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Chapter 6. Consumers, Savers, and Investors. Consumers. Anyone who buys goods and services for personal use. Sources of Income. Income From Work Salaries and Wages Income from Wealth Rent, interest on savings, selling assets. Wealth through Investing And Saving.

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chapter 6

Chapter 6

Consumers, Savers, and Investors

consumers
Consumers
  • Anyone who buys goods and services for personal use.
sources of income
Sources of Income
  • Income From Work
    • Salaries and Wages
  • Income from Wealth
    • Rent, interest on savings, selling assets
wealth through investing and saving
Wealth through Investing And Saving
  • According to the Economic Report of the President, US consumers invest less than 1% of their income.
  • recommended that people invest as much as 10% of their income.
how much people invest and save
How Much People Invest and Save
  • How much people invest or save depends on the following:
    • Their income level.
    • Expectations
    • Current interest rates
    • Tax Laws
a budget leads to saving and investing
ABudget Leads to Saving and Investing
  • budget = personal financial plan.
  • It is balanced when income and expenditures are equal.
a budget leads to saving and investing1
A Budget Leads to Saving and Investing
  • A deficit occurs when expenditures exceed income.
  • A surplus exists when income exceeds expenditures.
the process of budgeting
The Process of Budgeting
  • 3 steps:
    • 1. Setting financial goals
    • 2. Estimating Income
    • 3. Planning Expenditures
saving and investing
Saving and Investing
  • When deciding where to invest your money, there are three factors you should always consider…
1 safety
#1 = Safety

Banks = safe.

Under the mattress = not safe

Stock Market = less safe

safety
Safety
  • Stocks, for example, have market riskassociated with them.
  • The value of stock can rise and fall dramatically, especially in the short term.
2 rate of return
#2 = Rate of Return
  • Interest is your reward for giving up money and allowing a financial institution to use it.
  • Compound interest—computed on the sum of savings you deposit (principal) plus the accumulated interest measured at regular intervals.
3 liquidity
#3 = Liquidity
  • A measurement of how quickly you can convert your savings to cash.
  • Some investments are more liquid than others.
liquidity
Liquidity
  • Liquid assets—Checking account, savings account, homes, cars.
  • Non-liquid assets—401k investment plans, mutual funds, IRA’s (Individual Retirement Accounts)
savings deposits
Savings Deposits
  • Very safe investments with low rates of return.
  • Checking Accounts—Low interest and high liquidity
  • Certificates of Deposit (CD’s)—Higher interest, less liquid
money market deposit accounts
Money Market Deposit Accounts
  • Insured deposits that allow you to write a limited amount of checks.
  • Offer much liquidity, but lower interest rates than a CD.
pension and retirement funds
Pension and Retirement Funds
  • Funds that are invested in stocks, mutual funds, etc.
  • Examples: IRA, 401(k), 403(b), Employee Stock Ownership Plans (ESOP).
  • Usually tax deferred —meaning you don’t pay taxes on the interest you earn.
corporate stocks
Corporate Stocks
  • One share of stock=one part ownership in a company.
  • Profits are sometimes given to the shareholder in the form of a dividend.
  • As company’s grow, the value of stocks also grow.
corporate bonds
Corporate Bonds
  • IOU’s issued by a company to a bondholder.
  • Bonds can rise or fall depending on the success of a company.
mutual funds
Mutual Funds
  • Special investment companies where people pool their money to make a variety of investments.
  • A mutual fund company may own stock in over 300 firms.
us savings bonds
US Savings Bonds
  • When the US treasury borrows money from you.
  • Sold at a discount (usually half the face value) and then can be redeemed when they mature.
life insurance
Life Insurance
  • People pay a monthly premium to ensure their family is cared for in the event of an emergency.
other investments
Other Investments
  • Appreciable Assets—Buying something that you think will be worth more in the future.
  • Foreign exchange—Other country’s currency.
  • Commodities—Precious metals and gems
consumer credit
Consumer Credit
  • Allows you to enjoy goods and services before you pay for them fully.
  • When you borrow money, you must pay the principalplus interest.
consumer credit1
Consumer Credit
  • Principal—The amount that is borrowed.
  • Interest—The cost of borrowing money, usually defined by APR (Annual Percentage Rate)
kinds of credit available
Kinds of Credit Available
  • Home Mortgages
  • Auto and Consumer Loans
  • Store Charge Accounts
  • Credit Cards
obtaining and using credit
Obtaining And Using Credit
  • Credit worthiness is judged by the following characteristics:
    • Character (record of repayment)
    • Capacity to repay debts
    • Capital—what you own
why establish credit
Why Establish Credit?
  • Must prove that you can handle financial obligations.
proving credit worthiness
Proving Credit Worthiness
  • Open and be responsible with a checking and savings account.
  • School Loans.
  • Open a charge account/credit card and pay the entire balance off every month!
life insurance1
Life Insurance
  • Ways to use life insurance policies:
    • Create an estate
    • Create a college fund
    • Fund a business transfer
    • Pay off a home mortgage
    • Guarantee loans
other kinds of insurance
Other Kinds of Insurance
  • Auto
  • Homeowners
  • Liability
  • Health
  • Disability