 consumers-savers-and-investors 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: ◦

 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

 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

 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 goalssavings goals  A financial budgeting tool to help you cover unexpected expenses or self- insure purchasesself- insure ◦ 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  rates.aspx 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

 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

 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