Download
1 / 49
490 likes | 493 Views
Chapter 12. The Importance of Making Sound Economic Decisions. Chapter Outline. Slowly Drowning in a Sea of Debt Making Good Credit, Borrowing, and Installment-Buying Decisions Financial Problems and Marital Strain The Seductive Society: Credit and Advertising
E N D
Chapter 12 The Importance of Making Sound Economic Decisions
Chapter Outline • Slowly Drowning in a Sea of Debt • Making Good Credit, Borrowing, and Installment-Buying Decisions • Financial Problems and Marital Strain • The Seductive Society: Credit and Advertising • Effective Money Management
Chapter Outline • The Economy and Black, Hispanic, Asian American, and Single-Parent Families • Inflation and Recession • Deciding What Insurance Is Needed • Deciding to Buy a Home • The Decision to Invest
How Much Do Americans Owe? • Americans owed approximately $1.98 trillion, or approximately $18,700 per household, for outstanding consumer credit in 2003. • Approximately $447 billion of the above was for the purchase of automobiles.
How Much Do Americans Owe? • Total credit card debt in 2001 was $735 billion, projected to rise to $985 billion by 2005. • Americans owed approximately $5.385 trillion in home mortgage debt including home-equity lines of credit.
The Road to Insolvency • You are spending more than you make. Bills are piling up, and creditors are sending second and third notices. • You have no regular savings plan. • You are making no plans for retirement (even if you are just starting to work, such plans are important).
The Road to Insolvency • You have many credit cards, all of which run a considerable balance. • All your money is tied up in your home or business, and you cannot easily come up with cash. • You can never say no to your wants and desires. • You think your financial problems will somehow magically disappear.
Credit Terms • Discount interest is usually charged for consumer debt. • This kind of interest is charged on the total amount of the loan for the entire time period. • Simple interest is charged only on the outstanding balance of a loan.
Credit Terms • Investment debt, or real-property debt, is lower-priced money, because it is used for tangible assets such as real estate or businesses, where value is more permanent.
Galbraith Theory of Consumer Demand • The urgency of wants does not diminish appreciably as more of them are satisfied. • Wants originate in the personality of the consumer, and are capable of indefinite expansion.
Family Monetary Decisions • The husband can make all the decisions. • The wife can make all the decisions. • They can make all decisions jointly.
Family Monetary Decisions • One spouse can control the income, but give the other a household allowance. • Each spouse can have separate funds and share agreed-on financial obligations. • The spouses can have a joint bank account on which each can draw, as necessary.
Steps in Budget Making • Analyze past spending by keeping records for a month or two. • Determine fixed expenses such as rent and any other contractual payments that must be made. • Determine flexible expenses, such as food and clothing. • Balance your fixed plus flexible expenditures with your available income.
Avoid Common Consumer Traps • Bait and switch • Low ball • High ball • Telemarketing • Contest winner • Free goods • Off-brand items
Avoid Common Consumer Traps • Hard sell • Home repairs • Magazines • Credit repair • Travel • Advance-fee loans
Inflation and Buying Power • Nominal cost: Absolute price for something • Inflation simply indicates that nominal prices have risen. • If income rises at the same rate as prices, buying power remains the same. • If income increases 10% in a year in which inflation is only 5%, real income (buying power) has increased 5%.
Minimizing the Effects of Inflation • Minimize your cash holdings. • Select high-yield savings accounts whenever possible. • Include a cost-of-living clause in employment contracts. • Try not to let inflation cause panic buying.
Minimizing the Effects of Inflation • Learn about investments. Money earns money. • Understand that inflation tends to favor the borrower. • Try to buy wisely. • Have more members of the family work. • Conserve and save to accumulate investment funds.
Riding out Recessions • Maintain enough liquidity to cover emergencies. • Beware of investments with a large balloon payment due in the near future. • If a slowing of inflation and economic downturn is foreseen, maintain a larger percentage of assets in cash, so good buys can be made. • Make sure your financial position is flexible enough for you to ride out short-term economic downturns.
Types of Insurance • Medical • Homeowners • Auto • Life
Hazards • Premature death. This risk is about 30% before age 65. It is especially important for married persons with young children. • Long-term disability. This can be worse than death itself because the victim usually faces large medical costs, but is unable to produce income.
Types of Life Insurance • Policy term insurance: A given amount of insurance bought for a set period of years • Cash value, or whole-life insurance: This insurance has two parts; first, a death benefit, and second, a savings part that acts as an investment.
Home-Buying Considerations • Affordability • Location • Size • Livability • Status
Investment Planning Steps • Use the credit system wisely to avoid economic entrapment. • Avoid buying consumer goods on credit. • Avoid running balances on credit card accounts. • Pay bills promptly to maintain a good credit rating.
Investment Planning Steps • Develop the habit of saving regularly, even if at first you can only save a small amount. • Learn about the many types of investments available to individuals in the United States.
1. This kind of investment is considered lower-priced money because it is used for assets where the value is more permanent • Discount interest • Investment debt • Insolvency • Savings Plan
Answer: b • Investment debt, or real-property debt, is lower-priced money, because it is used for assets where value is more permanent.
2. The absolute price of something is called its • Insurance cost • Investment cost • Cost after Inflation • Nominal cost
Answer: d • The absolute price of something is called its nominal cost.
3. Which of the following is not a consideration when buying a home, according to the text? • Affordability • Location • Size • Aesthetics
Answer: d • According to the text, affordability, location and size are all factors to consider when buying a home, but aesthetics is not on the list.
