personal finances next. section 1: money and credit in addition to using dollar bills and coins,...

Personal Finances

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Section 1: Money and Credit

In addition to using dollar bills and coins, individuals and businesses use checks, debit cards, and credit to pay for their purchases.

Reading Focus

• What are the three basic characteristics of currency?

• Why do people and businesses accept checks as payment?

• How is credit important to individuals and families?

• How is business credit useful to the economy as a whole?

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The Main Idea

Four basic characteristics of currency:

• Must be easy to carry and take up little space

• Based on system of units easy to multiply and divide

• Must be durable

• Must be in a standard form and guaranteed by the government

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Why do people and businesses accept checks?

• Much of the U.S. money supply is in the form of bank deposits.

• A check is a promise of funds sufficient to cover stated amount.

• Insufficient funds and overdrafts are punished with fines or criminal penalties.


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The Importance of Credit

• Credit allows wholesalers to buy a larger quantity of goods at once.

• Families use credit for emergency purchases and large purchases.

• Credit enables consumers to buy when production is high and goods are being sold.

• Consumer spending encourages economic growth.


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Question: How is credit good for families and the economy as a whole?


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Importance of Credit in the Family

• used for emergency expenses

• products or services needed immediately

• large purchases on short-term credit

• large purchases on long-term credit

Importance of Credit in Business

• used in most sales of large amounts of goods

• allows wholesalers to buy larger quantities than they have money for

• wholesaler can make money to repay debt


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Importance of Credit in the Economy

• makes it possible for consumers to buy whenever there are goods to be sold, even if money supply is low

• when production slows, banks can slow consumer spending by extend-ing less credit and raising interest rates on loans


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Section 2: Banks and Banking

Banks provide a safe place to keep money and help businesses and individuals by making loans.

Reading Focus

• How and why were the first banks established?

• What is the purpose of banks and the banking system?

• How and why does the U.S. Federal Reserve System regulate the amount of money in circulation?

• How does a person get a bank loan?

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The Main Idea

The FDIC:

• FDIC—Federal Deposit Insurance Corporation

• A government agency

• Insures accounts in commercial and savings banks for up to $100,000

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The savings and loan crisis:

• 1980s—many of the banks involved in risky loans, bad investments, and fraud

• Hundreds of the banks failed

• The FSLIC ran out of money, and debt was passed on to the FDIC.

• The Resolution Trusts Corporation was established to sort out the crisis.

• Total cost to taxpayers estimated at $165 billion


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The Federal Reserve System regulates the money in circulation:

• Regulation prevents bank failure.

• The Fed controls money circulation to keep the economy healthy.

• The Fed buys government bonds from banks and individuals to increase circulation and speed economic growth.

• The Fed sells government bonds to take money out of circulation when economy grows too fast.

• Member banks can borrow money from the Fed to increase their reserves.


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Question: What were the causes and effects of the savings and loan crisis in the 1980s?


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Question: What were the causes and effects of the savings and loan crisis in the 1980s?

Causes

• risky loans

• bad investments

• fraud

Effects

• The FSLIC runs out of money.

• The FDIC takes on FSLIC's obligations.

• The Resolution Trust Corp. (RTC) is formed.

• The total cost to taxpayers is nearly $165 billion.


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Section 3: Saving and Investing

There are many ways to save money. Saving helps the economy by providing banks with money to make loans to others.

Reading Focus

• Why is it important to save money?

• What are some ways people save and invest their money?

• How does saving money help the U.S. economy?

• How does the government protect savings and investments?

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The Main Idea

The importance of saving money:

• People save for education, emergencies, retirement, and large purchases.

• Credit purchases often require a down payment in cash.

• Ability to make a large down payment reduces monthly payments and the total interest on a loan.

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Ways of saving and investing:

• Purchasing items that may increase in value

• Regular installments to a savings account that is earning interest

• Certificates of deposit (CDs)—interest is paid when CD matures

• Stocks—common and preferred stock; mutual funds; money market funds

• Bonds—low risk; money and earned interest is returned when bond matures


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Saving money helps the U.S. economy:

• Expansion of the economy requires capital; money in savings is used for expansion.

• Money saved is also money invested in the economy.

• Companies' ability to raise capital promotes the country's prosperity.

• Banks use money in savings to make loans to businesspeople.

• Businesses that save are able to reinvest in themselves.


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Question: What are the different ways of saving and investing money?


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Section 4: Insurance Against Hardship

Insurance companies offer policies to protect people from possible financial hardships. The federal government also has several programs to help protect people from risks and uncertainties.

Reading Focus

• How are insurance companies able to protect you?

• What are some forms of insurance provided by the government?

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The Main Idea

Insurance companies cover many people:

• Premiums are collected from millions of policyholders.

• Money is held in a reserve fund.

• Laws specify how much must be held in the fund.

• Claims are paid from the fund.

• Relatively few policyholders make claims each year.

• Other moneys are invested and profits are used to run the company.

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Private Insurance and Social Insurance

• Private insurance—voluntary insurance paid by individuals and companies: life insurance, health insurance, property and liability insurance

• Social insurance—government programs meant to protect individuals from future hardships: Social Security

• Social Security includes old age, survivors, and disability insurance, unemployment compensation and workers' compensation


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Social Security and Its Future

• Social Security Act of 1935—part of the New Deal; intended to protect citizens from future hardships

• Retirement population is growing while birthrate is dropping.

• Fewer workers will be supporting growing group of retirees.

• Critics argue the tax will continue to rise and prefer to abolish the program.


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Question: What are the different types of services and coverage available under private and social insurance?


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Private Insurance

• Life Insurance

• Disability Income

• Health Insurance

• Property Insurance

• Liability Insurance


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Social Insurance

• Old Age, Survivors, and Disability Insurance

• Unemployment Insurance

• Workers' Compensation

• Medicare and Medicaid


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• Why are checks not considered legal tender, and why do people accept them for payment?

• How do charge cards differ from credit cards?

• What caused the savings and loan crisis of the 1980s?

• What are the duties of the Federal Reserve System?

• How does saving money help the economy grow?

• What options does an individual have if he or she wants to save or invest money?

• What enables insurance companies to stay in business while still charging the premiums that they do?

Chapter 19 Wrap-Up

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Wrap-Up

personal finances next. section 1: money and credit in addition to using dollar bills and coins,...

Documents

money supply

money forwholesaler

savings banks

purpose of banks

business credit useful

banks failedthe fslic

emergency purchases

immediatelylarge purchases