Personal Finance Overview People

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Personal Finance OverviewPeoples income,
in part, reflect choices they have made about
education, training, skill development, and
careers. People with few skills are more likely
to be poor.There are two methods for
classifying how income is distributed in a
nationthe personal distribution of income and
the functional distribution of income.
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GovernmentGovernment often
redistribute income directly when individuals or
interest groups are not satisfied with income
distribution resulting from markets. Transfer
payments can be cash or in-kind (noncash)
benefits (such as food stamps, housing subsidies,
or gifts between friends and family
members).Government also redistribute income
indirectly as side-effects of other government
actions that affect prices or output levels for
various goods and services.
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IncomeThere are four
basic categories of income wages, rent,
interest, and profit (corporate or proprietors
income). The majority of income earned in the
U.S. is from wages and salariesincome earned
working for an organization not owned by the
worker). The smallest amount of income is earned
from rental income.
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Personal Finance
Economics SSEPF1 The student will apply
rational decision making to personal spending and
saving choices.  a. Explain that people respond
to positive and negative incentives in
predictable ways.  b. Use a rational decision
making model to select one option over
another.  c. Create a savings or financial
investment plan for a future goal.  
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Rational Decision Making A
framework for understanding and often formally
modeling social and economic behavior.
Rationality, interpreted as "wanting more rather
than less of a good", is widely used as an
assumption of the behavior of individuals in
microeconomic models and analysis and appears in
almost all economics textbook treatments of human
decision-making. In short, this simply means
that an individual acts as if balancing costs
against benefits to arrive at action that
maximizes personal advantage (choose the
alternative that best meets your criteria).
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a. Explain that people respond to positive and
negative incentives in predictable ways.

• People will decide to perform an act if offered a
  positive incentive
• Ex. Complete chores for an allowance
• People will decide not to perform a task if
  offered a negative incentive
• - Ex. Most people do not commit crimes because
  of the fear of going to jail

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Rational Decision Making Model Alternatives
Choice 1 Choice
2Benefits -----
----- Decision -----
-----Opportunity Cost Choice 2
Choice 1Benefits Forgone Benefits of choice
2 Benefits of choice 1Ex. (riding the bus
rather than riding with an unreliable friend to
school/work).Remember, people are motivated by
incentives (positive reward negative
punishment).
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b. Use a rational decision making model to select
one option over another.
Decision making model Alternative Alternative
Choice 1- Sleep late Choice 2 wake up early to study
Benefits Enjoy more sleep Have more energy during the day Better grade on test Teacher and parental approval Personal satisfaction
Decision Sleep late wake up early to study
Opportunity Cost Extra study time Extra sleep time
Benefits Forgone Better grade on test Teacher and parental approval Personal satisfaction Enjoy more sleep Have more energy during the day
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c. Create a savings or financial investment plan
for a future goal.
What I want What It Costs What I Can Do When I Can Get It
Short-Term Goal (achievable in 6 months or less) Prom dress 200 Earn and save 20/ week from baby sitting 10 weeks from now
Long- Term Goal (takes a year or more to save for) Used car 2000 Save 10/week from allowance and get after-school job save 30/week 1 year from now
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QUESTIONS FOR REVIEW1. Ted
wants to be a doctor. He also wants to buy a
brand new car. Since both medical school and the
new car are very expensive, Ted cannot afford to
do both. If Ted decides that the benefits of
going to medical school will ultimately outweigh
the gratification of buying a new car, then the
MOST rational thing Ted can do is A. Use the
money for medical school. B. Invest the money
in bonds. C. Buy the car. D. Avoid using the
car as a trade-off.
Ans A
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2. Rikki just about to complete high school.
Before graduation her parents tell her that,
since she was a little girl, they have been
saving money to give her when she graduates.
Rikki learns, upon graduation, she will receive
50,000. Rikki must now decide what is next for
her in the future. Which would be the MOST
rational thing for Rikki to do? A. Use the
money to by the awesome new sports car she
desperately wants, then work her way
through college. B. Use the money to by the
awesome new sports car and get
college loans to pay for her education. C. Use
the money to pay for college and continue to
drive her old used car. D.
Use the money to pay a part of her college
tuition and a down payment on
the car and find a job to in order to
make payments on both her college tuition
and car payment.
Ans. C
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• SEPF2 The student will explain that banks and
  other financial institutions are businesses that
  channel funds from savers to investors.
• Compare services offered by different financial
• institutions.
• b. Explain reasons for the spread between
  interest
• charged and interest earned.
• c. Give examples of the direct relationship
  between risk
• and return.
• d. Evaluate a variety of savings and investment
  options
• include stocks, bonds, and mutual funds.

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The Bank

• Place to store money
• Kept in checking and savings deposits
• Also store other valuables jewels, stocks,
  documents (safety deposit boxes in vault)
• Offers LOANS mortgage, credit cards, car,
  personal, business, . etc.
• Interest creates a RETURN, yet still includes
  RISK!!!

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Sources of Loans Credit

• Types of Financial Institutions Include ..
• Commercial Banks accept deposits lend
  transfer funds among banks, businesses and
  individuals today control largest amount of
  and offer widest range of services.
• Credit Unions formed by employees owned
  operated by its members to provide low-interest
  loans only to its members.

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• 3) Savings and Loan Association similar to
  commercial bank (deposits loans) originally
  called building societies for purpose of home
  building.
• 4) Savings Bank similar to S Ls in that most
  of their business comes from savings and home
  loans originally created to serve the small
  saver overlooked by large banks.
• 5) Consumer Finance Companies take over
  contracts for installment debts from stores and
  add fees for collection PLUS often used by
  people unable to obtain credit from other routes
  higher interest rates!

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QUESTIONS FOR
REVIEW1. Which of the following types of
institutions will allow for both deposits and
lending money. It also controls the largest
amount of money and offers the widest range of
services today? A. Commercial Banks C.
Credit Unions B. Consumer Finance companies
D. Savings Bank2. What is the difference
between a Credit Union and a Commercial Bank? A.
Credit Unions are owned and operated by its
members to offer higher
interest rates on loans than Commercial
Banks. B. Credit Unions are safer than
Commercial Banks. C. Credit Unions are owned
and operated by its members to
offer lower interest rates on loans than
Commercial Banks. D. Credit
Unions are insured by the Federal Government
to insure deposits and Commercial
Banks are not.


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3. Frankie and Suzy are married and are planning
to build a home. Both have only been working in
their job for 4 years, where should they try to
get a loan to build their home? A. Credit
Union C. Bank of America B. Laurens Savings
Loan D. EZ Credit4. John needs cash fast
and does not have a job but owns a 2005 Ford
Mustang. Where would John most likely get the
cash he needs without having to verify most of
his current income? A. Local Commercial
Bank C. Title Max B. Heartland Mortgage
Co. D. Credit Union


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Reserve Requirement

• Federal Reserve system requires banks to keep
  certain amounts of money on hand
• A percentage of total deposits
• Current Reserve Requirement
• 10 of value of all checking and
• savings accounts

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Channeling Funds from Savers to Investors

• Banks and other Financial Institutions are
  BUSINESSES that channel funds from the people who
  save money to people who borrow for
  investment purposes.
• Can you think of a situation where this would
  happen?? _____________________________

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Savers Include

• People seeking to save money through a variety of
  means. How??
• Buying government securities such as bonds
  (regularly offered) by investing in them the
  investor is offered interest
• Buying corporation stock in exchange for
  ownership in the company.
• Investing in mutual funds pooling monies to
  increase purchasing power.

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Investors Include

• People seeking to earn more (future) money
  through an
• investment of present money.
• Stocks ownership in a company (offered dividends
  as a form of payment that might not be
  guaranteed).
• Bonds government securities (lent money out to
  be paid interest on the loan).
• Mutual Funds a collection of investments (money
  combined with others and managed by one group to
  increase purchasing power and profits).
• Business Start-Up entrepreneurship

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The Relationship Between Risk and Return

• Risk chance taken that money loaned will be
  repaid by borrower
• Return amount received through repayment of
  original loan PLUS INTEREST
• Many loans are insured by COLLATERAL it is
  often property.

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Examples of Risk and Reward
Investment Income Generated Growth Potential Risk Level
Savings Very steady Good Low risk (based on interest rates)
Stocks Variable (up and down with stock market) Good (in a good economy) High to moderate risks
Bonds Very steady Little or none (but guaranteed to be paid and maturity date) Low risk and the safest
Mutual Fund Variable (up and down with stock market) Combined with your invest-ment/Good Low to variable risks
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QUESTIONS FOR REVIEW1.
Which of the following will allow for good profit
returns if the economy is functioning at high
level? A. Mutual funds C. Stocks B.
Savings D. Bonds2. Which sentence describes
the risks and returns of investing in
stocks? A. They offer the lowest risks and the
lowest potential returns. B.
They offer the highest risks and the highest
potential returns. C. They offer
the lowest risks, but the highest
potential returns. D. They offer the highest
risks, but the lowest possible
return.


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Difference BetweenInterest Charged and
Interest Earned

• Why? profit for bank as a business
• Interest Rate the percentage amount of payment
  by borrowers to the lender.
• Interest Charged is determined on a loan amount
  or credit account by the lender (lender makes
  profit).
• Interest Earned is determined on a savings,
  checking, etc. once your money is deposited and
  the bank owes you (depositor makes profit).
• Two types Compound Interest rate and Simple
  Interest rate Compound is greater than Simple
  rate.

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Questions for Review1. Juan
goes to the Southern Union Bank to get a loan.
Juan has an account at the bank on which he
receives 2.2 annual interest. Which of the
following can be said of the rate of interest he
will pay on the loan that he takes out? A. It
will be lower than 2.2. B. Nothing can be
known about it, because he has
not yet applied. C. It will be higher than
2.2. D. He will be denied the loan.2. On
which of the following loans would one be MOST
LIKELY to pay the highest interest rate? A. A
home mortgage loan B. An automobile loan C. A
credit card D. A student loan for college
Ans C
Ans C
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SSEPF3 The student will explain how changes in
monetary and fiscal policy can have an impact on
an individuals spending and saving choices. a.
Give examples of who benefits and who
loses from inflation. b. Define progressive,
regressive, and proportional taxes. c.
Explain how an increase in sales tax
affects different income groups.
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Types of Income Taxes1. Progressive taxthe
tax rate increases as income increases, meaning
the wealthy pay a higher percentage of their
earnings than people less well off (ex. U.S.
personal income tax) tends to reduce
inequalities in income. 2. Regressive tax
people with lower income tend to pay a larger
proportion, or percentage of their income that
people with higher income the tax rate decreases
as income increases (ex. sales tax). Most sales
taxes are imposed by state governments.3.
Proportional taxknown as a flat tax, does not
change with respect to changes in income (does
not redistribute income from one social class to
another).
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Sales Tax and Inflation

• Sales Tax
• A regressive tax because it affects the lower
  income people with regard to a great proportion
  of their income going to pay taxes.
• To protect this, necessities (such as food,
  clothing, and medicines) are put in place to be
  often sold tax free.
• The alternative is excise tax or sin tax on
  items such as alcohol and tobacco.

• Inflation
• Simply stated, the rising in prices. When
  inflation is high the purchasing power of the
  dollar declines.
• The individuals with lower income suffer from
  this due necessities of basic living cost.
• Some union workers have contracts with their
  employers to receive cost-of-living adjustments
  to counter the increasing in prices.

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Questions for
Review1. The BEST example of a regressive tax
in the United States is A. Personal income
taxes. C. Luxury taxes. B. Sales taxes. D.
Property taxes.2. Susan earns 70,000 annually
and pays a tax of 8,500. John earns 30,000
during the same period and pays taxes of 2,500.
The tax they both paid was a A. Proportional
tax. C. Progressive tax. B. Regressive
tax. D. Marginal tax. 3. How does high
inflation cost affect consumer spending and
saving? A. Consumers save more and spend
less. B. Consumers spend more and save
less. C. Consumers decrease both spending and
savings. D. It has no effect
on spending or saving.



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SSEPF4 The student will evaluate the costs and
benefits of using credit.  a. List factors that
affect credit worthiness.  b. Compare interest
rates on loans and credit cards from
different institutions.  c. Explain the
difference between simple and compound
interest rates.
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Credit Cards Buy Now, Pay Later

• Credit Who needs it????
• The ability to obtain goods and services now,
  based on an agreement to pay for them later.
• Includes bank loans to pay major expenses such as
  cars, houses, and higher education.
• It can lead to spiraling debt that can destroy an
  individuals or familys financial health now and
  in the future.

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Are you CREDIT WORTHY???

• An important part of a being successful adult in
  the U.S. is learning how to build a good credit
  history, how to obtain credit at the lowest
  possible cost, or interest rate, and how to use
  credit wisely.
• Factors that affect your credit worthiness are
• Where you work, how much you earn, how much money
  you have saved.
• What is your current expenses?
• How many people depend on your basic needs
  (dependents)?
• How much you owe in debts?
• What property you own (collateral)?

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Interest Rate (the cost of using credit)Fixed or
Variable

• Fixed
• A fixed rate never changes regardless of your
  living circumstances.
• Mostly on car or house loans.
• Commercial banks/ Credit Unions

• Variable
• A variable rate can go up at any time regardless
  of your living expensesfollows your payment
  history, stock market, etc.
• Mostly on credit cards, title pawns, etc. usually
  has an annual fee.

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Difference BetweenInterest Charged and
Interest Earned

• Why? profit for bank as a business
• Interest Rate the percentage amount of payment
  by borrowers to the lender
• Simple Interest determined annually with the
  original loan amount
• Compound Interest future interest is determined
  with the existing amount owed
• Compound rate is greater than simple rate

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Calculating Interest
Example 1. Simple Interest The formula for
simple interest is I P x r x t, where I is
interest, P is the principal, r is rate of
interest, and t is time period. Simple
interest for one year on 100 at 3 percent is
100 x .03 x 1 3 Simple interest for second
year on 100 at 3 percent is 100 x .03 x 1 3
Total interest for two years 6. The
account, therefore, is worth 106 after two years
of simple interest at 3 percent per annum.
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Calculating Interest
Example 2. Compound Interest The formula for
compound interest is A P(1 r)n, where A is
the money accumulated after n is years including
interest, P is the principal, r is the annual
rate of interest, and n is the number of years.
The step-by-step explanation for 100 for two
years at 3 percent compound interest is
Interest for year one 100 x .03 x 1 3.00
amount at end of year one 100 3 103.00
Interest for year two 103 x .03 x 1 3.09
The total amount at end of year two 103 3.09
106.09.
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Questions for
Review1. George deposits 100,000 in Kennesaw
Mountain Bank. A year later, he borrows 100,000
from Kennesaw Mountain Bank to finance his sons
college education. Which of the following
statements is true? A. George did not have to
prove he had collateral and
credit worthy. B. George is being paid compound
interest by the bank. C. George is being
charged a higher interest rate and
receiving high interest on his deposit. D.
George is earning more interested that hes
charged. Which of the following people would
benefit the most from compound interest? A.
Someone applying for a home loan. B. Someone
who needs a car loan. C. Someone investing
their money in an mutual fund. D. A borrower
with a high credit score.


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SSEPF5 The student will describe how insurance
and other risk-management strategies protect
against financial loss. a. List various types of
insurance such as automobile, health,
life, disability, and property. b. Explain
the costs and benefits associated with
different types of insurance.
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InsuranceAn investment in your possessions

• The purpose of insurance is to provide financial
  protection against different kinds of risks one
  faces in life.
• It involves transferring risks to others.
• An individual or household has something of great
  value and wants to make sure that, if it is lost
  or damaged, it will be financially covered.
• The cost/benefit associated with insurance is it
  covers what you might lose. The money you pay to
  the insurance company (usually monthly) is
  assurance that if your possessions are lost
  (either in full or in part) are covered and can
  be replaced.

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How does Insurance work?

• When you buy insurance, you receive an insurance
  policya written agreement between you and the
  insurance company.
• The policy explains the kinds of losses the
  company will cover and how much you pay for the
  protection (coverage limitsmaximum covered and
  deductible amountsthe amount you must pay before
  the company will pay).
• NOTE The higher your deductible the lower your
  premium.
• Premium-amount of money you pay per month to be
  insured.
• Claim-requested payment/filing on what you have
  loss from the company.

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Types of Insurances1. AutomobileMost
states require all drivers to have at least
minimum coverage on their vehicle. In order to
protect you and/or the other driver. Liability
coverageto pay for personal injuries or property
damage. Collision coverageto pay
for any damage to your own
car. Uninsured motoristto pay for your damages
or injuries if the other
driver if uninsured. 2. Healthdesigned to pay
for medical costs, expenses, etc. It is very
expensive. One can chose different coverage
limits. Usually employers offer to their
employees.3. Disabilityset up to help provide
people with an income in case they become injured
or unable to work at a job. It can provide up to
60 of a persons income until they can return to
work.
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4. Lifedesigned to provide people with money in
case a family member unexpectedly passes
away. A. Term Lifesimply pays the money of the
policy to a beneficiary (family
member money goes to). It is cheaper
and pays a higher death benefit but the
policy is for a limited term. NO
CASH VALUE B. Whole Lifemore expensive and less
of a benefit because it
builds cash value like an investment. It
provides coverage for your whole life
and the premium never increases.
CASH VALUE YOU CAN BORROW5.
Property/Homeownerscoverage on house or other
property in the event it is damaged or destroyed,
often it will include liability (for personal
injuries). NOTE Business have comprehensive
liability which covers a much wider range.
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Questions for
Review1. If you switched to an insurance policy
with a higher deductible, you could probably
expect, A. A higher premium. C. A lower
premium. B. A higher coverage limit D. No
coverage limit.2. Of the following people,
which one would probably pay the highest rate for
car insurance? A. A 50-year old single man
C. An 18-year old boy B. A 30-year
old married woman D. An 30-year old woman3.
Which kind of insurance pays a monthly income to
people who are unable to work for an extended
period? A. Health insurance C. Life
insurance B. Disability insurance D.
Homeowners insurance4. The cost you pay for
insurance coverage is called your A. Policy C.
Deductible B. Premium D. Coverage limit




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SSEPF6 The student will describe how the
earnings of workers are determined in the
marketplace.  a. Identify skills that are
required to be successful in the workplace.
 b. Explain the significance of investment
in education, training, and skill
development.    
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Workers Earnings

• Workers Earningshow much employers pay workers
  for their labor. Their earnings determine how
  much money laborers have to spend and save/invest
  for the future.
• The amount of money one makes in the labor market
  is due to the skills, training, education, etc.
  This is called the earning potential.
• People who are financially successful tend to
  earn more money for their labor because they
  possess special skills and/or training.
• Usually, the highest paid workers are college
  educated, have good communication skills, show
  respect for their peers and authority figures,
  conduct themselves professionally, and have
  actively sought to improve their skills with
  additional training.

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1. Sophie is the major income earner for her
family. For this reason, Sophie is concerned
that her family would struggle financially if she
got hurt and could not work, or even worse, died
and was no longer around. Sophie asks you what
steps she could take to ease some of her
concerns. The BEST answer you could give her is
to tell her to A. Invest in liability
insurance. B. Invest in promising stocks. C.
Invest in life and disability insurance. D.
Invest in health and life insurance. 2. Kelly
works for a large law firm in San Diego. Her
boss informs her that a promotion will be
available in the next 4 months. Kelly wants the
job, so she works as hard as she can to impress
her boss and bring in profits for the company.
Kelly is motivated by a A. Negative
incentive. C. Rational decision. B. Positive
incentive. D. List of alternatives.
Ans C
Ans B
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3. Which of the following people will LIKELY
find the highest paying job in the workforce? A.
Someone with a high school diploma. B. Someone
with a college degree and additional
training. C. Someone with mediocre
communications skills. D. Someone with a
history of bouncing from job to job.4. Arthur
gets high 2006 tax returns back from his
accountant to discover that he owes fewer taxes
this year than last year. As a result, he gets a
refund check for 3000. What impact will this
have on Arthur? A. He will be more likely to
spend money on consumer goods
and services. B. He will be less likely to
spend money on consumer goods
and services. C. He will not have to depend as
heavily on subsidies as he
did the previous year. D. He will pay fewer
tariffs.
Ans B
Ans A
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5. Annabelle is tired of making less than
40,000 a year. Which of the following is the
BEST way for Annabelle to raise her earning
potential? A. Support subsidies that will
protect US jobs. B. Save more of her
income. C. Invest in capital. D. Acquire more
education and training.6. In 2007, the United
States experienced record numbers of home
foreclosures. In other words, because many
people had signed home loans that they ultimately
could not afford to pay back, record number lost
their homes to lenders. Lenders were able to
take these homes because they home were A.
Illegally bought. C. Collateral. B.
Uninsured. D. Part of a housing surplus
Ans D
Ans C
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Personal Finance Activity1.
PF/EQ1 Using the rational decision making model
explain in 1 paragraph how you
completed your Standard of
Living budget based on your
monthly income. Rank choices on
budget to pay, list costs and benefits,
benefits forgone, etc.2.
PF/EQ2 Based on Visual 1 (Economic Cartoon 10
packet). Give a
biographical sketch of your
educational level/life and describe your
ambitions to progress
economically. You can only
progress one level.Your biographical sketch
should be like an interview for a better job
DUE Wednesday, August 28th