Your Role As a ConsumerTo Spend or Not to Spend!

Consumption, Income, & Decision Making

• Disposable Income: money left after paying all taxes– Usually spent on Basic Necessities– Top 3: 1. Housing, 2. Food, 3. Transportation

Consumption, Income, & Decision Making

• Discretionary Income: money left after paying for all necessities; $$$ saved or spent on luxuries– Examples: Big screen TV, movie, Ferrari!!!– No matter what, there is always a COST!!!– “There is no such thing as a free lunch”– Opportunity Cost: the value of your highest

alternative choice that you did not make» Ex. Working vs. Studying

Consumption, Income, & Decision Making

• How Education Affects Income

Males Femalesi. Males Females Not a high school graduate = $18, 952 $9,995 High School graduate= $27,669 $15,120 Bachelor’s degree = $49,180 $30,489 Professional Degree = $81, 606 $45,999

Buying Principles or Strategies

• 3 Buying Principles:I. Gather InformationII. Evaluate advertising

1. Competitive Advertising: emotional appeal2. Informative Advertising: gives basic info. about

product, e.g. drug commercials3. Bait & Switch: advertise item at a low price to

get you into the store; try to sell higher priced item instead – Illegal

Buying Principles or Strategies

• 3 Buying PrinciplesIII. Comparison Shopping: get info. on the types

and prices of products available from different stores & companies, e.g. Lofinos vs. Krogers

1. Brand Name vs. Generic Brand• Aunt Jemima Syrup vs. Kroger Brand

2. Shopping Exclusively at 1 store – why???1. Convenience (right up the street)2. Like the service – rewards program3. Takes too much time

Americans & Credit

• What is Credit?• Receive money to buy goods & services today

with promise to pay for them in the future• Principle: original amount borrowed• Interest: amount added for the privilege of

borrowing

Americans & Credit

• Installment Debt: loan paid back in equal payments over time (including taxes & interest)– Durable Goods: items lasting longer than 3 years

• Ex. Cars, washing machines, refrigerators

– Longer payback periods have lower Payments but higher total Interest

Americans & Credit

• Mortgage: most popular form of installment debt owed on property

• *Typically paid monthly in equal payments over time

• When might it be better to have a longer/shorter payback period?– Longer: limited finances (right out of college)– Shorter: More income, make larger payments &

pay less total interest

Sources of Loans & Credit

• Financial Institutions (Banks)i. Commercial Banks: accept deposits, loan

money, & transfer funds among banksii. Savings & Loan Associations: accept deposits

& loan money for mortgages onlyiii. Savings Banks: set up to serve small saversiv. Credit Unions: set up by employees of

companies; provide savings accounts & low-interest loans only to its members

Sources of Loans & Credit

• Types of Financial Institutionsv. Finance Companies:

– Serve as debt collectors for stores; usually work with Repo Men

– Loan money typically with high interest rates

Sources of Loans & Credit

• Charge Accountsi. Enable a consumer to buy now & pay later just

at a particular companyii. Usually have a Credit Limit: maximum amount

person can buy with the promise to repay in the future ($500-$1,000)

iii. Charge no interest if bill is paid in full at the end of the month

Sources of Loans & Credit

• Credit Cardsi. Enable a consumer to buy now & pay later at

many stores/companiesii. Have high interest rates iii. Finance Charge: entire cost of borrowing

including interest & fees (inactivity fees)iv. Annual Percentage Rate: how much interest you

will pay in 1 year (expressed as a percent)

Sources of Loans & Credit

• Debit Card: transfer funds directly from a person’s bank account to the store

Applying for Credit

• Creditworthinessi. Fill out an applicationii. A credit bureau will perform a credit check:

i. Investigation of a person’s Income, Debt, personal life, past history of borrowing & repaying

i. Credit Rating: how risky it is for a bank to lend you money

i. Considers income, debt, character, & Collateral: something of value that the bank takes in case the loan is not repaid

Applying for Credit

ii. Secured Loan: loan with Collateral – something of value that the bank takes in case of non-payment

iii. Unsecured Loan: loan without collateral– Usually need a Cosigner: person responsible for

paying the loan in the event of non-payment

• ***In most cases it is better to have bad credit than no credit at all!!!