Agenda: Monday, October 7

1. Agenda: Monday, October 7 • CHECK AERIES • Chapter 6 – Lecture • Take notes on PowerPoint • Chapter 6 vocabulary sheet due Tuesday/Wednesday • Chapter 6 Quest – 80 points • End of the quarter this Friday • FINISH PRESENTATIONS

2. Chapter 6: Consumers, Savers, and Investors

3. GDP: Gross Domestic Product • 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.

4. Sources of 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

5. Median Monthly Earnings • 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

6. Income from Wealth • 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

7. 2 forms of income that can be earned from wealth: • Rent: payment for the use of someone else’s property • Interest: income earned from allowing someone else to use your financial capital • RENT IN SANTA ROSA • Shared accommodation (room in home or apt.)$350-$750V • Vacant 1 bedroom apartment$650-$1200 • Vacant 2 bedroom apartment$875-$1350 • Vacant 2 bedroom, 1 bath house$1000-$1700 • Vacant 3 bedroom, 2 bath house$1200-$2200

8. Factors that Influence Wealth Accumulation • 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

9. Disposable Income • Disposable income: money you take home after taxes are paid • Amount people save DEPENDS on THEIR INCOME • Future income • Current rates of interest • Taxation

10. Income • 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

11. Current Interest Rates • Higher interest rates tend to promote savings • Higher interest rates = incentive to save • http://www.bankrate.com/compare-rates.aspx

12. Taxes • 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

13. Taxes Continued… • Banks, insurance companies, stock brokerages work hard to persuade you to save or invest money…MORE and MORE of your money. • IN CONTRAST • Businesses try to encourage more spending, stores, movies, etc. • YOUR CHOICE: Buy or Save, Buy and Save

14. A Budget’s Influence on Saving and Investing Choices • 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

15. 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

16. Estimating Income • Part-time jobs • Allowances • Gifts • Interest on current savings • Scholarship • Per diem

17. Planning Expenditures • 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

18. Consideration in making Saving and Investment decisions • 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 $100,000

19. Rate of Return • 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 • The ration of money gained or lost on an investment relative to the amount of money invested. • The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, loss, or net income/loss. The money invested may be referred to as the asset, capital, or principal of the investment.

20. 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)

21. Stock • 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

22. Savings • 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

23. Savings continued… • 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%

24. Compound Interest • 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

25. Liquidity • 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

26. Where do people put their savings? • 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

27. A Certificate of Deposit: CD • 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.

28. Money Market Deposit Accounts • 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

29. Money Market:ROI: Rate of Interest • 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

30. Pension and Retirement Funds • 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

31. IRA, 401 K, ESOP • 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

32. Corporate Stocks and Bonds • 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

33. Mutual Funds • 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)

34. U.S. Savings Bonds • 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

35. Consumer Credit • 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

36. What credit terms should you investigate? • 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

37. Advantages of Credit • 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

38. Disadvantages of Credit • 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.

39. Obtaining and Using Credit • 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

40. Credit continued… • 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.

41. Consumer Protection • 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

42. Business Self-Regulation • 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

43. If a savings institution, which makes loans from MONEY SAVED, cannot depend on having that money on hand to lend, IT MUST pay a LOWER rate of interest

44. Liquidity continued… 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