action usually fall into these categories:
widespread deflation is unlikely, certain items may be • Continue the same course of action. For example, you may determine that the
affected and their prices will drop. amount you have saved each month is still appropriate.
• Expand the current situation. You may choose to save a larger amount each month.
INTEREST RATES In simple terms, interest rates represent the cost of money.
• Change the current situation. You may decide to use a money market account
Like everything else, money has a price. The forces of supply and demand usually influ- instead of a regular savings account.
ence interest rates. When consumers expand Pagessaving and investing, the supply •of Take a new course of action. You may decide to use your monthly saving budget to
their
Confirming
pay off credit card debts.
money available for lending increases and interest rates tend to decrease. However, as bor-
rowing by consumers, businesses, and government increases, interest rates are likely to rise Not all of these categories will apply to every decision; they represent possible
courses of action. For example, if you stop working full-time to go to school, you must
due to an increased demand for money.
Interest rates affect your financial planning activities. The earnings you receive as a
Digital Financial Literacy
Digital Financial Literacy With. . . saver or an investor reflect current interest rates as well as a risk premium based on such
factors as the length of time your funds will be used by others, expected inflation, and the
extent of uncertainty about getting your money back. Risk is also a factor in the interest
Online resources (apps, websites, podcasts, blogs, videos,
rate you pay as a borrower. People with poor credit ratingskap72373_ch01_002-049
social media) are valuable for learning. As both a consumer
pay a higher16interest rate than
Students are both consumers and producers of 07/17/20 05:41 PM
and producer of digital content, you need people
to be with
able togood credit ratings. Interest rates influence many financial decisions.
locate, assess, create, and share information for wise money
management. Also, online safety, privacy settings, social
Kiplinger’s Personal Finance digital content. This feature provides students
media sharing, and fake news can influence your financial return. His goals included continuing to save for retirement
well-being and career opportunities. Improving your digital and buying a car and a house. He also kept some of his with an opportunity to enhance their digital
financial literacy involves developing skills for using informa- savings in an account as an emergency fund.
tion to identify, research, and implement money WHAT WOULD
decisions. YOU
As the yearsDO? The and
progressed, future direction
marriage was on theof
Kiplinger.com and Kiplinger’s Personal Finance maga- zon, consideration was given to some additional goals. These
uncertain.
interest rates is usually
hori-
financial literacy skills to identify, research, and
zine offer a wide variety of personal financial articles, vid- You aretargets
financial trying to decide
included howhouse
buying a bigger interest rates might affect your
and renting
eos, podcasts, calculators, and other features. savings
A recentandoutinvesting
how
the current decisions.
changing
one. Kiplinger’s What
interest
Personalinformation
rates
Finance staff also
article in the magazine featured an individual who had a recommended that the couple consult a financial planner as
understand might affect the amount saved and invested
implement money decisions.
sources would help you better
strong savings program but wanted to invest for a higher they make plans to formally combine their finances.
by individuals? If interest rates are expected to rise, or fall, what actions might be
appropriate for your savings and investment decisions?
ACTION STEPS FOR. . .
. . .Information Literacy . . .Financial Literacy . . .Digital Literacy
Based on your personal life sit- Financial Planning
Locate the “Tools Gallery” at Activities
Select an article from kiplinger.
uation, identify a financial goal kiplinger.com and select one com. Talk with others about the
and develop action steps to
achieve that goal. Create a list of
To achieve a secure financialarticle.
position,
of the items. Prepare a visual youanmust
Describe how
(photo, poster) or brief video that
online coordinate several components through
video or app might be used to
questions that might be used to an organized plan and wise decision
explains how this tool might be
communicate making.
the information
validate the action steps. used to achieve a personal from these sources.
financial goal.
OBTAINING (CHAPTER 1) You obtain financial resources from employment, invest-
ments, or ownership of a business. Obtaining financial resources is the foundation of
financial planning.
Confirming Pages
Career Choice andPLANNING
Financial (CHAPTERS
Planning 2, 3) Planned spending with a budget is vital for achieving
Have you ever wondered why some people goalsfindand future
great financial
satisfaction security.
in their work, while Efforts to anticipate expenses along with making certain
financial
others only put in their time? As with other personaldecisions can reduce
financial decisions, taxes, increase savings, and result in less financial stress.
career selection
and professional growth require planning. The lifework you select is a key to your finan-
cial well-being and personal satisfaction. The steps of the financial planning process can
SAVING (CHAPTERS
Your career goals2,
will4)
guide your career planning, advancement, and career change. affectLong-term financial security starts with a regular savings
how you use this process. If you desire more responsibility on the job, for example, you
may decide to obtain advanced trainingplan forcareer
or change emergencies, unexpected
fields. The Chapter 2 Appendix bills, replacement of major items, and the purchase of
expensive
provides guidance for obtaining employment goods
and professional and services, such as a college education, a boat, or a vacation home.
advancement.
Once youFinancial Health
have established a basic savings plan, use additional money for investments that
offer greater financial growth.
Financial Literacy in Practice
EXAMPLE:
Your Career
talents, or financial resources.Planning Decisions
These features offer information that can assist
Based on your current or future career situation, describe how you might use the
Example Your Goal
financial planning process (Exhibit 1–3) to plan and implement an employment
decision.
Specific
you when faced with special situations and
. . . Create an emergency fund . . .
Measurable
. . . of $1,800 . . .
Action-oriented
. . . at a credit union . . .
21
unique financial planning decisions. They chal-
Realistic
. . . by reduced spending on food away
from home . . .
kap72373_ch01_002-049 7
lenge you to apply the concepts you have learned
09/18/20 08:25 AM
Time-based
. .kap72373_ch01_002-049
. within the next six21months. 07/17/20 05:41 PM
to your life and record personal responses.
Yes No
1. Do you have a budget or spending plan that guides your financial activities?
2. Each month, do you pay your bills and credit card accounts on time?
3. Do you maintain a record of the amount spent on various items each month?
4. Is your monthly spending less than your income?
5. If you had an unexpected major expense, would you have access to funds to cover this cost?
 Figure It Out!
This feature presents important
mathematical applications relevant to
personal finance situations and concepts. Confirming Pages

Figure It Out!
Confirming Pages
Time Value of Money Calculations for Achieving Financial Goals
Achieving specific financial goals may require making regular savings deposits or determining an amount to be invested.
By using time value of money calculations, you can compute the amount needed to achieve a financial goal.

Situation 1: Jonie Emerson has two children who will start college in 10 years. She plans to set aside $1,500 a year for her
children’s college education during that period and estimates she will earn an annual interest rate of 5 percent on her savings.
What amount can Jonie expect to have available for her children’s college education when they start college?

Chapter 5 Consumer Credit: Advantages, Disadvantages, Sources, and CostsFormula Time Value of Money Table
171 Financial Calculator Spreadsheet Software

+ i)n − 1
(1_______
FV = Annuity Using Exhibit 1–B (Chapter PV , I/Y , N , PMT , CPT FV = FV(rate, periods, amount
i 1 Appendix), multiply the per period, amount)
(1 + .05)10 − 1 amount deposited by thefac- 0 PV , 5 I/Y , 10 N , 1,500 = FV(0.05,10, −1,500)
FV = 1,500 ______________
.05 tor for the interest rate and PMT , CPT FV $18,866.84 = $18,866.84
FV = $18,866.85 time period. (Different financial calculators will-
1,500 × 12.578 = $18,867 require different keystrokes.)

Example Your Home

Conclusion: Based these calculations, if Jonie deposits $1,500 a year at an annual interest rate of 5 percent, she would have
$18,867 available for her children’s college education.
Approximate market value of your home $ 200,000 $
Multiply by 0.75 × 0.75 × 0.75
Situation 2: Don Calder wants to have $50,000 available in 10 years as a reserve fund for his parents’ retirement living expenses
and health care. If he earns an average of 8 percent on his investments, what amount must he invest today to achieve this goal?
Approximate loan value 150,000
Formula Time Value of Money Table Financial Calculator Spreadsheet Software
Subtract balance due on mortgage(s) 100,000
FV
PV = _____n Using Exhibit 1–C FV , N , I/Y , PMT , CPT PV = PV(rate, periods, payment,
Approximate credit limit available $ 50,000 $ (1 + i ) (Chapter 1 Appendix), future value amount type)
50,000 multiply the amount desired 50,000 FV , 10 N , 8 I/Y , 0 = PV(0.08,10,0,−50,000)
PV = _________
(1 + .08)10 by the factor for the interest PMT , CPT PV $23,159.67 = $23,159.67
rate and time period. (Different financial calculators will
PV = $23,159.67
50,000 × 0.463 = $23,150 require different keystrokes.)

Conclusion: Don needs to invest approximately $23,160 today for 10 years at 8 percent to achieve the desired financial goal.
Unlike interest on most other types of credit, the interest you pay on a home equity loan
is tax-deductible. You should use these loans only for major items such as education,NOTE:
home
Expanded explanations of these time value of money calculation methods are presented in the Chapter 1 Appendix.

improvements, or medical bills, and you must use them with care. If you miss payments on
a home equity loan, the lender can take your home.

Copyright © 2022 by McGraw Hill

PRACTICE QUIZ 1–3
What Would You Do? Sheet 3 Achieving Financial Goals Using
Time Value of Money

WHAT WOULD YOU DO? You plan to spend $5,000 on a smart television
and home theater system. You are willing to spend some of your $9,000 in 1.
These situations, placed in the main text
What are some examples of personal opportunity costs?

savings. However, you want to finance the rest and pay it off in small monthly install-2. What does time value of money measure?

ments out of the $400 a month you earn working part-time. How might you obtain a3. throughout each chapter, are designed to
Use the time value of money tables in Exhibit 1–3 (or a financial calculator) to calculate the following:

low-interest loan and make low monthly payments? a. The future value of $100 at 7 percent in 10 years.
engage students in decision-making relat-
b. The future value of $100 a year for six years earning 6 percent.
c. The present value of $500 received in eight years with an interest rate of 8 percent.

14
ing to the topics being discussed.
Confirming Pages

PRACTICE QUIZ 5–2 kap72373_ch01_002-049 14 07/17/20 05:41 PM

1. What are two types of consumer credit?

52 Chapter 2 Money Management Skills

2. Define the following key terms:

FinTech for Financial Literacy

a. Closed-end credit First, personal financial records and documents help
b. Open-end
FinTech for credit $ you plan the use of your resources. These provide evi-
dence of business transactions and ownership of property,
c. Line ofLiteracy
Financial credit
and are helpful in legal matters. Next, personal financial
d. Interest
FinTech (financial technology) involves apps,
statements measure and guide your financial position and
e. Finance
Robo-advisors charge
are automated programs to guide progress. Finally, your spending plan, or budget, is the
financial planning. These online financial planners basis for effective money management.
may3.beWhat areautonomous
completely the majororsources
may be of: software, and computers for banking and other
combined with human assistance. The process
a. Inexpensive loans A System for Personal Financial
starts by responding to questions related to
income,b. Medium-priced
assets, loans
debt, goals, and risk tolerance. Records financial activities. This margin feature high-
Copyright © 2022 by McGraw Hill

c. Expensive
Then, computer algorithmsloans
suggest actions for
your investment portfolio and financial plan. Digital
Purchase receipts, credit card statements, insurance poli-
cies, and tax forms are the basis of financial recordkeep-
lights emerging and expanding use of FinTech,
advisers
4. Whathave lower fees
is the than other financial
difference between a
planners. Search nerdwallet.com for advice on
credit
ingand a debit
and personal card? choices. An organized system
economic
of financial records provides a basis for (1) handling daily
affecting various aspects of personal finance.
selecting a robo-advisor. business activities, such as bill paying; (2) planning and
measuring financial progress; (3) completing required
tax reports; (4) making effective investment decisions;
and (5) determining available resources for current and future spending.
As Exhibit 2–1 shows, most financial records are kept in one of three places: a home

Applying for Credit

file, a safe deposit box, or a computer system or online. A home file should be used to
keep records for current needs and documents with limited value. Your home file may be a
series of folders, a cabinet with several drawers, or even a box. Whatever method you use,
your system should be secure and organized to allow quick access to needed documents
When you are ready to andapply for credit, you should know what creditors think is important
information.
in deciding whether youImportant are creditworthy. You should also know what they cannot
that pro- legally
safe deposit box A private
financial records and valuable articles should be kept in a location
vides better security than a home file. A safe deposit box is a private storage area at a finan- xxiii
consider
storage area atin their decisions.
a financial The Equal Credit Opportunity Act (ECOA) starts all credit
cial institution with maximum security for valuables and difficult-to-replace documents.
applicants off on the same
institution with maximum footing.
The number It states
of financial that
records and race, color,
documents age, overwhelming;
may seem sex, marital but status,
they and
security for valuables.
certain other factors can may easily be organized into 10 categories (see Exhibit 2–1). These groups correspond to
not be used to discriminate against you in any part of a credit
the major topics covered in this book. You may not need to use all of these records and
dealing. documents at present. As your financial situation changes, you will add others.
How long should you keep personal finance records? Records such as birth certificates,
Focus on . . .
Practice and Assessment Rev. Confirming Pages

Road Map to Financial Literacy Road Map to financial literacy

and Your Personal Finance
Dashboard You Are Here
Debt Capacity

Having read the chapter, now consider your Checkpoint

financial progress. The road map is designed to Seek information from several
sources when evaluating the
Determine how you intend to
use your credit card before

help you move forward in your personal financial Checkpoint

sources of credit including
various websites and Exhibit 5-3.
Look for a low interest rate
choosing one.
Find the card that best needs
your needs and use it wisely.

journey. The dashboard is designed to help you card with no annual fee.
Don’t miss or be late on your
payments, and avoid late fees.
Spend within your means, and
don't go over your credit limit
on credit cards.

monitor key performance indicators for your

personal financial situation. Lower your cost of credit by
consolidating your debt
through a second mortgage Checkpoint
or a home equity line of credit. Financial Security
Consider carefully before
taking out a home equity loan.

CAUTION

15
10 20

DA
OD

N
GO

GE
5 25

R
0
DEBT PAYMENTS-TO-INCOME RATIO
30
your personal finance dashboard

Debt Payments-to-Income Ratio

A key indicator of your creditworthiness is your capacity to handle a certain level of debt. Lenders will review your current
debt payments-to-income ratio. Based upon this, they will determine how much credit they will extend and at what inter-
est rate. Lenders will be more reluctant to lend to individuals who are near the top of the acceptable range of 20 percent.

Confirming Pages YOUR SITUATION: Are you able to pay your credit cards off each month when the bill is due? If you carry a balance, is it
steadily increasing? Are there debts that you can eliminate to reduce the amount of your overall debt payments?

195

Chapter Summary
Chapter
kap72373_ch05_160-215 195 09/21/20 05:14 PM
Summary LO5.1 Consumer credit is the use of LO5.4 Compare the finance charge and
credit by individuals and families for per- the annual percentage rate (APR) as you
sonal needs. Among the advantages of using shop for credit. Under the Truth in Lending
credit are the ability to purchase goods Act, creditors are required to state the cost
when needed and pay for them gradually, of borrowing so that you can compare
the ability to meet financial emergencies,
convenience in shopping, and establish-
credit costs and shop for credit. Organized by learning objective, this
LO5.5 If a billing error occurs on your
ment of a credit rating. Disadvantages are
that credit costs money, encourages over-
account, notify the creditor in writing
within 60 days. If the dispute is not settled
concise content summary is a great
spending, and ties up future income.
LO5.2 Closed-end and open-end credit it in your credit file. You
in your favor, you can place your version of
may alsoPages
Confirming withhold study and self-­assessment tool, located
are two types of consumer credit. With payment on any defective goods or services
closed-end credit, the borrower pays back a you have purchased with a credit card as
one-time loan in a stated period of time and long as you have attempted to resolve the
conveniently at the end of chapters.
with a specified number of payments. With problem with the merchant.
open-end credit, the borrower is permitted If you have a complaint about credit,
to take loans on a continuous basis and is first try to deal directly with the creditor.

Page Topic Formula

billed for partial payments periodically. If that fails, you can turn to the appropri-
The major sources of consumer credit ate consumer credit law.
are commercial banks, savings and loan the Truth in Lending Act, the Consumer
These laws
Confirming
Key Formulas
include
Pages Key Formulas
associations, credit unions, finance com- Leasing Act, the Equal Credit Opportunity
183 Calculating annual panies, lifeofinsurance companies,
2___________________________________________
× Number payment periods and
in one year fam- costAct,
× Dollar the Fair Credit Billing Act, the Fair
of credit

A list of key formulas and page references

APR =ily andamount
friends.
percentage rate Loan (TotalEach
numberofofthese sources
payments to pay has Credit
off the loan + 1)Reporting Act, the Consumer Credit
(APR) unique advantages and disadvantages. Reporting Reform Act, and the Electronic
= 2 × n × I/P(N + 1)
Parents or family members are often the Fund Transfer Act.
184 Calculating
simple interest
Interestsource
of loanmay
of )the
(in dollars least expensive
= Principal borrowed loans. They
× Interest If you cannot meet your obligations,
rate × Length
charge you only the interest they would contact your creditors immediately. Also,
in years
appears at the end of select chapters,
grouped for easy reference.
have earned I = had
P × rthey
× T not made the loan. contact your local Consumer Credit
Key Formulas
Page Calculating
172 Topic debt Formula
Monthly Such debtloans,
paymentshowever, can complicate
(excluding family divided
mortgage payments) Counseling Service or other debt counsel-
183 payments-to-
Calculating annual by net relationships.
monthly income
2 × Number of payment periods in one year × Dollar costing organizations.
of credit
income ratiorate
percentage APR = ___________________________________________
Loan amount (Total number of payments to pay off the loanA+debtor’s 1) last resort is to declare bank-
(APR) LO5.3 Two general rules for measuring
172 Calculating debt-to- Total liabilities (excluding mortgage) divided by net worthruptcy, permitted by the U.S. Bankruptcy
=credit × I/P(N +are
2 × n capacity 1) the debt payments-to-income

Self-Test Problems
equity ratio Act of 1978. Consider the financial and
ratio and the debt-to-equity ratio. In reviewing
184 Calculating Interest (in dollars) = Principal borrowed × Interest rate ×other Length costs of bankruptcy before taking this
simple interest your creditworthiness, a creditor seeks infor-
of loan in years extreme step. A debtor can declare Chapter 7
mation fromI =one P ×ofr ×the
T three national credit (straight) bankruptcy Self-Test
or Chapter 13 (wage
Suppose
1. 172 that your
Calculating monthlyMonthly
debt
bureaus
net income or$3,000.
is a regional
debt payments
credit
Your
(excluding
bureau.
monthly debtpayments)
mortgage paymentsdivided
include Problems
earner plan) bankruptcy.
your student loan paymentby
payments-to- and Creditors
netamonthly
gas credit determine
card,
income and they creditworthiness
total $400. What on is your
income ratio
debt payments-to-income ratio?the basis of the five Cs: character, capacity,
Self-test problems are worked out using
Copyright © 2022 by McGraw Hill

Suppose
2. 172 you borrow
Calculating $2,000Total
debt-to- capital,
at 6 liabilities
percent and collateral,
will repay
(excluding and itconditions.
in onedivided
mortgage) payment at the
by net end of
worth

step-by-step solutions so that students can

one year. Use
equity the simple interest formula to determine the amount of interest you will pay.
ratio
Solutions
1. Use the debt Keypayments-to-income
Terms ratio formula: Monthly debt payments/Monthly net
Suppose that your monthly net income is $3,000. Your monthly debt payments include
1. income.
annual percentage rate conditions 173
Self-Test
Problems
line of credit 164
see how they were solved. This user-friendly
your student loan payment and a gas $400
credit card, and they total $400. What is your
feature increases student comprehension of
Debt payments-to-income ratio =(APR) ______ 181= 0.13, or 13%
debt payments-to-income ratio? $3,000 consumer credit 161 mobile commerce 168
2. Suppose you borrow $2,000 at 6capacity 173will repay it in one payment
percent and at the end of
credit 161 open-end credit 164

the material and gives confidence to solve

2. Using the Use
one year. simple
the interest formula
simple interest (Interest
formula to = Principalthe
determine × amount
Rate of of
interest × you
Time),
willthe
capital 173 Fairinterest
Credit Billing pay.
Act revolving check
interest is $120 computed as follows:
Solutions
$120 = $2,000 × 0.06 × 1 (year)
character 173 (FCBA) 186 credit 165
1. Use the debt payments-to-income
income.
closed-end credit Monthly
ratio formula:
collateral 173
164 finance charge 165 net
debt payments/Monthly
interest 165
simple interest 184

Financial Planning
the end-of-chapter problems.
$400
______
1. Debt
A few payments-to-income
years ago, Simon Powellratio =purchased = 0.13, or 13% Problems
$3,000 a home for $220,000. Today, the home is
xxiv
196
worth $300,000. His remaining mortgage balance is $100,000. Assuming that Simon
can borrow
2. Using up tointerest
the simple 80 percent of the
formula market =value,
(Interest what×isRate
Principal the maximum
of interestamount
× Time),hethe
can borrow?
interest is $120(LO5.2)
computed as follows:
2. $120
Louise= $2,000 × 0.06
McIntyre’s × 1 (year)
monthly gross income is $4,000. Her employer withholds $800 in
federal, state, and local income taxes and $320 in Social Security taxes per month.
Louise contributes $160 each month to her IRA. Her monthly credit payments for
McGraw Hill

kap72373_ch05_160-215 196 Financial Planning

08/25/20 07:58 PM
Visa and MasterCard are $70 and $60, respectively. Her monthly payment on an
A few yearsloan ago,isSimon Problems
1. automobile $570. Powell
What ispurchased a home
Louise’s debt for $220,000. Today,
payments-to-income theIshome
ratio? Louiseis
worth $300,000. His remaining mortgage balance is $100,000. Assuming that Simon
 184 Calculating Interest (in dollars) = Principal borrowed × Interest rate × Length
simple interest of loan in years
I=P×r×T
172 Calculating debt Monthly debt payments (excluding mortgage payments) divided
payments-to- by net monthly income
income ratio
172 Calculating debt-to- Total liabilities (excluding mortgage) divided by net worth
equity ratio

Self-Test
1. Suppose that your monthly net income is $3,000. Your monthly debt payments include Problems
your student loan payment and a gas credit card, and they total $400. What is your
debt payments-to-income ratio?
2. Suppose you borrow $2,000 at 6 percent and will repay it in one payment at the end of
one year. Use the simple interest formula to determine the amount of interest you will pay.
Solutions
1. Use the debt payments-to-income ratio formula: Monthly debt payments/Monthly net
income.
$400
Debt payments-to-income ratio = ______ = 0.13, or 13%
$3,000
2. Using the simple interest formula (Interest = Principal × Rate of interest × Time), the
interest is $120 computed as follows:
$120 = $2,000 × 0.06 × 1 (year)

Financial Planning
Financial Planning
1. A few years ago, Simon Powell purchased a home for $220,000. Today, the home is Problems
worth $300,000. His remaining mortgage balance is $100,000. Assuming that Simon

Problems
can borrow up to 80 percent of the market value, what is the maximum amount he
can borrow? (LO5.2)
2. Louise McIntyre’s monthly gross income is $4,000. Her employer withholds $800 in
federal, state, and local income taxes and $320 in Social Security taxes per month.
Louise contributes $160 each month to her IRA. Her monthly credit payments for

Copyright © 2022 by McGraw Hill

Visa and MasterCard are $70 and $60, respectively. Her monthly payment on an
A variety of problems allow students to automobile loan is $570. What is Louise’s debt payments-to-income ratio? Is Louise
living within her means? (LO5.3)

put their quantitative ­analysis of ­personal 3. Robert Sampson owns a $140,000 townhouse and still has an unpaid mortgage of
$110,000. In addition to his mortgage, he has the following liabilities:

financial decisions to work. Each problem

Visa $565
MasterCard 480
Confirming Pages
Discover card 395

is tagged with a ­corresponding learning Education loan

Personal bank loan
920
800

objective for easy assessment. Auto loan

Total
4,250
$7,410
Confirming Pages

Financial Literacy Portfolio

197

FINANCIAL LITERACY PORTFOLIO

RESEARCHING LOANS kap72373_ch05_160-215 197

To develop competencies related to spe- 08/25/20 07:58 PM

Competency
FINANCIAL LITERACY PORTFOLIO cific financial decisions, this activity asks
Research and compare alternative credit sources.

Action Research LOANS

RESEARCHING
students to conduct action research beyond
Based on this chapter and online research, complete the Your Personal Financial Plan
Sheet 17 for an auto loan or some other type of purchase on credit. (An Excel file for this
Competency
the class setting. Outcomes are presented
sheet is available on Connect.)
Research and compare alternative credit sources.
Outcome
in the form of a written, visual, or other
Action Research
Report the findings and conclusion of the loan research with the use of an audio file, video,
Based on this
PowerPoint chapter and
presentation, online research,
storyboard, or othercomplete the Your Personal Financial Plan
visual format.
creative format.
Sheet 17 for an auto loan or some other type of purchase on credit. (An Excel file for this
sheet is available on Connect.)

Outcome
REAL LIFE PERSONAL FINANCE
Report the findings and conclusion of the loan research with the use of an audio file, video,
PowerPoint presentation, storyboard, or other visual format.
FINANCING SUE’S HONDA CIVIC

After shopping around, Sue Wallace decided

REAL LIFE PERSONAL
agreed to make
on the car of her choice, a used Honda FINANCE
of the sales contract, indicating that she had
a $2,000, or 20 percent, down
Real Life Personal Finance
Civic. The dealer quoted her a total price payment on the $10,000 car, so this require-
of $10,000. Sue decided to use $2,000 of ment caused her no problem. Although the
her savings as a SUE’S
FINANCING down payment
HONDA and CIVIC
$8,000. The salesperson wrote this informa-
borrow bank was willing to make 48-month loans
at an annual percentage rate of 9 percent on Students can work through a ­hypothetical
tion
Afteron a sales around,
shopping contractSuethatWallace
Sue took with
decided used
of thecars,
salesSue chose indicating
contract, a 36-monththat repayment
she had
her
on when
the car
Civic.
When Sue
sheofsether
The applied
out choice,
to find financing.
dealer quoted
a used Honda
her she
for a loan, a total price
discussed
schedule.
higher
She believed
agreed to make
paymentpayments,
a $2,000,she
and she
on the $10,000
or 20could
car,knew
so this
afford
percent, the
down
sherequire-
would
personal finance dilemma in order to
apply concepts from the chapter. A series
of $10,000. Suethedecided to useofficer.
$2,000The
of not
menthave to pay
caused herasnomuch interest
problem. if she paid
Although the Confirming Pages
loan terms with bank lending
her savings
officer told as
hera that
downthepayment
bank’s and borrow
policy was off
bankthewas
loanwilling
at a faster rate. The
to make bank lending
48-month loans
$8,000.
to The salesperson
lend only 80 percent of wrote
the this
totalinforma-
price of officer provided
at an annual Sue withrate
percentage a copyof 9ofpercent
the Truth-
on
tion on a sales contract that Sue took with in-Lending Disclosure
used cars, Sue chose aStatement
36-monthshown here:
repayment
of questions reinforces successful mastery
© 2022 by McGraw Hill

a used car. Sue showed the officer her copy

her when she set out to find financing. schedule. She believed she could afford the
discussed higher DISCLOSURE
and application of these chapter topics.
When Sue applied for a loan, she TRUTH-IN-LENDING payments, and she knew(LOANS)
STATEMENT she would
loan terms
Annual with the bank
Percentage Rate lending officer.
Finance ChargeThe not have to pay as much interest if she
Amount Financed
paid
Total of 36 Payments
officer told her that the bank’s policy was off the loan at a faster rate. The bank lending
The cost of your credit The dollar amount theofficer
Theprovided Sue with a copy of theThe
amount of credit provided amount you will have paid after you
Truth-
toaslend only 80
a yearly rate. percent of the total price of
credit will cost you. to you or on your behalf. have made all payments as scheduled. Sue decided to compare the APR she had The 2 percent difference in the APRs of the
a used car. Sue showed the officer her copy in-Lending Disclosure Statement shown here:
Hill

9% $1,158.32 $8,000.00 $9,158.32 been offered with the APR offered by two banks meant Sue would have to pay
Copyright
Copyright © 2022 by McGraw

another bank, but the 11 percent APR of the $7.51 extra every month if she got her loan
TRUTH-IN-LENDING
You have the right to receive at this time an itemization of DISCLOSURE STATEMENT (LOANS)
the Amount Financed.
second bank (Bank B) was more expensive from the second bank. Of course, she got
□ I wantPercentage
Annual an itemization.
Rate □ I do notCharge
Finance want an itemization.
Amount Financed Total of 36 Payments than the 9 percent APR of the first bank the loan from the first bank.
Your payment schedule will be: (Bank A). Here is her comparison of the
The cost of your credit The dollar amount the The amount of credit provided The amount you will have paid after you
as a yearly rate. credit will cost you. to you or on your behalf. have made all payments as scheduled. two loans: Questions
Number of Payments
9% Amount of Payments
$1,158.32 $8,000.00 When Payments Are Due
$9,158.32
Bank A Bank B 1. What is perhaps the most important item
36 $254.40 1st of each month 9% APR 11% APR shown on the disclosure statement? Why?
You have the right to receive at this time an itemization of the Amount Financed.
Amount financed $8,000 $8,000
2. What is included in the finance charge?
□ I want an itemization. □ I do not want an itemization. 199
3. What amount will Sue receive from the
Your payment schedule will be: Finance charge 1,158.32 1,428.75
bank?
Total of payments 9,158.32 9,428.75
Number of Payments Amount of Payments When Payments Are Due
4. Should Sue borrow from Bank A or
Monthly payments 254.40 261.91 Bank B? Why?
36 $254.40 1st of each month

08/25/20199

Continuing Case
kap72373_ch05_160-215 199 07:58 PM

CONTINUING CASE

This feature allows students to apply

kap72373_ch05_160-215 199 08/25/20 07:58 PM
CONSUMER CREDIT: ADVANTAGES, DISADVANTAGES, SOURCE,
AND COSTS
course concepts in a life situation. It Jamie Lee Jackson, age 27, full-time student and part-time bakery employee, has just
moved into a bungalow-style, unfurnished home of her own. The house has only one bed-
encourages students to evaluate the room, but the rent is manageable and it has plenty of room for Jamie Lee. She decided
to give notice to her roommate that she would be leaving the apartment and the shared

finances that affect a household and then

expenses after the incident with the stolen checkbook and credit cards a few weeks back.
Jamie Lee had to dip into her emergency savings account to help cover the deposit and
moving expenses because she had not planned to move out of the apartment and be on her

respond to the resulting shift in needs, own this soon.

Jamie Lee is in need of a few appliances, as there is a small laundry room but no washer

resources, and priorities through the or dryer, nor is there a refrigerator in the kitchen. She will also need a living room set and
a television because she had only a bedroom set to move in with. Jamie is so excited to
finally have the say in how she will furnish her home, and she began shopping for it as soon
questions at the end of each case. as the lease was signed.
The home appliance store was the first stop, where Jamie Lee chose a stacking washer and
Copyright © 2022 by McGraw Hill

dryer set that would fit comfortably in the laundry space provided. A stainless steel refrig-
erator with a built-in television screen was her next choice, and the salesperson quickly
began to write up the order. She informed Jamie Lee that if she opened up a credit card
through the appliance store, she would receive a discount of 10 percent off her total pur-
chase. As she waited for her credit to be approved, Jamie Lee decided to continue shopping
for her other needed items.
Living room furniture was next on the list. Jamie Lee went to a local retailer who offered
seemingly endless choices of complete sofa sets that included the coffee and end tables
as well as matching lamps. She chose a contemporary-style set and again was offered the
tempting deal of opening a credit card through the store in exchange for a percentage off
her purchase and free delivery. xxv
Jamie Lee’s last stop was the local big box retailer, where she chose a 52-inch 1080p LED
HDTV. For the third time, a percentage off her first purchase at the big box retailer was all
that was needed to get Jamie Lee to sign on the dotted line of the credit card application.
200
 Confirming Pages

Jamie Lee lugged the television back to the store, but they would not accept a return on
electronics. What should Jamie Lee do now?
5. Jamie Lee now has to juggle the three monthly credit card bills for each of the retailers
where she purchased her home furnishings. She is interested in getting one loan to
consolidate the three store consumer credit cards so she may make a single payment
on the goods per month. Using Your Personal Financial Plan Sheet 17, compare the
consumer loan options that Jamie Lee may consider. What are your recommendations
for her to consolidate her monthly consumer charge bills?

Daily Spending Diary

Spending
Diary “I ADMIRE PEOPLE WHO ARE ABLE TO PAY OFF THEIR CREDIT
Do you buy a latte or juice every day before class? CARDS EACH MONTH.”

Do you and your friends meet for a movie once a Directions Your ability to monitor spending and credit use is a fundamental skill for
wise money management and long-term financial security. Use the Daily Spending Diary

week? How much do you spend on gas for your car sheets to record all of your spending in the categories provided. Be sure to indicate the use
of a credit card with (CR). The Daily Spending Diary sheets are available at the end of
Chapter 1 and in Connect Finance.
each month? Do you like to donate to your favorite Questions Confirming Pages

local charity a couple of times a year? 1. Describe any aspects of your spending habits that might indicate an overuse of credit.
2. How might your Daily Spending Diary provide information for wise credit use?

These everyday spending activities might go

largely unnoticed, yet they have a significant effect Daily Spending Diary

on the overall financial health of an individual. Directions: Record every cent of your spending each day in the categories provided, or create your own format to
monitor your spending. You can indicate the use of a credit card with (CR). Comments should reflect what you have
learned about your spending patterns and desired changes you might want to make in your spending habits. (Note: As

The Daily Spending Diary sheets offer students income is received, record in Date column.)
Month: _____________ Amount available for spending: $_____________ Amount to be saved: $_____________

a place to keep track of every cent they spend in

Food Health, Other
Date Total Auto, Housing, (H) Home Personal Recreation, Donations, (note item,
(Income) Spending Transportation Utilities (A) Away Care Education Leisure Gifts amount) Comments

any category. Careful monitoring and assessing of

This takes
time, but it

Copyright © 2022 by McGraw Hill

helps me
$20 $4 control my

daily spending habits can lead to better control and Example

1
2
$83 (gas) (CR) $47 (H) $2 (pen) (DVD rental) $10 (church) spending.

understanding of your personal finances. 3

4
5
6
7
8
9
10
11
12

Your Personal Financial Plan

13
202
14
Subtotal
15
16
17

Rev. Confirming Pages

18
19
The Your Personal Financial Plan sheets that
kap72373_ch05_160-215 202 08/25/20 07:58 PM

correlate with sections of the text are conveniently

20
21
22

located at the end of each chapter. The perforated

Copyright © 2022 by McGraw Hill

23
24

2 Name: Date: 25
26
worksheets ask students to work through the
27

Setting Personal Financial Goals

YOUR PERSONAL FINANCIAL PLAN

applications and record their own personal

28
29
30

financial plan responses. These sheets apply

Purpose: To identify personal financial goals and create an action plan. 31

Financial Planning Activities: Based on personal and household needs and values, identify specific Total
goals that require action. This sheet is also available in an Excel spreadsheet format in Connect Finance. Total Income Total Spending Difference(+/−) Actions: amount to savings, areas for reduced spending, other

Suggested Websites: thebalance.com, www.360financialliteracy.org concepts learned to their unique situation and serve
$______________ $______________ $______________
actions . . . .

as a road map to their personal financial future. 29

Short-Term Monetary Goals (less than two years)

Amount Months Action Students can fill them out, rip them out, submit
Description needed to achieve to be taken Priority
Example: Pay off
credit card debt $850 12 Use money from pay raise High
them for homework, and keep them filed in a safe
kap72373_ch01_002-049 29 07/17/20 05:41 PM

spot for future reference. Excel spreadsheets for

each of the Your Personal Financial Plan sheets
Intermediate Monetary Goals (two to five years)
Amount Months Action
are available through Connect.
Description needed to achieve to be taken Priority
Key websites and apps are provided to help stu-
dents research and devise their personal ­financial
Long-Term Monetary Goals (beyond five years) plan, and the What’s Next for Your Personal
Description
Amount
needed
Years
to achieve
Action
to be taken Priority
Financial Plan? section at the end of each sheet
challenges students to use their responses to plan
the next level, as well as ­foreshadow upcoming
Nonmonetary Goals
Description Time frame Actions to be taken
concepts.
Example: Set up files for personal
Locate all personal and financial records and
add; set up files for various spending, saving, Look for one or more Your Personal ­Financial
financial records and documents Next 2–3 months borrowing categories
Suggested
App:
• Personal-
Plan icons next to most Practice Quizzes. This
Capital
graphic directs students to the Personal Financial
McGraw Hill What’s Next for Your Personal Financial Plan? Plan sheet that corresponds with the preceding
section.
• Based on various financial goals, calculate the savings deposits necessary to achieve those goals.
• Identify current economic trends that might influence various saving, spending, investing, and
borrowing decisions.
34

xxvi
kap72373_ch01_002-049 34 09/18/20 08:25 AM
Online Support for Students
and Instructors
Few textbooks provide such innovative and practical with discussion questions (useful for in-class or dis-
instructional resources for both students and teachers. cussion boards) and teaching suggestions.
The comprehensive teaching–learning package for Focus
on Personal Finance, 7e, includes the following:
Remote Proctoring &
Browser-Locking Capabilities
For Instructors
The Instructor’s site, delivered through Connect, pro-
vides the instructor with one resource for all supplemen-
tary material, including: New remote proctoring and browser-locking capabilities,
hosted by Proctorio within Connect, provide control of
• Teacher’s Resource Manual: Revised by Jake Poysti
the assessment environment by enabling security options
and Brendon Mitschow, this supplement includes a
and verifying the identity of the student.
“Course Planning Guide” with instructional strategies,
Seamlessly integrated within Connect, these services
course projects, and supplementary resource lists. The
allow instructors to control students’ assessment experi-
Chapter Teaching Materials section of the Teacher’s
ence by restricting browser activity, recording students’
Resource ­Manual provides a chapter overview, the
activity, and verifying students are doing their own work.
chapter objectives with summaries, introductory activi-
Instant and detailed reporting gives instructors an
ties, and detailed lecture outlines with teaching sugges-
at-a-glance view of potential academic integrity con-
tions. This section also includes concluding activities,
cerns, thereby avoiding personal bias and supporting evi-
ready-to-duplicate quizzes, supplementary lecture
dence-based claims.
materials and activities, and answers to concept checks,
end-of-chapter questions, problems, and cases.
• Test Bank, revised by Emily Bello, consists of true– Tegrity: Lectures 24/7
false, multiple-­ choice, problem-solving, and essay
Tegrity in Connect is a tool that makes class time avail-
questions. These test items are organized by the learn-
able 24/7 by automatically capturing every lecture. With
ing objectives for each chapter. This resource also
a simple one-click start-and-stop process, you capture
includes answers and an indication of difficulty level.
all computer screens and corresponding audio in a for-
• Chapter PowerPoint Presentations, revised and mat that is easy to search, frame by frame. Students can
enhanced by Courtney Baggett, offer more than 300 replay any part of any class with easy-to-use, brows-
visual presentations that may be edited and manipu- er-based viewing on a PC, Mac, iPod, or other mobile
lated to fit a particular course format. If you choose to device.
customize the slides, an online digital image library Educators know that the more students can see, hear,
allows you to pick and choose from all of the figures and experience class resources, the better they learn. In
and tables in the book. fact, studies prove it. Tegrity’s unique search feature helps
• The Focus on Personal Finance blog (https://kapoor students efficiently find what they need, when they need
financefocus.com/) offers summaries of current arti- it, across an entire semester of class recordings. Help turn
cles with timely, relevant information to enhance the your students’ study time into learning moments imme-
learning environment. The articles are keyed to the diately supported by your lecture. With Tegrity, you also
appropriate chapter and topic for ease of use. Each increase intent listening and class participation by easing
blog post includes a link to the original source, along students’ concerns about note-taking. Using Tegrity in

xxvii
xxviii Online Support for Students and Instructors
Connect will make it more likely you will see students’
faces, not the tops of their heads.
Test Builder in Connect
Available within Connect, Test Builder is a cloud-based
tool that enables instructors to format tests that can be
printed or administered within a LMS. Test Builder
offers a modern, streamlined interface for easy content
configuration that matches course needs, without requir-
ing a download.
Test Builder allows you to:
• access all test bank content from a particular title.
• easily pinpoint the most relevant content through robust
filtering options.
• manipulate the order of questions or scramble ques-
tions and/or answers.
• pin questions to a specific location within a test.
• determine your preferred treatment of algorithmic
questions.
• choose the layout and spacing.
• add instructions and configure default settings.
Test Builder provides a secure interface for bet-
ter protection of content and allows for just-in-time
updates to flow directly into assessments.
Assurance of Learning Ready
Assurance of learning is an important element of many
accreditation standards. Focus on Personal Finance, 7e, is
designed specifically to support your assurance of learn-
ing initiatives. Each chapter in the book begins with a list
of numbered learning objectives that appear throughout
the chapter, as well as in the end-of-chapter problems and
exercises. Every test bank question is also linked to one
of these objectives, in addition to level of difficulty, topic
area, Bloom’s taxonomy level, and AACSB skill area.
Connect, McGraw Hill’s online homework solution, and
EZ Test, McGraw Hill’s easy-to-use test bank software,
can search the test bank by these and other categories,
providing an engine for targeted assurance of learning
analysis and assessment.
AACSB Statement
McGraw Hill is a proud corporate member of AACSB
International. Understanding the ­importance and value
of AACSB accreditation, Focus on Personal Finance, 7e,
has sought to recognize the curricula guidelines detailed
in the AACSB standards for business accreditation by
connecting selected questions in the test bank to the gen-
eral knowledge and skill guidelines found in the AACSB
standards.
The statements contained in Focus on Personal
Finance, 7e, are provided only as a guide for the users
of this text. The AACSB leaves content coverage and
assessment within the purview of individual schools, the
mission of the school, and the faculty. While Focus on
Personal Finance, 7e, and the teaching package make no
claim of any specific AACSB qualification or evaluation,
we have, within the test bank, labeled selected questions
according to the six general knowledge and skills areas.
For Students (available
through Connect and
class instructor)
Digital Broadcasts
View chapter-related videos to see how personal finance
topics are applied in everyday life.
Narrated Summary Videos
Every student learns differently, and the narrated sum-
mary videos were created with that in mind! These pre-
sentations guide students through understanding key
topics and principles by presenting real-life examples
based on chapter content.
And More!
Looking for more ways to study? Self-grading crossword
puzzles will help students learn the material. Students
can also access Excel templates for the Your Personal
Financial Plan sheets and the Daily Spending Diary.
Instructors: Student Success Starts with You
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Thank You!
We express our deepest appreciation for the efforts of the colleagues whose extensive feedback over the years has helped
to shape and create this text.
Janice Akao, Butler Community College
Sophia Anong, University of Georgia
Brenda Anthony, Tallahassee Community College
Anna Antus, Normandale Community College
Victoria Arnold, University of Central Oklahoma
Eddie Ary, Ouachita Baptist University
Chris A. Austin, Normandale Community College
Gail H. Austin, Rose State College
Kali Bard, Crowder College
George Bernard, Seminole State College of Florida
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College
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xxxi
xxxii Thank You!
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College
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College
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Many talented professionals at McGraw Hill have con-
tributed to the development of Focus on Personal
Finance. We are especially grateful to Chuck Synovec,
Allison McCabe-Carroll, Trina Maurer and Jamie Koch.
In addition, Jack Kapoor expresses special apprecia-
tion to Theresa and Dave Kapoor, Kathryn Thumme, and
Karen and Joshua Tucker for their typing, proofreading,
and research assistance. Les Dlabay expresses his thanks
to Kyle Dlabay, Linda Dlabay, Anne Jaspers, Bryna
Mollinger, Lu Paletta, David Pecha, Tuyen Tran, and
Schuyler Vaughan for their help reviewing and updating
the content. Finally, we thank our spouses and families
for their patience, understanding, encouragement, and
love throughout this project.
Contents
1 Personal Financial Planning in
Action 2
Making Financial Decisions 3
Your Life Situation and Financial Planning 3
Financial Planning in Our Economy 4
Financial Planning Activities 7
Developing and Achieving Financial Goals 9
Types of Financial Goals 9
Goal-Setting Guidelines 9
Opportunity Costs and the Time Value of
Money 11
Personal Opportunity Costs 11
Financial Opportunity Costs 11
A Plan for Personal Financial Planning 15
STEP 1: Determine Your Current Financial
Situation 15
STEP 2: Develop Your Financial Goals 16
STEP 3: Identify Alternative Courses of Action 16
STEP 4: Evaluate Your Alternatives 17
STEP 5: Create and Implement Your Financial
Action Plan 18
STEP 6: Review and Revise Your Plan 20
Career Choice and Financial Planning 21
Daily Spending Diary 28
Chapter 1 Appendix: Time Value of
Money 37
2 Money Management Skills 50
A Successful Money Management Plan 51
Components of Money Management 51
A System for Personal Financial Records 52
Personal Financial Statements 54
Your Personal Balance Sheet: The Starting Point 54
Your Cash Flow Statement: Inflows and
Outflows 57
A Plan for Effective Budgeting 60
Step 1: Set Financial Goals 60
Step 2: Estimate Income 60
Step 3: Budget an Emergency Fund and
Savings 61
Step 4: Budget Fixed Expenses 61
Step 5: Budget Variable Expenses 63
Step 6: Record Spending Amounts 63
Step 7: Review Spending and Saving
Patterns 64
Money Management and Achieving
Financial Goals 66
Calculating Savings Amounts 68
Chapter 2 Appendix: Developing a Career
Strategy 81
3 Taxes in Your Financial Plan 94
Taxes in Your Financial Plan 95
Planning Your Tax Strategy 95
Types of Tax 95
The Basics of Federal Income Tax 97
Step 1: Determining Adjusted Gross Income 97
Step 2: Computing Taxable Income 97
Step 3: Calculating Taxes Owed 100
Step 4: Making Tax Payments 103
Step 5: Deadlines and Penalties 103
Filing Your Federal Income Tax Return 104
Who Must File? 104
Which Tax Forms and Schedules Should You
Use? 104
Completing the Federal Income Tax Return 104
What If I Made an Error on My Federal Tax
Return? 106
xxxiii
xxxiv Contents

How Do I File My State Tax Return? 107 Evaluating Checking and Payment Accounts 144

How Do I File My Taxes Online? 107 Other Payment Methods 146

What Tax Assistance Sources Are Available? 109 Managing Your Checking Account 146

Tax Preparation Services 111

What If Your Return Is Audited? 112

5 Consumer Credit: Advantages,
Disadvantages, Sources, and
Tax Planning Strategies 113
Costs 160
Education Deduction or Tax Credit? 114
What Is Consumer Credit? 161
Consumer Purchasing 114
The Importance of Consumer Credit in Our
Investment Decisions 115
Economy 161
Retirement and Education Plans 116
Uses and Misuses of Credit 162
Changing Tax Strategies 117
Advantages of Credit 162
Flat or VAT Tax? 117
Disadvantages of Credit 163

Summary: Advantages and Disadvantages of

4 Financial Services: Savings Credit 163
Plans and Payment
Types of Credit 164
Accounts 126
Closed-End Credit 164
Planning Your Use of Financial Services 127
Open-End Credit 164
Managing Daily Money Needs 127
Credit Cards 165
Sources of Quick Cash 128
Sources of Consumer Credit 168
Types of Financial Services 128
Loans 168
Online and Mobile Banking 129
Applying for Credit 171
Prepaid Debit Cards 130
Can You Afford a Loan? 172
Financial Services and Economic Conditions 131
General Rules of Credit Capacity 172
Sources of Financial Services 131
The Five Cs of Credit 173
Comparing Financial Institutions 131
Your Credit Report 174
Types of Financial Institutions 132
Credit Scores 177
Problematic Financial Businesses 134
Other Factors Considered in Determining
Comparing Savings Plans 135 Creditworthiness 178

Regular Savings Accounts 135 What If Your Application Is Denied? 179

Certificates of Deposit 135 What Can You Do to Improve Your Credit

Score? 179
Money Market Accounts and Funds 137

U.S. Savings Bonds 137 The Cost of Credit 181

Evaluating Savings Plans 138 Finance Charge and Annual Percentage Rate 181

Tackling the Trade-Offs 182

Comparing Payment Methods 142
Calculating the Cost of Credit 183
Digital Payments 142

Checking Accounts 144 Protecting Your Credit 186

 Contents xxxv

Billing Errors and Disputes 186 Class-Action Suits 234

Identity Crisis: What to Do If Your Identity Is Using a Lawyer 234
Stolen 187
Other Legal Alternatives 234
Protecting Your Credit from Theft or Loss 187
Personal Consumer Protection 235
Protecting Your Credit Information on the
Internet 188 Chapter 6 Appendix: Consumer Agencies
and Organizations 246
Cosigning a Loan 188

Complaining about Consumer Credit 188 7 Selecting and Financing

Consumer Credit Protection Laws 189 Housing 250
Consumer Financial Protection Bureau 190
Evaluating Renting and Buying 251
Managing Your Debts 190
Your Lifestyle and Your Choice of Housing 251
Warning Signs of Debt Problems 190
Renting versus Buying Housing 251
Debt Collection Practices 191
Rental Activities 252
Financial Counseling Services 191
Home-Buying Activities 256
Declaring Personal Bankruptcy 192
Step 1: Determine Home Ownership Needs 256
Chapter 5 Appendix: Education Financing,
Loans, and Scholarships 206 Step 2: Find and Evaluate a Home 258

Step 3: Price the Property 260

6 Consumer Purchasing and The Finances of Home Buying 261

Wise Buying Strategies 216 Step 4: Obtain Financing 261
Consumer Buying Activities 217 Step 5: Close the Purchase Transaction 267

Practical Purchasing Strategies 217 Home Buying: A Summary 268

Warranties 220 A Home-Selling Strategy 270

Research-Based Buying 220 Preparing Your Home for Selling 270
Major Consumer Purchases: Determining the Selling Price 270
Buying Motor Vehicles 221
Sale by Owner 270
Phase 1: Preshopping Activities 222
Listing with a Real Estate Agent 271
Phase 2: Evaluating Alternatives 223

Phase 3: Determining Purchase Price 227 8 Home and Automobile

Phase 4: Postpurchase Activities 229 Insurance 282
Resolving Consumer Complaints 231 Insurance and Risk Management 283
Step 1: Initial Communication 232 What Is Insurance? 283
Step 2: Communicate with the Company 232 Types of Risk 284
Step 3: Consumer Agency Assistance 232 Risk Management Methods 284
Step 4: Legal Action 233 Planning an Insurance Program 286

Legal Options for Consumers 233 Property and Liability Insurance in Your Financial
Plan 287
Small Claims Court 233
Home and Property Insurance 288
xxxvi Contents
Renter’s Insurance 288
Homeowner’s Insurance Coverages 289
Home Insurance Policy Forms 292
Home Insurance Cost Factors 294
How Much Coverage Do You Need? 294
Factors That Affect Home Insurance Costs 295
Automobile Insurance Coverages 297
Motor Vehicle Bodily Injury Coverages 298
Motor Vehicle Property Damage Coverage 299
No-Fault Insurance 299
Other Automobile Insurance Coverages 300
Automobile Insurance Costs 301
Amount of Coverage 301
Motor Vehicle Insurance Premium Factors 301
9 Health and Disability Income
Insurance 318
Health Insurance and Financial Planning 319
What Is Health Insurance? 319
Health Insurance Coverage 322
Types of Health Insurance Coverage 322
Major Provisions in a Health Insurance Policy 324
Health Insurance Trade-Offs 325
Coverage Trade-Offs 325
Which Coverage Should You Choose? 326
Private Health Care Plans and Government
Health Care Programs 327
Private Health Care Plans 327
Government Health Care Programs 331
Health Insurance and the Patient Protection
and Affordable Care Act of 2010 334
Disability Income Insurance 336
The Need for Disability Income 336
Sources of Disability Income 337
Disability Income Insurance Trade-Offs 337
Your Disability Income Needs 338
High Medical Costs 339
Why Does Health Care Cost So Much? 340
What Is Being Done about the High Costs of
Health Care? 341
What Can You Do to Reduce Personal Health
Care Costs? 341
10 Financial Planning with Life
Insurance 352
What Is Life Insurance? 353
The Purpose of Life Insurance 353
The Principle and Psychology of Life
Insurance 354
How Long Will You Live? 354
Do You Need Life Insurance? 354
Estimating Your Life Insurance Requirements 355
Types of Life Insurance Companies and
Policies 357
Types of Life Insurance Companies 357
Types of Life Insurance Policies 358
Selecting Provisions and Buying
Life Insurance 361
Key Provisions in a Life Insurance Policy 361
Buying Life Insurance 363
Financial Planning with Annuities 369
Why Buy Annuities? 370
Costs of Annuities 370
Tax Considerations 371
11 Investing Basics and Evaluating
Bonds 380
Preparing for an Investment Program 381
Establishing Investment Goals 381
Performing a Financial Checkup 382
Getting the Money Needed to Start an Investment
Program 384
How the Time Value of Money Affects Your
Investments 385

Factors Affecting the Choice of
Investments 386
Safety and Risk 387
Components of the Risk Factor 388
Investment Liquidity 390
Factors That Reduce Investment Risk 391
Asset Allocation and Diversification 391
Your Role in the Investment Process 393
Conservative Investment Options: Govern-
ment Bonds 396
The Psychology of Investing in Bonds 396
Government Bonds and Debt Securities 397
Conservative Investment Options: Corporate
Bonds 399
Why Corporations Sell Corporate Bonds 399
Why Investors Purchase Corporate Bonds 400
A Typical Bond Transaction 402
The Decision to Buy or Sell Bonds 403
The Internet 403
Financial Coverage for Bond Transactions 403
Bond Ratings 404
Yield Calculations 406
Other Sources of Information 406
12 Investing in Stocks 420
Common and Preferred Stock 421
The Psychology of Stock Investing 421
Why Corporations Issue Common Stock 422
Why Investors Purchase Common Stock 423
Preferred Stock 425
Evaluating a Stock Issue 426
The Internet 426
Stock Advisory Services 427
Newspaper Coverage and Corporate News 428
Numerical Measures That Influence Invest-
ment Decisions 431
Contents xxxvii
Why Corporate Earnings Are Important 431
Dividend Yield and Total Return 433
Beta, Book Value, and Other Factors That Affect the
Price of a Stock 434
Making a Decision to Buy, Hold, or Sell a Stock:
A Summary 436
Buying and Selling Stocks 437
Secondary Markets for Stocks 437
Brokerage Firms and Account Executives 438
Should You Use a Full-Service or a Discount
Brokerage Firm? 439
Sample Stock Transactions 439
Commission Charges 441
Long-Term and Short-Term Investment
Strategies 442
Long-Term Techniques 442
Short-Term Techniques 443
13 Investing in Mutual Funds 456
Why Investors Purchase Mutual Funds 457
The Psychology of Investing in Funds 458
Characteristics of Funds 459
Classifications of Mutual Funds 465
Stock Funds 465
Bond Funds 467
Other Funds 467
The Benefits of Portfolio Construction 468
Choosing the Right Fund for a Retirement
Account 468
How to Make a Decision to Buy or Sell Mutual
Funds 469
Managed Funds versus Index Funds 470
The Internet 471
Professional Advisory Services 472
The Mutual Fund Prospectus and Annual
Report 474
Financial Publications and Newspapers 474
xxxviii Contents

The Mechanics of a Mutual Fund Personal Retirement Plans 505

Transaction 476
Annuities 508
Return on Investment 477 Living on Your Retirement Income 508
Taxes and Mutual Funds 478
Estate Planning 509
Purchase Options 480
The Importance of Estate Planning 509
Withdrawal Options 481
What Is Estate Planning? 510

Legal Documents 510

14 Starting Early: Retirement and
Legal Aspects of Estate Planning 511
Estate Planning 494
Wills 511
Planning for Retirement: Start Early 495
Types of Wills 511
Why Is It Important Now? 495
Formats of Wills 511
Saving Smart for Retirement: Even a Little Goes a
Writing Your Will 512
Long Way 496
A Living Will 512
Conducting a Financial Analysis 498
Trusts 514
Estimating Retirement Living Expenses 499
Types of Trusts 514
Your Retirement Income 501
Taxes and Estate Planning 516
Employer Pension Plans 501

Public Pension Plans 503 Index 528

Focus on Personal
Finance
1 Personal Financial
Planning in Action

3 Steps to Financial Literacy . . .

Building an Emergency Fund

1 Determine the desired amount of your

emergency fund based on monthly
financial needs and income volatility.
Most financial advisors recommend three
to six months, or more.
Website: money.com

2 Monitor your daily spending to identify

possible areas of reduced spending and
increased savings.
App: BUDGT or Mint

3
Decide where to keep your emergency
fund. Your choices include a bank, credit
union, and other financial institutions.
Website: www.depositaccounts.com

What are the financial benefits of an

emergency fund?
You will be able to avoid or minimize a
financial crisis due to job loss, unexpected
expenses, or other unforeseen situation.
At the end of the chapter, Your Personal
Finance Road Map and Dashboard will
provide guidelines for measuring the
progress of your emergency fund along
with suggested actions to improve your
personal financial activities.

Gulcin Ragiboglu/Getty Images

CHAPTER 1 LEARNING OBJECTIVES
In this chapter, you will learn to:
LO1.1 Identify social and economic influences on financial literacy and personal
financial decisions.
LO1.2 Develop personal financial goals.
LO1.3 Calculate time value of money situations to analyze personal financial
decisions.
LO1.4 Implement a plan for making personal financial and career decisions.

YOUR PERSONAL FINANCIAL PLAN SHEETS

1. Personal Financial Data
2. Setting Personal Financial Goals
3. Achieving Financial Goals Using Time Value of Money
4. Planning Your Career

Making Financial Decisions LO1.1

Identify social and economic
Every person has some money. However, the amount, along with needs, financial choices, influences on financial
and unexpected situations, will vary from person to person. In this book, you will have the literacy and personal
opportunity to assess your current situation, learn about varied financial paths, and move financial decisions.
forward toward future financial security.
Financial literacy is the use of knowledge and skills for earning, saving, spending, and
investing money to achieve personal, family, and community goals. The process includes
developing attitudes, behaviors, and competencies to meet current and future financial
obligations. Financial literacy leads to financial well-being and a lifetime of financial secu-
rity, adapting to changing personal and economic circumstances. As shown in Exhibit 1-1,
financial literacy is the result of information and knowledge, attitudes and abilities, and ACTION ITEM
actions and behaviors.
Do you have an
Typical financial goals may include buying a new car or a larger home, pursuing
emergency fund for
advanced career training, contributing to charity, traveling extensively, and gaining finan- unexpected expenses?
cial self-sufficiency. To achieve these and other goals, people need to identify and set
Yes No
priorities. Financial and personal satisfaction are the result of an organized process that
is commonly referred to as personal money management or personal financial planning.
personal financial
planning The process of
Your Life Situation and Financial Planning managing your money to
achieve personal economic
Personal financial planning is the process of managing your money to achieve personal
satisfaction.
economic satisfaction. This planning process allows you to control your financial situation.
Every person, family, or household has a unique situation; therefore, financial decisions
must be planned to meet specific needs and goals.
4 Chapter 1
financial plan A formalized
report that summarizes your
current financial situation,
analyzes your financial
needs, and recommends
future financial activities.
adult life cycle The stages
in the family situation and
financial needs of an adult.
values Ideas and principles
that a person considers
correct, desirable, and
important.
economics The study of
how wealth is created and
distributed.
Personal Financial Planning in Action
A comprehensive financial program can enhance the quality of your life and increase
your satisfaction by reducing future uncertainty. A financial plan is a formalized report that
summarizes your current financial situation, analyzes your financial needs, and recom-
mends future financial activities. You can create this document on your own (by using the
Your Personal Financial Plan sheets at the end of each chapter), or you can seek assistance
from a financial planner or use a money management app.
Advantages of effective personal financial planning include:
• Increased effectiveness when obtaining, using, and protecting your financial
resources throughout your life.
• Expanded control of your financial affairs by avoiding excessive debt and
dependence on others.
• Improved personal relationships resulting from well-planned and effectively
communicated financial decisions.
• A sense of freedom from financial worries obtained by looking to the future,
anticipating expenses, and achieving personal economic goals.
Many factors influence financial decisions. People in their 20s spend money differently
from those in their 50s. Personal factors such as age, income, household size, and personal
beliefs influence your spending and saving patterns. Your life situation or lifestyle is
created by a combination of factors.
As our society changes, different types of financial needs evolve. Today people tend
to get married at a later age, and more households have two incomes. Many households
are headed by single parents. More than 2 million people provide care for both dependent
children and elderly parents. We are also living longer, with over 80 percent of all
Americans now alive expected to live well past age 65.
The adult life cycle—the stages in the family situation and financial needs of an adult—
is an important influence on your financial activities and decisions. The stages are affected
by age, marital status, number and age of household members, and employment situation.
Your life situation is also affected by events such as graduation, dependent children leaving
home, changes in health, engagement and marriage, divorce, birth or adoption of a child,
retirement, a career change or a move to a new area, or the death of a spouse, family
member, or other dependent.
In addition to being defined by your family situation, you are defined by your values—
the ideas and principles that you consider correct, desirable, and important. Values have a
direct influence on such decisions as spending now versus saving for the future or continu-
ing school versus getting a job.
Financial Planning in Our Economy
Daily economic transactions facilitate financial planning activities. Exhibit 1–2 shows the
monetary flows among providers and users of funds that occur in a financial system. These
financial activities affect personal finance decisions. Investing in a bond, which is a debt secu-
rity, involves borrowing by a company or government. In contrast, investing in stock, called
an equity security, represents ownership in a corporation. Other financial market activities
include buying and selling mutual funds, certificates of deposit (CDs), and commodity futures.
In most societies, the forces of supply and demand set prices for securities, goods,
and services. Economics is the study of how wealth is created and distributed. The
economic environment includes business, labor, and government working together
to satisfy needs and wants. As shown in Exhibit 1–2, government agencies regu-
late financial activities. The Federal Reserve System, the central bank of the United
States, has significant economic responsibility. The Fed, as it is often called, attempts
to maintain an adequate money supply to encourage consumer spending, business
growth, and job creation.
 Chapter 1 Personal Financial Planning in Action 5

Exhibit 1–1 Planning for Personal Financial Literacy

INFORMATION AND KNOWLEDGE

Financial Planning Activities Information Sources

Obtaining (Chapter 1) Spending (Chapters 6, 7) • Textbook reading, personal study

Planning (Chapters 2, 3) Managing Risk (Chapters 8-10) • Friends, relatives, others

Saving (Chapters 2, 4) Investing (Chapters 11-13) • Online sources, apps, podcasts

• Financial planning specialists
Borrowing (Chapter 5) Retirement and Estate Planning (Chapter 14)

Attitudes and Abilities

• A desire for ongoing learning in varied settings and from others in diverse situations
• A willingness to monitor spending and saving activities, to develop a realistic budget
• Reconciliation of varied money attitudes among family and household members
• A personal motivation to reduce or eliminate unplanned spending and credit use
• Determination and discipline for achieving long-term goals, gaining financial independence
• A commitment to share time, talents, and resources with others in need

ACTIONS AND BEHAVIORS

Short-term Long-term

• Obtain needed career training • Monitor investments for changing needs

• Create a financial document system
• Track spending; create/implement a budget
• Begin emergency fund/regular savings plan
• Reduce or eliminate existing credit balances
• Purchase appropriate insurance coverage
• Seek actions for beneficial tax planning
• Ongoing review of changing life situation
• Adapt budget, financial plan, as needed
• Assess changing career opportunities
• Plan retirement income, living situation

FINANCIAL LITERACY DEVELOPMENT

EXPERIENTIAL LEARNING . . . RETENTION, REINFORCEMENT . . . CRITICAL THINKING . . .

to use interviews, observations, and to consistently use knowledge and to creatively analyze and solve
market experiences for improved skills for wise money management problems for financial opportunities.
financial decisions. and personal financial decisions.

GLOBAL INFLUENCES The global economy influences financial activities.

The U.S. economy is affected by both foreign investors and competition from foreign
companies. American businesses compete against foreign companies for the spending
dollars of American consumers. When the level of exports of U.S.-made goods is lower
than the level of imported goods, more U.S. dollars leave the country than the dollar value
of foreign currency coming into the United States. This reduces the funds available for
domestic spending and investment. Also, if foreign companies decide not to invest in the
United States, the domestic money supply is reduced. This reduced money supply can
cause higher interest rates.
6 Chapter 1 Personal Financial Planning in Action

Exhibit 1–2 The Financial System

Financial
Intermediaries
banks, credit unions
insurance companies
Fun
ds
Funds investment companies
other financial
Providers institutions Users
(savers, investors) (borrowers, spenders)
of funds of funds
individuals individuals
businesses
FUNDS businesses
governments governments
foreign foreign
entities entities

Fun Financial Markets

ds ds
stock markets Fun
bond markets
money markets
commodity markets

Financial Regulators: Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration,
Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Securities and Exchange Commission,
state banking agencies, state insurance agencies.

inflation A rise in the
general level of prices.
INFLATION Most people are concerned with the buying power of their money. Inflation
is a rise in the general level of prices. In times of inflation, the buying power of the dollar
decreases. For example, if prices increased 5 percent during the last year, items that previ-
ously cost $100 would now cost $105. This means more money is needed to buy the same
amount of goods and services.
Inflation is most harmful to people with fixed incomes. Due to inflation, retired peo-
ple and others whose incomes do not change can only afford fewer goods and services.
Inflation can also have a negative affect on lenders of money. Unless an appropriate inter-
est rate is charged, amounts repaid by borrowers in times of inflation have less buying
power than the money they borrowed.
Inflation rates vary. During the late 1950s and early 1960s, the annual inflation rate
was in the 1 to 3 percent range. During the late 1970s and early 1980s, the cost of living
increased 10 to 12 percent annually. At a 12 percent annual inflation rate, prices double
(and the value of the dollar is cut in half) in about six years. To find out how fast prices
(or your savings) will double, use the Rule of 72: Just divide 72 by the annual inflation
(or interest) rate.

EXAMPLE: Rule of 72
An annual inflation rate of 4 percent, for example, means prices will double in 18 years
(72 ÷ 4 = 18). Regarding savings, if you earn 6 percent, your money will double in
12 years (72 ÷ 6 = 12).

More recently, the reported annual price increase for goods and services as measured by
the consumer price index has been in the 2 to 4 percent range. The consumer price index
(CPI), computed and published by the Bureau of Labor Statistics, is a measure of the aver-
age change in the prices urban consumers pay for a fixed “basket” of goods and services.
Another random document with
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 in Four or God in Tetrad, and the derivation is approved by
Hort (Dict. of Christian Biog. s.h.n.). It appears more likely,
however, that it is to be referred to the Hebrew root ‫בבל‬
“Babel” or confusion, a derivation which Hort also mentions. In
Irenaeus’ Greek text the name is spelt βαρβηλὼ, in the Latin
“Barbelo” with an accusative “Barbelon,” and in Epiphanius
βαρβηλὼ and βαρβήρω. If we might alter this last into
βαρβαριωθ, we might see it in a great: number of magic spells
of the period. Cf. Wessely, Ephesia Grammata, Wien, 1886,
pp. 26, 28, 33, 34.

472. Pistis Sophia, p. 16, Copt. The five words are zama, zama,
ôzza, rachama, ôzai. Whatever they may mean, we may be
quite sure that they can never contain with their few letters the
three pages or so of text which are given as their
interpretation. It is possible that the letters are used
acrostically like the A G L A, i.e. ‫ ?( ניבר לעולם אדני‬Ahih ? )‫אהיה‬
‫ אתה‬Ate Gibor Lailam Adonai, “The mighty Adonai for ever”
(or “thou art the mighty and eternal Lord”) commonly met with
in mediaeval magic. Cf. Peter de Abano, Heptameron, seu
Elementa Magica, Paris, 1567, p. 563; or, for other examples,
F. Barrett, The Magus, 1801, Bk II. pp. 39, 40. The notable
feature in these mysterious words is the quantity of Zetas or
ζ’s that they contain which points to the use of some sort of
table like that called by Cabalists ziruph, or a cryptogram of
the aaaaa, aaaab, kind. It should be noticed that Coptic
scribes were often afflicted with what has been called
Betacism or the avoidance of the letter Beta or β by every
means, which frequently led to the substitution for it of ζ as in
the case of Jaldabaoth = Ιαλδαζαω given above (Chap. VIII, n.
3, p. 46 supra).

473. This idea of certain powers being the members or “limbs” of

him from whom they issue recurs all through the Pistis
Sophia. Cf. especially p. 224, Copt., where it is said that the
χωρήματα or “receptacles” of the Ineffable go forth from his
last limb. It is probably to be referred to the conception of the
 Supreme Being as the Man κατ’ ἐξοχήν, which we have seen
current among the Ophites. See Chap. VIII, n. 2, p. 38 supra.
That the ancient Egyptians used the same expression
concerning their own gods and especially Ra, see Moret, “Le
Verbe créateur et révélateur,” R.H.R., Mai-Juin, 1909, p. 257.
Cf. Amélineau, Gnosticisme Égyptien, p. 288. So Naville, Old
Egyptian Faith, p. 227.

474. That is to say, their names make up his name as letters do a

word. So in the system of Marcus referred to in Chap. IX
supra, Irenaeus (Bk I. c. 8, § 11, p. 146, Harvey) explains that
the name of Jesus (Ἰησοῦς) which might be uttered is
composed of six letters, but His unutterable name of twenty-
four, because the names of the first Tetrad of Ἄρρητος
(Bythos), Σιγή, Πατὴρ (Monogenes or Nous) and Ἀλήθεια
contain that number of letters. See also § 5 of same chapter.
Those who wish to understand the system are recommended
to read the whole of the chapter quoted. As Irenaeus has the
sense to see, there is no reason why the construction from
one root of names founded on the principle given should not
go on for ever.

475. This is probably either the Horos or Stauros that we have

seen brought into being in the teaching of Valentinus as a
guard to the Pleroma, or, as is more probable, an antitype of
the same power in the world immediately above ours. That
there was more than one Horos according to the later
Valentinians appears plain from the words of Irenaeus above
quoted (see Chap. IX, n. 1, p. 105 supra). Probably each
world had its Horos, or Limit, who acted as guard to it on its
completion. That in this world, the Cross, personified and
made pre-existent, fulfils this office seems evident from the
Gospel of Peter, where it is described as coming forth from
the Sepulchre with Jesus (Mem. Miss. Archéol. du Caire,
1892, t. IX. fasc. 1, v. 10). Cf. too, Clem. Alex. Paedagogus, Bk
III. c. 12, and Strom. Bk II. c. 20.
476. Ὁ μηνευτος. The word is not known in classical Greek (but cf.
μηνυτής “a revealer”), and appears to have its root in μήν “the
moon,” as the measure of the month. From the Coptic word
here translated “Precept,” we may guess it to be a
personification of the Jewish Law or Torah which, according to
the Rabbis, before the creation of the world existed in the
heavens. Later in the book it is said that it is by command of
this power that Jeû places the aeons (p. 26, Copt.); that the
souls of those who receive the mysteries of the light (i.e. the
psychics) will have precedence in beatitude over those who
belong to the places of the First Precept (p. 196, Copt.); that
all the orders of beings of the Third χὠρημα are below him (p.
203, Copt.); and that he is “cut into seven mysteries,” which
may mean that his name is spelled with seven letters (p. 219,
Copt.).

477. Χάραγμαι. Are these the letters mentioned in last note?

478. Πρεσβευτής, properly, “ambassador” or “agent.” Doubtless a

prototype of our sun. Elsewhere in the book, Jesus tells His
disciples that He brought forth from Himself “at the beginning”
power (not a power), which He cast into the First Precept,
“and the First Precept cast part of it into the Great Light, and
the Great Light cast part of that which he received into the
Five Parastatae, the last of whom breathed part of that which
he received into the Kerasmos or Confusion” (p. 14, Copt.).
The Great Light is also called the Χάραγμα of the Light, and is
said to have remained without emanation (p. 219, Copt.).

479. Παραστάται, “Comrades” or “witnesses” or “helpers.” They

can here hardly be anything else but the Five Planets. It is
said later that it was the last Parastates who set Jeû and his
five companions in the “Place of the Right Hand” (p. 193,
Copt.). When the world is destroyed, Jesus is to take the
perfect souls into this last Parastates where they are to reign
with him (p. 230, Copt.) for 1000 years of light which are
 365,000 of our years (p. 243, Copt.). Προηγούμενος
“Forerunner” does not seem to occur in classical Greek.

480. We hear nothing more definite of these Five Trees, but they
appear again in Manichaeism, and are mentioned in the
Chinese treatise from Tun-huang, for which see Chap. XIII
infra.

481. This is a most puzzling expression and seems to have baffled

the scribe, as he speaks of them, when he comes to repeat
the phrase (p. 216, Copt.), as the “Twin Saviours,” which is a
classical epithet of the Dioscuri. In Pharaonic Egypt, Shu and
Tefnut the pair of gods who were first brought into being by
the Creator were sometimes called “The Twins.” See Naville,
Old Egyptian Faith, p. 120. Cf. p. 171 infra.

482. It is evident from the context that we here begin the

enumeration of the Powers of the Left, who are hylic or
material and therefore the least worthy of the inhabitants of
the heavens. According to Irenaeus, the Valentinians held that
all of them were doomed to destruction. Τριῶν ὠν ὄντων, τὸ
μὲν ὑλικὸν, ὃ καὶ ἀριστερὸν καλοῦσι, κατὰ ἀνάγκην
ἀπὸλλυσθαι λέγουσιν, ἅτε μηδεμίαν ἐπιδέξασθαι πνοὴν
ἀφθαρσίας δυνάμενον (Irenaeus, Bk I. c. 1, § 11, p. 51,
Harvey). “There being three forms of existences, they say that
the hylic, which they call the left hand, must be destroyed,
inasmuch as it cannot receive any breath of incorruption.” So
in the Bruce Papyrus to be presently mentioned, the “part of
the left” is called the land of Death. At their head stands “the
Great Unseen Propator,” who throughout the Pistis Sophia
proper is called by this title only, and occupies the same place
with regard to the left that Iao does in respect of the middle,
and Jeû of the right. In the Μέρος τευχῶν Σωτῆρος (p. 359,
Copt.) he is called by the name ἀγραμμαχαμαρεχ which
frequently appears in the Magic Papyri. It is there spelt
indifferently ακραμνικαμαρι, ακραμμαχαρι, ακραμμαχαμαρει,
ακραμμαχαχαχαρι, and in a Latin inscription on a gold plate,
 acramihamari (see Wessely, Ephesia Grammata, p. 22, for
references), which last may be taken to be the more usual
pronunciation. One is rather tempted to see in the name a
corruption of ἀγραμματέον in the sense of “which cannot be
written,” but I can find no authority for such a use of the word.
As the ruler of the material Cosmos he might be taken for the
Cosmocrator who, as we have seen, is called by Valentinus
Diabolos or the Devil (but see n. 1, p. 152 infra). Yet he
cannot be wholly evil like Beelzebuth for it is said in the text
(p. 41, Copt.) that he and his consort Barbelo sing praises to
the Powers of the Light. So in the Μέρος τευχῶν Σωτῆρος (p.
378, Copt.) he is represented as begging for purification and
holiness when the Great Name of God is uttered. It is plain
also from the statements in the text (pp. 43, 44, Copt.) that in
the Pistis Sophia he, Barbelo, and the Αὐθάδης or Arrogant
Power make up a triad called the great τριδυναμεῖς or “Triple
Powers” from whom are projected the powers called the
“Twenty-four Invisibles.” In another document of the same
MS. (p. 361, Copt.) a power from him is said to be bound in
the planet Saturn.

483. This Εἱμαρμένη or “Destiny” is the sphere immediately above

our firmament. It is evidently so called, because on passing
through it the soul on its way to incarnation receives the Moira
or impress of its own destiny, of which it cannot afterwards rid
itself except by the grace of the mysteries or Valentinian
sacraments. Cf. Chap. IX, n. 3, p. 115 supra.

484. Ἄρρητος. Irenaeus, Bk I. c. 5, § 1, p. 99, Harvey.

Innominabilis, Tertullian, adv. Valentinianos, c. 37. So Clem.
Alex. Strom. Bk V. c. 10, says that God is ineffable, being
incapable of being expressed even in His own power.

485. Χωρηματα: τόποι.

486. That [i.e. the First] mystery knoweth why there emanated all
the places which are in the receptacle of the Ineffable One
and also all which is in them, and why they went forth from the
 last limb of the Ineffable One.... These things I will tell you in
the emanation of the universe. Pist. Soph. p. 225, Copt.

487. Ibid. p. 222, Copt.

488. Ibid. p. 127, Copt.

489. See Chap. IX, pp. 121, 122 supra.

490. Heb. vi. 19.

491. p. 203, Copt. Why there should be 24, when the dodecad or
group of Aeons in the world above was only 12, it is difficult to
say. But Hippolytus supplies a sort of explanation when he
says (op. cit. Bk VI. c. 33, p. 292, Cruice): Ταῦτά ἐστιν ἃ
λέγουσιν· ἔτι [δὲ] πρὸς τούτοις, ἀριθμητικὴν ποιούμενοι τὴν
πᾶσαν αὐτῶν διδασκαλίαν, ὡς προεῖπον [τοὺς] ἐντὸς
Πληρώματος Αἰῶνας τριάκοντα πάλιν ἐπιπροβεβληκέναι
αὐτοῖς κατὰ ἀναλογίαν Αἰῶνας ἄλλους, ἵν’ ᾖ τὸ Πλήρωμα ἐν
ἀριθμῷ τελείῳ συνηθροισμένον. Ὡς γὰρ οἱ Πυθαγορικοὶ
διεῖλον εἰς δώδεκα καὶ τριάκοντα καὶ ἑξήκοντα, καὶ λεπτὰ
λεπτῶν εἰσὶν ἐκείνοις, δεδήλωται· οὕτως οὗ τοι τὰ ἐντὸς
Πληρώματος ὑποδιαιροῦσιν. “This is what they say. But
besides this, they make their whole teaching arithmetical,
since they say that the thirty Aeons within the Pleroma again
projected by analogy other Aeons, so that thereby the
Pleroma may be gathered together in a perfect number. For
the manner in which the Pythagoreans divide [the cosmos]
into 12, 30, and 60 parts, and each of these into yet more
minute ones, has been made plain” [see op. cit. Bk VI. c. 28, p.
279, where Hippolytus tells us how Pythagoras divided each
Sign of the Zodiac into 30 parts “which are days of the month,
these last into 60 λεπτὰ, and so on”]. “In this way do they [the
Valentinians] divide the things within the Pleroma.” Cf. Μέρος
τευχῶν Σωτῆρος p. 364, Copt. In another book of the
Philosophumena (Bk IV. c. 7 Περὶ τῆς ἀριθμετικῆς τέχνης) he
explains how the Pythagoreans derived infinity from a single
principle by a succession of odd and even or male and female
 numbers, in connection with which he quotes Simon Magus
(op. cit. p. 132, Cruice). The way this was applied to names
he shows in the chapter Περὶ μαθηματικῶν (op. cit. Βk IV. c.
11, pp. 77 sqq., Cruice) which is in fact a description of what
in the Middle Ages was called Arithmomancy, or divination by
numbers.

492. p. 224, Copt. See also p. 241, Copt.—a very curious passage
where the Ineffable One is called “the God of Truth without
foot” (cf. Osiris as a mummy) and is said to live apart from his
“members.”

493. In the beginning of the Μέρος τευχῶν Σωτῆρος (p. 252, Copt.)
it is said of the Ineffable that “there are many members, but
one body.” But this statement is immediately followed by
another that this is only said “as a pattern (παράδειγμα) and a
likeness and a resemblance, but not in truth of shape” (p. 253,
Copt.).

494. What he does say is that the Ineffable One has two χωρήματα
or receptacles and that the second of these is the χώρημα of
the First Mystery. It is, I think, probable that an attempt to
describe both these χωρήματα is made in one of the
documents of the Bruce Papyrus. See pp. 191, 192 infra.

495. In addition to the enumeration contained in the so-called

interpretation of the mysterious “Five Words,” there appears in
the 2nd part of the Pistis Sophia (pp. 206 sqq. Copt.) a long
rhapsody in which it is declared that a certain mystery knows
why all the powers, stars, and heavenly “places” were made.
These are here again set out seriatim, and as the order in the
main corresponds with that in the five words translated in the
text, it serves as a check upon this last. The order of the
powers in the text was given in the article in the Scottish
Review before referred to, and, although this was written 20
years ago, I see no occasion to alter it.
496. It is the “last Parastates” who places Jeû and his companion
in “the place of those who belong to the right hand according
to the arrangement (i.e. οἰκονομία) of the Assembly of the
Light which is in the Height of the Rulers of the Aeons and in
the universes (κοσμοὶ) and every race which is therein” (p.
193, Copt.). A later revelation is promised as to these, but in
the meantime it is said that Jeû emanated from the chosen or
pure (εἰλικρινής) light of the first of the Five Trees (loc. cit.).

497. See nn. 1 and 3, p. 141 supra. As has been said, it is difficult
not to see in this “1st Precept” a personification of the Torah
or Jewish Law.

498. See n. 3, p. 146 supra.

499. See n. 2, p. 136 supra.

500. So Secundus, Valentinus’ follower, taught according to

Hippolytus (v. Chap. ΙΧ supra) “that there is a right and a left
tetrad, i.e. light and darkness.” This may be taken to mean
that the constitution of the light-world was repeated point for
point in the world of darkness. The middle world is of course
that where light and darkness mingle.

501. Jeû is generally called the ἐπίσκοπος or overseer of the Light.

He it is who has placed the Rulers of the Aeons so that they
always “behold the left” (p. 26, Copt.). He is also said to have
bound “in the beginning” the rulers of the Aeons and of
Destiny and of the Sphere in their respective places (p. 34,
Copt.), and that each and every of them will remain in the
τάξις or order and walk in the δρόμος or course in which he
placed them. We also hear in the Pistis Sophia proper of two
“books of Jeû” “which Enoch wrote when the First Mystery
spoke with him out of the Tree of Life and the Tree of
Knowledge in the Paradise of Adam” (p. 246, Copt.). In the
first part of the Μέρος τευχῶν Σωτῆρος, however Jeû is
described as “the First Man, the ἐπίσκοπος of the Light, and
the πρεσβευτής or Ambassador of the First Precept” (p. 322,
 Copt.); and it is further said in the same book that “the Book of
Jeû (not books) which Enoch wrote in Paradise when I
(Jesus) spoke with him out of the Tree of Life and the Tree of
Knowledge” was placed by His means in “the rock Ararad.”
Jesus goes on to say that He placed “Kalapataurôth the ruler
who is over Skemmut in which is the foot of Jeû, and he
surrounds all rulers and destinies—I placed that ruler to guard
the books of Jeû from the Flood and lest any of the rulers
should destroy them out of envy” (p. 354, Copt.).

502. Melchizidek is very seldom mentioned in the Pistis Sophia,

but when he is, it is always as the great παραλήμπτωρ or
“inheritor” of the Light (p. 34, Copt.). Jesus describes how he
comes among the Rulers of the Aeons at certain times and
takes away their light, which he purifies (p. 35, Copt.). He is
said to have emanated from the light of the 5th Tree of the
Treasure House, as Jeû did from that of the 1st (p. 193,
Copt.). In the Μέρος τευχῶν Σωτῆρος, he is called the great
παραλημπτής or “receiver” of the Light (p. 292, Copt.). In the
2nd part of the last named document he is called Zorocothora
Melchizidek, an epithet which C. W. King in The Gnostics and
their Remains translates “light-gatherer.” It is also said in the
same 2nd part that “he and Jeû are the two great lights,” and
that he is the πρεσβευτής or “Legate” of all the lights which
are purified in the Rulers of the Aeons (p. 365, Copt.). We
may perhaps see in him and Jeû the antitypes of which the
Great Light and the First Precept are the paradigms.
Hippolytus, op. cit. Bk VII. c. 36, p. 391, Cruice, says that there
was a sect, the followers of one Theodotus, a τραπεζίτης or
money-changer, who said that there was “a greatest power
named Melchizidek who was greater than Christ.” Pseudo-
Tertullian repeats the same story and adds that Melchizidek is
“a celestial virtue of great grace,” who does for heavenly
angels and virtues what Christ does for men, having made
himself “their intercessor and advocate.” See auct. cit.
(probably Victorinus of Pettau) Against all Heresies, c. XXIV. p.
279, Oehl. He doubtless founded his opinion on the passage
 in the Hebrews. The name seems to mean “Holy King” Cf. the
“King of Glory” of the Manichaeans, see Chap. XIII infra.

503. p. 35, Copt.

504. He is said to have emanated from the 2nd Tree (p. 193, Copt.)
and is nowhere distinctly named. But one may perhaps guess
from the order in which he occurs in the 2nd part of the Μέρος
τευχῶν Σωτῆρος that his name was Zarazaz, evidently a
cryptogram like those mentioned in n. 1, p. 139 supra. It is
also said that the Rulers call him “Maskelli after the name of a
strong (i.e. male) ruler of their own place (p. 370, Copt.).” This
name of Maskelli, sometimes written Maskelli-maskellô, is
frequently met with in the Magic Papyri. Cf. Wessely, Ephesia
Grammata, p. 28.

505. They are said to have emanated from the 3rd and 4th Tree
respectively (p. 193, Copt.).

506. p. 193, Copt. He is evidently called the Good because there is

a wicked Sabaoth sometimes called Sabaoth Adamas, and
the Great because there is a Little Sabaoth the Good who
seems to act as his messenger. It is this last who takes the
power from the Great Sabaoth the Good which afterwards
becomes the body of Jesus and “casts it into matter and
Barbelo” (p. 127, Copt.). He seems to be set over or in some
way identified with what is called the Gate of Life (p. 215,
Copt.) both in the Pistis Sophia and the Μέρος τευχῶν
Σωτῆρος (p. 292, Copt.).

507. p. 12, Copt., where he is oddly enough called the Little Iao the
Good, I think by a clerical error. Later he is said to be “the
great leader of the middle whom the Rulers call the Great Iao
after the name of a great ruler in their own place” (p. 194,
Copt.). He is described in the same way in the second part of
the Μέρος τευχῶν Σωτῆρος (p. 371, Copt.).

508. See last note.

509. p. 12, Copt. This “power” is evidently the better part of man’s
soul like the Logoi who dwell therein in the passage quoted
above from Valentinus, see Chap. IX, p. 112 supra.

510. p. 194, Copt.

511. See n. 3, p. 137 supra.

512. So the Μέρος τευχῶν Σωτῆρος (p. 321, Copt.).

513. The likeness of Mary the Mother and Mary Magdalene to the
seven Virgins appears in the translation of Amélineau (Pistis
Sophia, Paris, 1895, p. 60). Schwartze (p. 75, Lat.) puts it
rather differently. See also Schmidt, K.-G.S. bd. 1, p. 75. The
“receivers” of the Virgin of Light are mentioned on p. 292,
Copt.

514. p. 184, Copt.

515. pp. 340, 341, Copt. As ⲒⲞϨ (ioh) is Coptic for the Moon, it is
just possible that there may be a kind of pun here on this word
and the name Iao. Osiris, whose name was often equated by
the Alexandrian Jews with their own divine name Jaho or Jah,
as in the Manethonian story of Osarsiph = Joseph, was also
considered a Moon-god. Cf. the “Hymn of the Mysteries”
given in Chap. VIII, where he is called “the holy horned moon
of heaven.”

516. See note 1, p. 138 supra. The Bruce Papyrus (Amélineau,

Notice sur le Papyrus Gnostique Bruce, Paris, 1882, p. 220)
speaks of the “Thirteenth Aeon, where are the Great Unseen
God and the Great Virgin of the Spirit (cf. the παρθενική
πνεῦμα of Irenaeus) and the twenty-four emanations of the
unseen God.”

517. See n. 2, p. 142 supra.

518. See Chapter IX, p. 104 supra.

519. p. 116, Copt.

520. I suppose it is in view of this maternal aspect of her nature

that she is alluded to in the latter part of the Μέρος τευχῶν
Σωτῆρος as βαρβηλω βδελλη “Barbelo who gives suck”? Her
place, according to the Bruce Papyrus (Amélineau, p. 218), is
said to be in the Twelfth Aeon.

521. There have been many attempts to make this name mean
something else than merely “Faith-Wisdom.” Dulaurier and
Renan both tried to read it “πιστὴ Σοφία” “the faithful Wisdom”
or “La fidèle Sagesse.” If we had more documents of the style
of Simon’s Apophasis, we should probably find that this
apposition of two or more nouns in a name was not
infrequent, and the case of Ptah-Sokar-Osiris will occur to
every Egyptologist. The fact that the name includes the first
and last female member of the Dodecad of Valentinus (see p.
101 supra) is really its most plausible explanation.

522. This Adamas seems to be an essentially evil power, who

wages useless war against the Light on the entry of Jesus into
his realm (p. 25, Copt.). His seat is plainly the Twelve Aeons
or Zodiac (p. 157, Copt.), and it is said in the Μέρος τευχῶν
Σωτῆρος that his “kingdom” is in the τοποι κεφαλης αἰωνων or
Places of the head of the Aeons and is opposite the place of
the Virgin of Light (p. 336, Copt.). In the second part of the
same document (i.e. the μ. τ. σ.) it is said that the rulers of
Adamas rebelled, persisting in the act of copulation
(συνουσία) and begetting “Rulers and Archangels and Angels
and Ministers (λειτουργοί) and Decans” (Δεκανοί), and that
thereupon Jeû went forth from the Place of the Right and
“bound them in Heimarmene and the Sphere.” We further
learn that half the Aeons headed by Jabraoth, who is also
once mentioned in the Pistis Sophia proper (p. 128, Copt.,
and again in the Bruce Papyrus, Amélineau, p. 239), were
consequently transferred to another place, while Adamas,
now for the first time called Sabaoth Adamas, with the
 unrepentant rulers are confined in the Sphere to the number
of 1800, over whom 360 other rulers bear sway, over whom
again are set the five planets Saturn, Mars, Mercury, Venus,
and Jupiter (pp. 360, 361, Copt.). All this seems to me to be
later than the Pistis Sophia proper, to have been written at a
time when belief in astrology was more rife than in Hadrian’s
reign, and to owe something to Manichaean influence. The
original Adamas, the persecutor of Pistis Sophia herself,
seems identifiable with the Diabolos or Cosmocrator of
Valentinus, in which case we may perhaps see in the “Great
Propator” a merely stupid and ignorant power like the
Jaldabaoth of the Ophites and their successors. See p. 163
infra.

523. p. 145, Copt. So Irenaeus in his account of the Valentinian

doctrines, Bk I. c. 1, p. 12 sqq. I suppose there is an allusion
to this in the remark of Jesus to Mary that a year is as a day
(p. 243, Copt.). But all the astrology of the time seems to have
divided the astronomical day not into 24, but into 12 hours. It
was the same with the Manichaeans. See Chavannes and
Pelliot, “Un Traité manichéen retrouvé en Chine,” Journal
Asiatique, série X, t. XVIII. (Nov.-Dec. 1911), p. 540, n. 4.

524. But curiously enough, not the “souls” of fish. So in the Middle
Ages, the Manichaeans of Languedoc did not allow their
“Perfects” to partake of animal food nor even of eggs, but
allowed them fish, because they said these creatures were
not begotten by copulation. See Schmidt, Hist. des Cathares,
Paris, 1843. Is this one of the reasons why Jesus is called
Ἰχθύς?

525. This idea of man being made from the tears of the eyes of the
heavenly powers is an old one in Egypt. So Maspero explains
the well-known sign of the utchat or Eye of Horus as that “qui
exprime la matière, le corps du soleil, d’où tous les êtres
découlent sous forme de pleurs,” “Les Hypogées Royaux de
Thébes,” Ét. Égyptol. II. p. 130. Moret, “Le verbe créateur et
 révélateur en Égypte,” R. H. R. Mai-Juin, 1909, p. 386, gives
many instances from hymns and other ritual documents. It
was known to Proclus who transfers it after his manner to
Orpheus and makes it into hexameters:

Thy tears are the much-enduring race of men,

By thy laugh thou hast raised up the sacred race of
gods.

See Abel’s Orphica, fr. 236.

526. See n. 1, p. 148 supra.

527. This is, perhaps, to be gathered from the Pistis Sophia, p. 36,
Copt. Cf. Μέρος τευχῶν Σωτῆρος, pp. 337-338. In another
part of the last-named document, the Moon-ship is described
as steered by a male and female dragon (the caduceus of
Hermes?) who snatch away the light of the Rulers (p. 360,
Copt.).

528. This seems to be the passage referred to later by Origen. See

n. 2, p. 159 infra.

529. The usual epithet or appellation of Osiris Neb-er-tcher = Lord

of Totality or the Universe. Cf. Budge, Book of the Dead,
passim.

530. So in the Ascensio Isaiae, of which Mr Charles says that “we

cannot be sure that it existed earlier than the latter half of the
2nd century of our Era,” it is said (Chap. IX, v. 15) “And thus
His descent, as you will see, will be hidden even from the
heavens, so that it will not be known who He is.” Charles, The
Ascension of Isaiah, p. 62. Cf. ibid. pp. 67, 70, 73 and 79.

531. pp. 39, 40, Copt. The reference is apparently to the Book of
Enoch, c. LXXX. (see Charles, Book of Enoch, pp. 212, 213,
and the Epistle of Barnabas, N.T. extra can., c. IV. p. 9,
Hilgenfeld). In the Latin version of the last-quoted book, it is
 assigned to Daniel, which shows perhaps the connection of
Enoch with all this quasi-prophetic or apocalyptic literature.

532. According to the Valentinian system, his name was Θελητὸς

or “the Beloved.” See Chap. IX, p. 101 supra.

533. See Chap. VIII supra. Here he occupies a far inferior position
to that assigned him by the Ophites. In the Μέρος τευχῶν
Σωτῆρος he sinks lower still and becomes merely one of the
torturers in hell (p. 382, Copt., κ.τ.λ.). Thus, as is usual in
matters of religion, the gods of one age become the fiends of
the next. In the Bruce Papyrus (Amélineau, p. 212) he
appears as one of the chiefs of the Third Aeon. It is curious,
however, to observe how familiar the name must have been to
what Origen calls “a certain secret theology,” so that it was
necessary to give him some place in every system of
Gnosticism. His bipartite appearance may be taken from
Ezekiel viii. 2.

534. Probably the latter. See what is said about the Outer
Darkness in the Μέρος τευχῶν Σωτῆρος, p. 319, Copt. where
it is described as “a great dragon whose tail is in his mouth
who is without the whole κόσμος and surrounds it.”

535. p. 83, Copt. So in the Manichaean legend, the First Man, on

being taken captive by Satan, prays seven times to the Light
and is delivered from the Darkness in which he is imprisoned.
See Chap. XIII infra.

536. This demon in the shape of a flying arrow seems to be well

known in Rabbinic lore. Mr Whinfield in J.R.A.S., April, 1910,
pp. 485, 486, describes him as having a head like a calf, with
one horn rising out of his forehead like a cruse or pitcher,
while to look upon him is certain death to man or beast. His
authority seems to be Rapaport’s Tales from the Midrash.

537. The basilisk with seven heads seems to be Death. See

Gaster, “The Apocalypse of Abraham,” T.S.B.A. vol. IX. pt 1, p.
 222, where this is said to be the “true shape” of death. Cf.
Kohler, “Pre-Talmudic Haggadah,” J.Q.R., 1895, p. 590.
Death, as we have seen in Chap. IX, p. 107, was in the ideas
of Valentinus the creature of the Demiurge. For the dragon,
see Whinfield, ubi cit.

538. These “three times” are not years. As the Pistis Sophia opens
with the announcement that Jesus spent 12 years on earth
after the Resurrection, we may suppose that He was then—if
the author accepted the traditional view that He suffered at 33
—exactly 45 years old, and the “time” would then be a period
of 15 years, as was probably the indiction. The descent of the
“two vestures” upon Jesus is said (p. 4, Copt.) to have taken
place “on the 15th day of the month Tybi” which is the day
Clement of Alexandria (Strom. Bk I. c. 21) gives for the birth of
Jesus. He says the followers of Basilides gave the same day
as that of His baptism.

539. Epiphanius, Haer. XXVI. t. II. pt 1, p. 181, Oehler.

540. This doctrine of ἑρμηνεία occurs all through the book. The
author is trying to make out that well-known passages of both
the Old and New Testaments were in fact prophetic
utterances showing forth in advance the marvels he narrates.
While the Psalms of David quoted by him are Canonical, the
Odes of Solomon are the Apocrypha known under that name
and quoted by Lactantius (Div. Inst. Bk IV. c. 12). For some
time the Pistis Sophia was the only authority for their
contents, but in 1909 Dr Rendel Harris found nearly the whole
collection in a Syriac MS. of the 16th century. A translation
has since been published in Cambridge Texts and Studies,
vol. VIII. No. 3, Cambridge, 1912, by the Bishop of Ossory,
who shows, as it seems conclusively, that they were the
hymns sung by the newly-baptized in the Primitive Church.

541. Astrological doctrine first becomes prominent in Gnostic

teaching in the Excerpta Theodoti which we owe to Clement
of Alexandria. We may therefore put their date about the year
 200. This would be after the time of Valentinus himself, but
agrees well with what M. Cumont (Astrology and Religion, pp.
96 sqq.) says as to the great vogue which astrology attained
in Rome under the Severi. Its intrusion into the Valentinian
doctrines is much more marked in the Μέρος τευχῶν Σωτῆρος
than in the Pistis Sophia, and more in the Bruce Papyrus than
in either.

542. See Chap. VIII, pp. 73, 74 supra.

543. Origen, cont. Cels. Bk VI. c. 34.

544. Hippolytus (Chap. IX, p. 92), speaks of the Jesus of

Valentinus as the Joint Fruit of the Pleroma simply. Irenaeus
(Bk I. c. 1, p. 23, Harvey) goes into more detail: Καὶ ὑπὲρ τῆς
εὐποιΐας ταύτης βουλῇ μιᾷ καὶ γνώμῃ τὸ πᾶν Πλήρωμα τῶν
Αἰώνων, συνευδοκοῦντος τοῦ Χριστοῦ καὶ τοῦ Πνεύματος, τοῦ
δὲ Πατρὸς αὐτῶν συνεπισφραγιζομένου, ἕνα ἕκαστον τῶν
Αἰώνων, ὅπερ εἶχεν ἐν ἑαυτῷ κάλλιστον καὶ ἀνθηρότατον
συνενεγκαμένους καὶ ἐρανισαμένους, καὶ ταῦτα ἁρμοδίως
πλέξαντας, καὶ ἐμμελῶς ἑνώσαντας, προβαλέσθαι
προβλήματα εἰς τιμὴν καὶ δόξαν τοῦ Βυθοῦ, τελειότατον
κάλλος τε καὶ ἄστρον τοῦ Πληρώματος, τέλειον καρπὸν τὸν
Ἰησοῦν ὃν καὶ Σωτῆρα προσαγορευθῆναι, καὶ Χριστὸν, καὶ
Λόγον πατρωνομικῶς καὶ κατὰ [καὶ τὰ] Πάντα, διὰ τὸ ἀπὸ
πάντων εἶναι. “Αnd because of this benefit, with one will and
opinion, the whole Pleroma of the Aeons, with the consent of
Christos and the Spirit, and their Father having set his seal
upon the motion, brought together and combined what each
of them had in him which was most beautiful and brightest,
and wreathing these fittingly together and properly uniting
them, they projected a projection to the honour and glory of
Bythos, the most perfect beauty and star of the Pleroma, the
perfect Fruit Jesus, who is also called Saviour and Christ, and
after his Father Logos, and Pan, because He is from all.”
Compare with these the words of Colossians ii. 9: ὅτι ἐν αὐτῷ
 κατοικεῖ πᾶν τὸ πλήρωμα τῆς θεότητος σωματικῶς. “For in
him dwelleth all the fulness of the Godhead bodily.”

545. That the Valentinians considered the Dodecad (and a fortiori

the Decad) as having a collective entity, and as it were a
corporate existence, seems plain from what Hippolytus says
in narrating the opinions of Marcus: ταῦτα γὰρ δώδεκα ζώδια
φανερώτατα τὴν τοῦ Ἀνθρώπου καὶ τῆς Ἐκκλησίας θυγατέρα
δωδεκάδα ἀποσκιάζειν λέγουσι. “For they say that these 12
signs of the Zodiac most clearly shadow forth the Dodecad
who is the daughter of Anthropos and Ecclesia” (Hipp. op. cit.
Bk VI. c. 54, p. 329, Cruice). And again (loc. cit. p. 331,
Cruice): ἔτι μὴν καὶ τὴν γῆν εἰς δώδεκα κλίματα διῃρῆσθαι
φάσκοντες, καὶ καθ’ ἒν ἕκαστον κλίμα, ἀνὰ μίαν δύναμιν ἐκ τοῦ
οὐρανῶν κατὰ κάθετον ὑποδεχομένην, καὶ ὁμοούσια
τίκτουσαν τέκνα τῇ καταπεμπούσῃ κατὰ τὴν ἀπόρροιαν
δυνάμει, τύπον εἶναι τῆς ἄνω δωδεκάδος. “These are also
they who assert that the earth is divided into twelve climates,
and receives in each climate one special power from the
heavens and produces children resembling the power thus
sent down by emanation, being thus a type of the Dodecad
above.” The doctrine of correspondences or, as it was called
in the Middle Ages, of “signatures” is here most clearly stated.
In all this the Valentinian teaching was doubtless under the
influence of the ancient Egyptian ideas as to the paut neteru
or “company of the gods,” as to which see Maspero’s essay
Sur L’Ennéade quoted above.

546. It is said (p. 9, Copt.) that it is by him that the universe was
created and that it is he who causes the sun to rise.

547. As has before been said, this is attempted in one of the

documents of the Bruce Papyrus. See pp. 191, 192 infra. In
the present state of the text this attempt is only difficultly
intelligible, and is doubtless both later in date than and the
work of an author inferior to that of the Pistis Sophia.
548. p. 16, Copt. Yet the First Mystery is not the creator of Matter
which is evil, because Matter does not really exist. See Bruce
Papyrus (Amélineau, p. 126) and n. 2, p. 190 infra.

549. As mentioned in the Scottish Review article referred to in n. 1,

p. 135 supra, there is no passage but one in the Pistis Sophia
which affords any colour for supposing that the author was
acquainted with St John’s Gospel. All the quotations set forth
by Harnack in his treatise Über das gnostische Buch Pistis-
Sophia, Leipzig, 1891, p. 27, on which he relies to prove the
converse of this proposition, turn out on analysis to appear
also in one or other of the Synoptics, from which the author
may well have taken them. The single exception is this (Pistis
Sophia, p. 11, Copt.), “Wherefore I said unto you from the
beginning, Ye are not from the Cosmos; I likewise am not from
it”; John xvii. 14: “(O Father) I have given them thy word; and
the world hath hated them, because they are not of the world,
even as I am not of the world.” The parallel does not seem so
close as to make it certain that one document is copying from
the other. Both may very possibly be taken from some
collection of Logia now lost, but at one time current in
Alexandrian circles; or from the Gospel of the Egyptians, from
which the Pistis Sophia afterwards quotes.

550. See Chap. IX, p. 107 supra.

551. See last note. The Authades or Proud God of the Pistis
Sophia seems to have all the characteristics with which
Valentinus endows his Demiurge.

552. So Pistis Sophia sings in her second hymn of praise after her
deliverance from Chaos (p. 160, Copt.) “I am become pure
light,” which she certainly was not before that event. Jesus
also promises her later (p. 168, Copt.) that when the three
times are fulfilled and the Authades is again wroth with her
and tries to stir up Jaldabaoth and Adamas against her “I will
take away their powers from them and give them to thee.”
That this promise was supposed to be fulfilled seems evident
 from the low positions which Jaldabaoth and Adamas occupy
in the Μέρος τευχῶν Σωτῆρος, while Pistis Sophia is said to
furnish the “power” for the planet Venus.

553. See Chap. IX, p. 108 and n. 1 supra.

554. All the revelations in the Pistis Sophia are in fact made in
anticipation of the time “when the universe shall be caught
up,” and the disciples be set to reign with Jesus in the Last
Parastates. Cf. especially pp. 193-206 Copt.

555. The idea may not have been peculiar to Valentinus and his
followers. So in the Ascensio Isaiae (x. 8-13) the “Most High
the Father of my Lord” says to “my Lord Christ who will be
called Jesus”: “And none of the angels of that world shall
know that thou art Lord with Me of the seven heavens and of
their angels. And they shall not know that Thou art with Me till
with a loud voice I have called to the heavens, and their
angels, and their lights, even unto the sixth heaven, in order
that you may judge and destroy the princes and angels and
gods of that world, and the world that is dominated by them.”
Charles, Ascension of Isaiah, pp. 70-71.

556. p. 194, Copt.

557. p. 230, Copt.

558. On the belief in the Millennium in the primitive Church, see

Döllinger, First Age of Christianity and the Church, Eng. ed.
1906, pp. 119, 123 and 268 and Ffoulkes, s.v. Chiliasts, in
Dict. Christian Biog.

559. p. 230, Copt. Cf. Luke xxii. 29, 30.

560. p. 231, Copt. “disciples” not apostles. So the Manichaeans

made Manes to be attended by twelve disciples. See Chap.
XIII infra.