Chapter 20

Objectives:

7.02, 7.03, 8.07, 8.08,

Managing Your Money

• Consumer: someone who buys a product or service– Have rights and responsibilities

• 2 types of income:– Disposable Income: money that remains after

all taxes on it have been paid– Discretionary Income: the money remaining

after paying for necessities.

Managing Your Money

• Caveat Emptor – “let the buyer beware”

• Consumerism: movement to educate buyers about purchases and to demand better/safer products from manufacturers– Congress has passed laws like Fair

Packaging and Labeling Act– Better Business Bureau- private group that

seeks to protect individual consumers

Managing Your Money

• 5 Consumer Rights (1960’s)– Right to a safe product– Right to be informed (labels, ads, etc.)– Right to choose– Right to be heard– Right to redress (obtain payment from

manufacturer if a product causes physical/financial damage)

Managing Your Money• Consumer Responsibilities:

– Gathering info/ recognizing quality– Use advertising carefully (to learn about products

and the best place to buy them)– Deciding where to buy a product

• Comparison Shopping: comparing types/prices of products at different stores

– Balancing cost of buying used items, items by mail, or other alternative method

– Filing complaints/Reporting Problems• Warranty: the promise of a manufacturer or a seller to

repair or replace a faulty product within a certain time period

Planning/Budgeting

• Personal budget: – A careful record of all the money you earn and

spend– Includes

• Income: money you earn• Expenses: the money you spend (or save)• Balance: amount of money left over after expenses

are subtracted– Surplus- more income than expenses– Deficit- more expenses than income (negative balance)

Planning/Budgeting

• Credit: borrowed money to pay for a good or a service

• Credit terms:– Lender: person who loans money– Borrower: receives borrowed money– Interest: the cost for use of the money– Annual percentage rate (APR): annual cost of

credit expressed as a percentage of amount borrowed.

Planning/Budgeting

– Credit rating: an evaluation of the likelihood that a borrower will be unable to pay back a loan (default)

• Based on job, previous credit experiences, financial situation, etc.

– Collateral: property (i.e. a house or a car) that a borrower pledges as security for a loan.

• If the borrower can’t repay the loan, the lender can seize the collateral.

Planning/Budgeting

• Sources of Credit:– Banks– Credit Unions– Finance Companies– Retail stores

• Credit Cards– Allows consumer to charge for goods/services

(up to a preset monthly limit)– Fees for late payments, interest charges, etc.

Planning/Budgeting

• Anyone over 18 can get a credit card

• Benefit:– Not having to wait to save the full value– Making monthly payments can teach discipline

• Drawbacks:– Many people buy more on credit than they can

afford– Bankruptcy: the inability to pay debts

• Remains on credit rating for 7-10 years

Saving

• Should be looked at as a regular expenditure.

• Reasons for saving:– To put towards an expensive item– For emergencies– For luxuries (like vacations)

• Saving is good for economy:– Money available for others to invest/spend– Money businesses can borrow

Saving

• Saving money involves a trade-off– More money for tomorrow, or less for today

• Questions to ask before saving:– How much do you spend on a daily basis?– How fast will your savings grow?– How much income do you expect in the future?

Types of Savings

• Savings Accounts:– Can be opened at banks or credit unions– Pay a fairly low interest rate– Interest is added to the principal:

• Initial amount deposited

– Funds are readily available (can withdraw them)– Often require a minimum balance

Types of Savings

• Checking Accounts:– No interest– Designed for constant transfer of money

• Paying bills, writing checks, etc.

– Sometimes requires a minimum balance– Debit cards– Don’t spend more than you have, or you could

• “bounce” a check• overdraft

Types of Savings

• Money Market Account:– Savings account with a high minimum balance– Can withdraw money any time, or write checks– Has a higher interest rate than savings account

• Certificate of Deposit– Deposit money for a certain amount of time (6

months -5 years)– Guaranteed interest rate, higher than savings– Cannot withdraw until the time period is up

• Withdrawing early results in a financial ‘penalty’

Investments

• Stocks– Ownership share of a company– Value fluctuates with success of the business– Some companies pay dividends:

• payment to shareholders of a portion of companies earnings at regular intervals

– Higher return (profit), but higher risk

Investments

• Bonds– Lending money to a company or gov’t– Risk with company bonds– Gov’t bonds are considered safest investment

• Pay half of the face value; after a certain time period it matures to face value

Investments

• Mutual Funds– Pools of money from many people– Money invested in expert’s choices of stocks

and bonds– Less risky because money is spread out over

different stocks– Popular mutual funds (and stocks) are tracked

by a gov’t regulated index• Like the Dow Jones Industrial Average

Achieving Financial Goals

• Constantly review your spending habits

• Avoid impulse buying:– Buying based on feeling without considering the

consequences– Signaled by excessive buying, constantly

borrowing money, quickly lose interest in things you have bought, etc.

• Choosing between long-term and short term goals (spending now or later)