Presentation Transcript

1. Unit 5 Personal Finance

   Spending, Saving and Investment Monetary and Fiscal Policy Using Credit Types of Insurance
2. Spending, Saving and Investment Rational Decisions and Financial Planning Financial Institutions and Savings High returns in exchange for higher risk
3. Rational Decisions and Financial Planning Cost -benefit analysis - weighing marginal benefits one receives for each additional unit of money spent. Delayed gratification - delaying a small benefit now for a greater benefit later. Our economy bombards us with information as to how to satisfy our wants NOW. People need to decide how much of their income to spend now, how much to set aside for savings to achieve short-term goals, and how much to use for investments to achieve long-term goals.
4. Rational Decisions and Financial Planning Savings - money deposits placed securely in a ban or financial institution, for later use. Interest - Money banks pay for the use of your savings. Investments - money paid into a business with the expectation, (NOT GUARENTEE) of future rewards.
5. Rational Decisions and Financial Planning Financial plan - a set of goals, a process of achieving those goals, putting your plan into action and setting priorities and making choices
6. Financial Institutions for Savings Banks Savings and loan Credit unions
7. Financial Institutions for Savings Banks - a corporation that stores deposits and makes loans to earn a profit. Banks pay simple interest on savings deposits Certificate of Deposit (CD) - a deposit you promise to leave in the bank for a specific time - in exchange for a higher interest rate. The interest a bank pays is always less than it charges its customers, that is how a bank earns money.
8. Financial Institutions for Savings Savings and Loan – gets most of its deposits from consumers, rather than business, and lends most of its money to home buyers. With banks the have reserve requirements – certain amount of money needed to be kept on hand All deposits are insured up to $100,000 by the Federal Deposit Insurance Company (FDIC)
9. Financial Institutions for Savings Credit union – a not for profit financial institution that is owned and controlled by its members – usually people who work in the same company Credit union deposits earn interest, and depositors are eligible to borrow money from the credit Union sometimes at lower rates than banks can charge.
10. Higher Risks = Higher Returns Hierarchy of Risk Savings Account Mutual Fund Individual Stock Least Risky Most Risky Three important kinds of investments Bonds Stocks Mutual Funds
11. Investments Bonds – Loans to corporations Interest paid on the credit worthiness of the corporation Have a maturity date – when loan comes due Can pay interest all at once or over periods of time Only slightly more risky than savings accounts because they are backed by company assets
12. Investments Stocks – individual ownership shares in a corporation. Pay the highest rewards because they are the riskiest. All monies paid on stocks are called dividends – portions of the corporations profits. Capital Gains – money earned from the sale of assets (stock) when they are sold for a profit.
13. Investments Mutual Funds – a pool of money from many investors and uses a variety of stocks and bonds called a portfolio. Mutual funds pool together low risk low return stocks and bonds with high risk high return stocks and bonds so investors can spread their risk and maximize their earning potential.
14. Why do companies sell stocks or bonds? Expanding their business For new capital resources Tools, Buildings, etc. For new labor Hiring more people to work Stocks – selling ownership of a company Bonds – IOU from a company
15. Two Types of Stock Common Stock (CS) First stock offered by a company Many offered No benefits (like dividend) Dividend – money paid to stock holders either monthly or quarterly Preferred Stock (PS) Has benefits (like dividends) Fewer shares
16. Stock Symbols Rather than put an entire company’s entire name, Exchanges use symbols Examples: Microsoft – MSFT General Electric – GE Hewlett-Packard – HWP Home Depot – HD Harley Davidson – HOG
17. Parent Companies Many places that we use are owned by parent companies Examples: Cadillac – GM Cheerios – General Mills Crest Tooth Paste – Proctor-Gamble Duracell – Gillette Play Station – Sony CNBC – General Electric
18. Gathering the Information The Stock Prices Its like a Price Tag The price is for one (1) share of the stock Initial Public Offering (IPO) – the first time that a stock is ever sold. (primary market) When you buy a share of a stock, you are buying it from another person who is selling the same stock. (secondary market)
19. The Dow Jones Industrial AverageAKA “The Dow” Originally, Charles Dow averaged the top 12 stocks prices This has expanded to 30 companies today Various industries Here they are, how many do you recognize? Pfizer Inc. Procter & Gamble Co. SBC Communications Inc. United Technologies Corp. Verizon Communications Wal-Mart Stores Inc. Walt Disney Co. Minnesota Mining & Manufacturing General Motors Corp. Home Depot Inc. Alcoa Inc. Altria Group American Express Co.  American Int'l Group Boeing Co. Caterpillar Inc. Citigroup Inc. Coca-Cola Co. DuPont Co. Exxon Mobil Corp. General Electric Co. Honeywell International Inc. Hewlett-Packard Co. International Business Machines Intel Corp. J.P.Morgan Chase Johnson & Johnson McDonald's Corp. Merck & Co. Microsoft Corp.
20. Inflation How does inflation effect groups in society?
21. How Inflation Effects Groups in Society. Borrowers (spenders) Willing to borrow more because $ repaid are not equal to $ borrowed Inflation causes interest rates to go ______? Expect to pay higher interest rates during high inflationary times.
22. How Inflation Effects Groups in Society. Savers Hurt in high inflationary times $ invested does not always keep up with inflation rates Invested money has less purchasing power than invested money
23. How Inflation Effects Groups in Society. Fixed Income People Hurt the most because they can never catch up to inflation Maintain same income levels even though they face continuing rising prices Usually already on the lower side of the economic scales – retired/disabled people, people receiving social security
24. How Inflation Effects Groups in Society. COLA (Cost of Living Adjustment) receivers Hurt the least because salary and benefits are tied to the inflation (Cost of Living) rate Usually a union benefit Not available as much today as in the past Responsible for increased prices or decrease in employment because employers pass on losses to consumers
25. Using Credit Credit – the ability to obtain goods and service now, based on an agreement to pay for them later. Positives – convenience, allow people to enjoy goods and services before they pay for them Negatives – increases total costs of things, can lead to spiraling debt that can destroy an individual or family’s financial health and future
26. Becoming Creditworthy Creditworthy – the ability and likelihood to pay back on a loan. Collateral – something a bank can take away if you fail to repay on a loan. Credit history – how well you have managed your bills and credit in the past. Show how reliable a person is. Shows every bill you have paid and weather if it was paid on time or not as well as how much that person has received in loans. Based on this information you are given a credit score – the higher the score the more creditworthiness you have.
27. Becoming Creditworthy Credit history follows you your whole life. It determines: If I can get a loan What interest I have to pay on my loan What insurance premiums I have to pay Can I get that job or not
28. Becoming Creditworthy How do I improve my credit scores Pay all bills on time Establish a steady work history Open a checking account and do not bounce any Buy an item on an Installment Plan – pay a fixed amount over a specified number of months – and make all payments on time
29. Making wise credit decisions Understand you fixed expenses (expenses that do not change on a monthly basis) – rent utilities, transportation. Understand your variable expenses (expenses that change on a monthly basis) how much you usually spend on food entertainment clothes, etc. Deduct these expenses from your income and see if you have enough left over every month to make your credit payment.
30. Interest Rates Interest – the cost of using credit. Interest Rate – a percentage of the total amount owed. To compare the cost of different credit options, you need to know the following: Is the interest rate quoted as an annual rate (the amount of interest charged per year rather than per month) Is the interest rate fixed or variable? A fixed rate never changes, a variable rate can go up at any time Is the interest calculated as simple interest or compound interest.
31. Interest Rates Simple Interest – interest charged only on the original amount of the loan. Example Loan of $1,000 at 10% interest – One year $1,000 + (.10 x 1,000)=$1,000 +$100 =$1,100 If you take two years $1,000 + (.10 x 1,000) + (.10 x 1,000 )=$1,000 +$200 =$1,200
32. Interest Rates Compound Interest – Interest charged not only on the original amount you borrowed, but on the existing amount you owe. Take the same loan of $1,000 at 10% interest Year one $1,000 + (.10 x 1,000)=$1,000 +$100 =$1,100 Year Two $1,100 + (.10 x 1,100)=$1,100 +$110 =$1,210
33. Credit Card Interest Credit cards charge an annual fee – a fee for using the card Credit cards charge compound interest – compounded on a monthly basis Credit cards charge a finance charge – a fraction of the annual interest rate on your monthly balance.
34. Types of Insurance Insurance – a way to provide financial protection against different kinds of risks we take in life. Insurance Policy – a written agreement between a person and an insurance company. Coverage Limits – the maximum amount the company will pay you for your loss Deductible – amount of loss that you must pay yourself before the company will step in and pay the rest. Claim – a request for payment of your losses Premium – the amount of money you pay per month, quarter or year in order to guarantee you r coverage.
35. How Insurance Works Factors that control insurance premiums Type of insurance – health very expensive, auto not so expensive Amount of coverage – higher the coverage, the higher the premium Amount of deductable – higher the deductable, lower the premium Personal information – age, marital status, where you live, and credit history
36. Types of Insurance Car insurance – states require drivers to carry car insurance. two types Liability Insurance – pays for personal injuries and property damages caused by an accident Collision Insurance – pays for any damage to your own car
37. Types of Insurance Health Insurance – Insurance pays your medical bills when you are sick or injured. Cheapest way to receive health insurance is thorough your job, if you are lucky enough to find an employer who offers it.
38. Types of Insurance Property Insurance – Renters’ or owner’s insurance helps you replace your belongings in case they are stolen or destroyed. Homeowners insurance helps protect the value of your belongings as well as the value of your house.
39. Types of Insurance Disability of Insurance – if you suffer an illness or injury that keeps you from working for an extended period, this insurance will pay you 75% of your monthly income until you recover.
40. Types of Insurance Life Insurance – provides money to people you leave behind when you die. Beneficiary – the person who you want to receive the money 2 Types Term Insurance – cheaper insurance that pays a higher death benefit - you purchase the policy for a period of time. When the time is over you need to buy a new policy usually at a higher price Whole life Insurance – expensive insurance that pays a lower benefit Provides coverage for your whole life and the premiums never increase. Allows you to borrow or withdraw accumulated cash for emergencies or major expenses.