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Consumers in the Economy

Consumers in the Economy. Income vs. Wealth. Income . Wealth. Accumulated assests Financial or Porperty. Wages Salary Interest Returns Any cash flow items. Types of Income . Gross Income Earnings before taxes are deducted Disposable Income

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Consumers in the Economy

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  1. Consumers in the Economy

  2. Income vs. Wealth Income Wealth Accumulated assests Financial or Porperty • Wages • Salary • Interest • Returns • Any cash flow items

  3. Types of Income • Gross Income • Earnings before taxes are deducted • Disposable Income • Amount of paycheck after taxes are deducted • Discretionary Income • Income used to pay for luxuries or nonessential goods

  4. Inflation • Increases the general level of prices • CPI – Consumer Price Index • http://www.usinflationcalculator.com/inflation/current-inflation-rates/

  5. Purchasing Power • Dollar value of how much an indiiduals money will really buy • Inflation decreases Purchasing Power • PP = Income – (Income x Inflation rate)

  6. So Why Save?? • Borrow less on big ticket items • Increase wealth over time • In case of emergencies • Factors: • AMOUNT saved • LENGTH OF TIME money is saved • INTEREST RATE earned

  7. Interest Rates Savings Borrowing Want a low interest rate on borrowing Takes away from Purchasing Power (higher interest rate) • You want a high interest rate on savings! • Simple interest (specific period) • I=Prin x Rate x Time • $5000 x .07 x 1 yr = $350 • $5000 x .07 x 2 yr = $700 • Future value (int. not compound) • FV=PV x (1 + Rate) x Time

  8. Interest • Simple – interest based on original amount • Compound – interest payment is added to principle every time period • Yield – actual amount received on savings • Yields are highter when compounded more often

  9. What do we think about when we are making investment decisions? • RISK - “Will I lose my investment?” • RATE – “What will I earn on my investment?” • LIQUIDITY – “How quickly can I turn my investment into cash?”

  10. How easy can I get cash? • Liquidity!! • Speed at which you can convert investment into cash Liquid>>>>>>>>>>>>>>>>>>>>>>>Illiquid Cash, savings, CD, stocks, IRA’s, 401K Trade offs- Risk vs. Rate at Return?

  11. Social Security • When did it start? • What was the purpose for it? • How is it funded?

  12. Markets Equity Bond Bonds Lend money to corp/govt Pay interest rate Predictable income Types: Corp. bonds Treasury bonds/Savings Municipal • Stocks • Buy piece of co • Profits-dividends • Voting rights • High rate of return

  13. Personal Managed Investments • Money Markets • Mutual fund • Real Estate • Beware: • Diversify Capital Gains (sell investment for more than you bought it,….pay taxes) Insurance – avoid losing money due to unforeseen circumstances (pay premiums)

  14. Credit/Credit Worthiness • How consumers pay back money • 3 C’s: • Collateral – repossess if fail to repay • Capacity – level of income, can they pay? • Character – history of payments

  15. Credit Cards • Cost: • Opportunity cost – future spending limited • Interest rates – annual percentage rate high • Annual fees – priviledge of having card • Other fees – late pymt, exceed limit, cash adv.

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