http://jeopardylabs.com/play/chapter-6-consumers-savers-and-investors

Final value of all goods and services produced in the country in ONE year

When YOU and other consumers spend your money you are taking part in markets for goods and services

Before you can become a consumer, you must have money or earn income.

Income from work: ◦ Wage ◦ Salary

Wage: earnings paid by the hour or unit of production

Salary: earning paid weekly, monthly, or on a yearly basis

How much you earn will depend on:◦ Nature of your job◦ Your skills◦ Your education◦ Your performance◦ Your entrepreneurial drive

Middle amount of earnings to be a full-range of earnings for a particular job category

Bureau of Labor Statistics:◦ http://www.bls.gov/oes/current/oes_alph.htm

Wealth: a value of the things you own◦ Adding together the value of all your tangible possessions,

bank accounts, savings, and investments gives you the TOTAL amount of your WEALTH = NET WORTH

Net Worth: an individual’s wealth after debts and other obligations have been subtracted

Accumulated wealth: initial money and/or assets you earn and the money and assets you add to your initial wealth

How do you accumulate wealth?

◦ SAVE

A savings account is, of course, a place to stash your money at a bank. However, it can be far more than just a place to keep your cash. Used as part of an overall financial plan, savings accounts can provide:

A feeling of financial stability from knowing your principal is safe and the interest income is reliable

A pain-free way of tracking and accomplishing your savings goals A financial budgeting tool to help you cover unexpected expenses or 

self-insure purchases

◦ INVEST

Disposable income: money you take home after taxes are paid

Amount people save DEPENDS on THEIR INCOME

◦Future income◦Current rates of interest◦Taxation

Income levels increase: typical households save and invest more

Income levels decrease: people save and invest less

Expectations: what people think, or hope, will happen in the future

◦ POWERFUL FORCE IN THE ECONOMY

◦ If consumers are feeling comfortable it will boost the economy by spending more

Higher interest rates tend to promote savings Higher interest rates = incentive to save

http://www.bankrate.com/compare-rates.aspx

Government tax rates can encourage or discourage savings

Higher taxes on income earned from savings and investments DISCOURAGE people from saving

CUTTING taxes on savings and investments encourages people to set money aside for saving and investing

Need to know: money you receive (income) and how much you plan to spend

BUDGET: Personal financial plans◦ Budget: summarizes an individual’s planned income and

spending over a specific time period

3 steps in creating a budget:◦ Setting financial goals◦ Estimating income◦ Planning expenditures

Setting financial goals:◦ Income◦ Expenditure goals

Example: work extra to meet goal Setting an aggressive income goal

Possibly college tuition, car payment

BE REALISTIC IN SETTING FINANCIAL GOALS!

Start with current expenses and add other expenses you know you will be incurring◦ Example: heating and air conditioning◦ Example: college tuition

Part-time jobs

Allowances

Gifts

Interest on current savings

Scholarship◦ Per diem

List all the things you are likely to buy or pay for over the time period of your budget

What you need to save to meet your longer-term goals

Safety: desk drawer vs. banks/saving institutions

◦Government sponsored insurance provided by the Federal Deposit Insurance Corporation (FDIC)

FDIC = guarantees the safety of any savings account up to $100,00

Rate of return: refers to the percentage of interest or the amount of dividends paid on savings or on an investment◦ Dividends: products distributed to stockholders

Greater rate of return = riskier the investment◦ WHY???

Let's say you invest $100 in stock, which is called your capital. One year later, your investment yields $110. What is the rate of return of your investment? We calculate it by using the following formula:

((Return - Capital) / Capital) × 100% = Rate of Return

Therefore:◦ (($110 - $100) / $100) × 100% = 10%

Your rate of return is 10%.

There are two ways to measure the rate of return on an investment.◦ Average annual rate of return (also known as average annual

arithmetic return)◦ Compound rate of return (also called average annual geometric

return)

Stock: ownership in a corporation

Biggest concern:◦ STOCK’S VALUE

If the price of a company’s stock falls, you can lose much of the money you used to buy the stock = MARKET RISK

Market risk: potential decrease in the value of a stock in a stock market

Inflation: general RISE on OVERALL prices◦ Purchasing power of your money decreases

One of the main reasons to put your savings into a bank is to earn INTEREST

Interest: income earned by allowing a person or institution, such as a bank, to use your money

Interest: % of the principal

Principal: initial amount of savings

ROR: Rate of return: % of the amount on deposit – usually for a period of one year

Ex: ◦ Deposit = $1000◦ Account = paying 5% annually◦ Earnings = $50 in interest over a year

ROR = 5%

Compound interest: interest calculated on the sum of savings plus the accumulated interest◦The interest earned is kept in savings

To receive CI:◦Leave both your initial savings AND

◦The interest earned in your account

Liquidity: the ease with which any asset, such as savings or stock, can be converted to cash◦ The easier it is to withdraw your funds = the greater your

liquidity

HOWEVER: liquidity usually has a cost◦ The easier it is for you to withdraw your money from a

bank/savings institution – the lower interest rate your likely to earn

◦WHY???

If a savings institution – which makes loans from money

saved, CANNOT depend on having that money on hand to lend – IT MUST PAY AT A LOWER RATE OF INTEREST

Savings deposits: banks, savings/loans firms, credit unions◦ $100,000 savings: if the bank fails the government will pay the

amount you have in savings up to a max of $100,000

Passbook savings account: safety and liquidity ◦ Pay a relatively low interest rate◦ Minimum balance requirement = low◦ Liquidity = good, can withdraw money easily

CD: receipt issued by a bank to a person depositing money in an account for a specified period of time at a FIXED rate of interest.

◦ Require to leave their money on deposit for a specified period of time, 6 months, 1 year

◦ CD’s pay a higher rate of interest Your best trade-off with a CD is that you give up liquidity

for a higher interest rate.

Money market deposit account: insured deposit or to write a limited number of checks within a defined time period

Use your money market funds to participate in the “money market”

“Money market”: consists of short-term loans – usually one year or less ◦ Banks makes its money on the interest it receives on the loans

ROI: the depositor (you) receives on these accounts is higher than a Passbook Savings Account and lower than a CD

Accounts are safe and offer liquidity

Investing in these types of funds provides tax deferment

Tax deferment: payment of taxes on interest after the interest is earned – often upon retirements

Pension funds: various retirement accounts that people receive through their employers

IRA: Individual Retirement Account:◦ Type of retirement account that an individual can establish with a

bank, an insurance company, or a brokerage firm 401 K Plan: for-profit company’s retirement plan that

allows an employee to save up to a certain amount of income per year and avoid paying taxes on the income until is withdrawn◦ Employers will often match a percentage of the employee’s 401K

contribution ESOP: Employee Stock Ownership Plan: an employer-

sponsored retirement plan that allows employee’s to purchase the employer’s stock◦ Often at a reduced price

Corporate stocks:

◦ Share of stock: share of ownership in a corporation◦ Dividends: profits distributed to stockholders

Corporate bonds:

◦ Bond: promise to repay borrowed money to a lender at a fixed rate of interest at a specified time

Mutual funds: a pool of money used by a company to buy assets – such as stocks and bonds – on behalf of its shareholders

Mutual fund companies: special investment companies in which people “pool” their savings to make a variety of investments.

◦ Ex: own stock in 200 different firms◦ Tends to be less risky (not just one avenue)

Issued by the U.S. Treasury

Savings Bonds: debts of the federal government◦Have face values This amount will be paid to the bondholder

when the bond matures Bonds issued at a discount: SOLD at a price

BELOW the face of value of the bond

Credit: the ability of a customer to buy goods or services before paying for them – BASED ON AN AGREEMENT to pay later◦ Ex: car loans, mortgages

2 strings attached:◦ Must repay the principal: original amount borrowed

◦ Pay the interest: amount of money charged for borrowing the principal

Finance charge: ◦Total amount paid to use credit◦Includes interest costs and any other fees – a

service charge that the seller or lender may be entitled to add to the loan

APR: Annual Percentage Rate: ◦cost of credit calculated as an annual percentage of

the principal borrowed

Immediate possession: enjoy good and services immediately rather than postponing or do without them.

Flexibility: allows people to time their purchases to take advantage of sale items or other bargains, even when their funds are low

Safety: safe and convenient means for people to carry their purchasing power while shopping or traveling.◦ Rather than carrying cash: lost or stolen

Emergency Funds: cushion in case of emergency.◦ Car breaks down.

Character reference: pattern of a person’s payment of bills is recorded, called a credit history

Overspending: make it too easy to spend money.◦ Debt mounts, and it is difficult to make the needed monthly

payments Higher cost: stores that accept credit cards pay the

credit card companies a fee.◦ Handling the paperwork associated with credit purchases can

be expensive for merchants. As a result, stores that accept credit cards typically charge higher

prices than those who sell their products only for cash. Impulse buying: ignore sales and special prices

because they can buy on credit whenever they want to.

Lenders look at 3 things to judge a person’s credit:◦ Character: personal qualities

Honesty and willingness to repay debts Record

◦ Capacity: capability – measure of your ability to repay debts Know about your income sources How much you earn Financial obligations

◦ Capital: what people own Money in the bank or tangible property (a house)

More you own the easier it is to repay debts Capital used for security is called collateral

Collateral: capital acceptable to a lender for a loan◦Ex: automobile is the collateral for an auto loan Failure to pay = take it away

Co-signer: a person who has a good credit rating and who guarantees to pay off your loan if you cannot.

Good consumer choice: means looking for quality products at the lowest possible prices

Government and Consumers:◦ The right to safety: have the right to be protected from unsafe products◦ The right to be informed:

Exactly what they are buying The terms of the sale and any guarantees accompanying it The kinds of risks that might be involved in the use of a product

◦ The right to choose: Competition is the backbone in free enterprise It is illegal to restrict market competition

◦ The right to be heard: Business and government recognize the need to learn what consumers are thinking

(800) numbers or website addresses for customer service

Satisfied consumers = key to financial success

Goals:◦Pay attention to consumer satisfaction◦Try and avoid complaints◦Respond quickly when consumers point out problems

BBB: Better Business Bureau◦ International organization sets standards for business

ethics