consumers, savers, and investors. anyone who buys goods and services for personal use
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Chapter 6Consumers, Savers,
and Investors
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Anyone who buys goods and services for personal use.
Consumers
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Income From Work◦Salaries and Wages
Income from Wealth◦Rent, interest on savings, selling assets
Sources of Income
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According to the Economic Report of the President, US consumers invest less than 1% of their income.
recommended that people invest as much as 10% of their income.
Wealth through Investing And Saving
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How much people invest or save depends on the following:◦Their income level.◦Expectations◦Current interest rates◦Tax Laws
How Much People Invest and Save
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budget = personal financial plan.
It is balanced when income and expenditures are equal.
A Budget Leads to Saving and Investing
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A deficit occurs when expenditures exceed income.
A surplus exists when income exceeds expenditures.
A Budget Leads to Saving and Investing
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3 steps:◦1. Setting financial goals
◦2. Estimating Income
◦3. Planning Expenditures
The Process of Budgeting
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When deciding where to invest your money, there are three factors you should always consider…
Saving and Investing
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Banks = safe.
Under the mattress = not safe
Stock Market = less safe
#1 = Safety
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Stocks, for example, have market risk associated with them.
The value of stock can rise and fall dramatically, especially in the short term.
Safety
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Interest is your reward for giving up money and allowing a financial institution to use it.
Compound interest —computed on the sum of savings you deposit (principal) plus the accumulated interest measured at regular intervals.
#2 = Rate of Return
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A measurement of how quickly you can convert your savings to cash.
Some investments are more liquid than others.
#3 = Liquidity
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Liquid assets—Checking account, savings account, homes, cars.
Non-liquid assets—401k investment plans, mutual funds, IRA’s (Individual Retirement Accounts)
Liquidity
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Where People Put Their Savings
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Very safe investments with low rates of return.
Checking Accounts—Low interest and high liquidity
Certificates of Deposit (CD’s)—Higher interest, less liquid
Savings Deposits
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Insured deposits that allow you to write a limited amount of checks.
Offer much liquidity, but lower interest rates than a CD.
Money Market Deposit Accounts
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Funds that are invested in stocks, mutual funds, etc.
Examples: IRA, 401(k), 403(b), Employee Stock Ownership Plans (ESOP).
Usually tax deferred —meaning you don’t pay taxes on the interest you earn.
Pension and Retirement Funds
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One share of stock=one part ownership in a company.
Profits are sometimes given to the shareholder in the form of a dividend.
As company’s grow, the value of stocks also grow.
Corporate Stocks
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IOU’s issued by a company to a bondholder.
Bonds can rise or fall depending on the success of a company.
Corporate Bonds
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Special investment companies where people pool their money to make a variety of investments.
A mutual fund company may own stock in over 300 firms.
Mutual Funds
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When the US treasury borrows money from you.
Sold at a discount (usually half the face value) and then can be redeemed when they mature.
US Savings Bonds
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People pay a monthly premium to ensure their family is cared for in the event of an emergency.
Life Insurance
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Appreciable Assets—Buying something that you think will be worth more in the future.
Foreign exchange—Other country’s currency.
Commodities—Precious metals and gems
Other Investments
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Allows you to enjoy goods and services before you pay for them fully.
When you borrow money, you must pay the principal plus interest.
Consumer Credit
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Principal—The amount that is borrowed.
Interest—The cost of borrowing money, usually defined by APR (Annual Percentage Rate)
Consumer Credit
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Home MortgagesAuto and Consumer LoansStore Charge AccountsCredit Cards
Kinds of Credit Available
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Credit worthiness is judged by the following characteristics:◦Character (record of repayment)
◦Capacity to repay debts
◦Capital—what you own
Obtaining And Using Credit
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Must prove that you can handle financial obligations.
Why Establish Credit?
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Open and be responsible with a checking and savings account.
School Loans.
Open a charge account/credit card and pay the entire balance off every month!
Proving Credit Worthiness
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Ways to use life insurance policies:◦Create an estate◦Create a college fund◦Fund a business transfer◦Pay off a home mortgage◦Guarantee loans
Life Insurance
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Auto Homeowners Liability Health Disability
Other Kinds of Insurance