Consumers, Savers, and Investors

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Chapter 6

• Consumers, Savers, and Investors

2
Consumer

• Is anyone who buys goods and services for
  personal use.
• See page 78 for pie chart on consumption as a
  percentage of Gross Domestic Product (2004)-The
  final value of all goods and services produced in
  the country in one year)
• Consumer spending 66
• Government spending 18
• Investment 16

3
Sources of Income

• Income from Work
• Money earned from your job.
• Wage vs. salary
• Income from Wealth
• Money and tangible property people own.
• Net worth wealth after debt

4
Saving and Investing

• Saving
• Consuming less than we produce putting aside
  money for future use.
• Investing
• Saving allows resources to be channeled into
  productive investment putting your money to work
  so that it earns extra income.

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Factors that Influence Wealth Accumulation-Reasons
to Save or Not

• Disposable income money you take home after
  taxes are paid. When income increase, people
  save and invest
• Expectations What people think might happen in
  the future
• Current Interest Rates Higher rates promote
  saving
• Taxes Encourages or discourage savings

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To Save or Not to Save?

• Reasons to save or not to save
• Income
• Expectations
• Current Interest Rates
• Tax Laws

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BUDGET
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Budget

• A plan for using your money in a way that best
  meets your wants and needs.
• MONEY MANAGEMENT
• The process of planning how to get the most from
  you money.

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Steps in A Budget

• Set Goals
• Be realistic
• Estimate Income
• Estimate Low
• Estimate Expenses
• Estimate High
• Plan for Savings
• Try to save up to 10 of your income
• Balance and Adjust
• EXPENSES INCOME SAVINGS

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INVESTING
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Factors to Consider when Investing

• Safety (Risk)
• Rate of Return
• Liquidity
• Tax Advantages
• Inflation Fighter

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Safety (RISK)

• The possible loss you face if your investment
  fails.
• Usually, the higher the risk, the higher the
  possible rate of return.

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Rate of Return

• Yield the percentage of the investment that you
  earn each year from your invested money.

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Liquidity

• The ease or quickness with which you can change
  your investment into cash.

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Tax Advantages

• Taxable Savings - taxes are taken out each year
  on your account
• Tax-Deferred Savings - taxes are taken out when
  you start receiving benefits.

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Inflation Fighter

• Inflation rate varies from year to year, but is
  usually around 3-4 each year.
• Your investment should yield more than that.

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Saving Options

• Checking Accounts
• Savings Accounts
• Certificates of Deposit (CDs)
• U.S. Savings Bonds
• U.S. Treasury Bills

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Checking Accounts

• High Liquidity
• Little to no inflation fighter
• Low Risk
• Usually insured by FDIC
• Rate of Return 0-4

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Savings Account

• High Liquidity
• Little to no inflation fighter
• Low Risk
• Usually insured by FDIC
• Rate of Return 1-6

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Certificate of Deposits

• Liquidity 1 week to 8 years
• Penalty for early withdrawal
• Can be a weak inflation fighter
• Low Risk
• Usually insured
• Rate of Return 3-9

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U. S. Savings Bonds Government Notes

• Safe Investment little to no risk
• Special IOUs from US government
• Issued at a discount then redeemed at their full
  value at maturity date
• Bonds repaid after a year or longer
• A Gov. Note is repaid after 6 months but within
  on year.
• A Gov. Bill is repaid with 3-6 months

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Investment Options

• Stocks
• Bonds
• Mutual Funds
• Real Estate
• Collectibles
• Pension funds

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Stocks

• Stocks - shares of ownership
• Often corporations are faced with a need for
  capital / money and will raise it through the
  sale of stocks.
• Common Stock
• Preferred Stock

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Common Stock

• All profit-making corporations must offer this
  type of stock
• Holders of this stock may participate directly or
  indirectly in the management of the company
• Receive DIVIDENDS (a share of corporate profits
  paid to stockholders)

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Preferred Stock

• Gives holders certain privileges
• Paid dividends first
• Generally no voice in the running of the company

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Financial Markets

• Place where firms and individuals enter into
  contracts to sell or buy a specific product such
  as stocks, bonds, or futures contracts.

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Securities Markets

• Deal primarily with stocks and bonds
• Purpose is for businesses to acquire investment
  capital
• Examples
• Nasdaq
• Computer based
• Technology and .com companies
• Growth Stocks
• NYSE
• New York Stock Exchange
• Floor Based brokers represent investors
• Income stocks Blue Chip Stocks

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Futures Market

• Trade on the future price of commodities and
  financial products. Purpose is to provide
  businesses with a way to manage price risk.
• Locks In a price
• Buyers obtain protection against rising prices
• Sellers obtain protection against declining
  prices
• Examples
• Chicago and New York Mercantile Exchanges
• Chicago Board of Trade

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Corporate Bonds

• Promise to repay borrowed money to a lender at a
  fixed rate of interest.
• Not ownership
• Receive periodic interest payments
• Subject to rise or fall in prices, just like
  stocks

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Mutual Funds

• A pool of money that is used by an investment
  company to purchase stocks and/or bonds of other
  corporations.
• Less risky because of DIVERSIFICAITON
• Spread your risk so that all of your savings or
  investments are not in one area

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Pension and Retirement funds

• Provide tax deferment payment of taxes on
  interest after the interest is earned, upon
  retirement.
• IRA Individual retirement accounts
• 401 (k) for-profit companys retirement plan
• Employee saves, avoids paying taxes until it is
  withdrawn.
• Employer often matches the contribution
• ESOP employee stock ownership plan

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Factors that Effect the Price of Stocks

• Actions of Investors
• Business Conditions
• Government Actions
• Economic Indicators
• International Events and Conditions

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CONSUMER CREDIT

• The opportunity to obtain money, goods, or
  services now in exchange for a promise to pay in
  the future.
• Involves a creditor (lender) and a debtor
  (borrower).

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Kinds of Credit

• Charge accounts
• Credit cards
• Installment plans
• Car loans
• Home mortgages
• See page 92 for explanation

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Credit Terminology

• Principal
• The amount borrowed
• Finance Charge
• The total amount you pay to use credit

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Advantages of Credit

• Immediate Possession
• Use while you pay
• Flexibility
• Take advantage of sale items and bargains
• Safety (Convenience)
• Easy to carry your purchasing power with you
• Emergency Funds
• Especially when traveling
• Character Reference
• Develops a credit rating

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Disadvantages of Credit

• Overspending
• Make it too easy to spend funds that you do not
  have
• Remember, credit is an increase in debt, not an
  increase in income
• Higher Costs (Interest)
• Watch for hidden costs interest and annual fees
• Impulse Buying
• The tendency to buy items you dont need

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The 3 Cs of Credit

• Credit Worthiness - having an established credit
  record that shows you are a good risk.
• Credit Worthiness is based on the Three Cs
• Character - willingness to repay
• Capacity - ability to repay
• Capital - what you have to back up your promise
  to pay collateral, financial assets.

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Establishing Credit

• Open a charge account at a department store
• Apply for a credit card
• Opening a telephone in your name
• Prompt payment of bills
• Have a savings account ability to manage a
  checking account
• Have a co-signer on an account

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Risk and Insurance

• Insurance
• The protection from the financial effect of an
  emergency.
• Provides protection that divides possible losses
  among large numbers of people.
• Principle of Large Numbers - risk pooling where
  many share a loss so one person suffers less.
• Sharing the cost among many people reduces
  financial loss.
• Provides you with financial security.

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Insurance Terms

• Insurer - the insurance company you work with.
• Insured - customer or policy holder
• Agent - person with whom you will work with to
  help you decide on a coverage.
• Policy - a formal written agreement between you
  and the company.
• Premium - money charged by the insurance company
  for protection during a certain period time.
• Claims - request for payments due to financial
  losses.
• Deductible - the amount the policyholder must pay
  first, before the insurance company pays
  anything.
• Proceeds - the amount of money paid to the
  survivors.
• Beneficiary - each survivor named in the policy.

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Auto Insurance

• Bodily Injury Liability
• Insurance that covers injuries or deaths caused
  by the policy holder in an accident.
• Does not include the policyholder
• Required by Law
• Covers Medical Expenses, loss of income, and
  Pain and Suffering
• Property Damage Liability
• Coverage for the cost of damage to another
  persons property in an accident.
• Split Limits 100/300/50
• Required by Law

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Auto Insurance

• Medical Payments
• Covers the expenses from injury to the driver or
  anyone in the car.
• Collision
• Covers damages to the car itself in case of
  accident.
• Comprehensive
• Covers damage to the policyholders car caused by
  most things except collision.
• Uninsured Motorists
• Protects you by paying damages when you are in an
  accident with an uninsured driver or hit and run

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Life Insurance

• Designed to protect the standard of living for
  the survivors of a policyholder. The survivors
  are paid the face value of the life insurance
  policy.
• Three types of life insurance policies
• Term
• Whole Life
• Universal Life

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Term Insurance

• Provides coverage for a specific period time
• Does not accumulate cash value
• Is the least costly form of life insurance

46
Whole Life Insurance

• Enables those insured to pay the same premium and
  receive the same coverage throughout their
  lifetimes.
• Accumulates in cash value - similar to a savings
  account.

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Universal Life Insurance

• Flexible
• Level or adjustable premiums and coverage
• Accumulates cash value

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Health Insurance

• Provides protection against the costs of illness
  and accidents.
• Covers doctor, hospital, and surgical costs
• Also covers against the loss of income
  (disability insurance)

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Medical Insurance

• Pays doctors fees, hospital services and
  surgical procedures.
• Major medical insurance - catastrophe insurance
  for serious illness or accidents. Would include
  nursing care and prescription drugs.

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Disability Income Insurance

• Protects against loss of income due to illness or
  injury.

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Individual Group Insurance

• Individual usually costs more than group
• Group is provided by employers, professional
  associations, unions, and other organizations.

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HMOs

• Health Maintenance Organizations
• A health care center formed within a community to
  provide health care for a fixed fee per month.
• Stress importance of preventive health care.

53
Liability Insurance

• Protects people against the cost of injuries to
  others or damage to others property for which
  they are responsible.