Chapter 6: Consumers, Savers, and Investors

Final value of all goods and services produced in the
country in ONE year
When YOU and other consumers spend your money
you are taking part in markets for goods and services
Before you can become a consumer, you must have
money or earn income.
Income from work:
Wage: earnings paid by the hour or unit of production
Salary: earning paid weekly, monthly, or on a yearly basis
How much you earn will depend on:
◦ Wage
◦ Salary
Nature of your job
Your skills
Your education
Your performance
Your entrepreneurial drive
Middle amount of earnings to be a full-range of
earnings for a particular job category
Bureau of Labor Statistics:
Wealth: a value of the things you own
◦ Adding together the value of all your tangible possessions,
bank accounts, savings, and investments gives you the TOTAL
amount of your WEALTH = NET WORTH
Net Worth: an individual’s wealth after debts and other
obligations have been subtracted
Rent: payment for the use of someone else’s property
Interest: income earned from allowing someone else to use
your financial capital
Shared accommodation (room in home or apt.)$350-$750V
Vacant 1 bedroom apartment$650-$1200
Vacant 2 bedroom apartment$875-$1350
Vacant 2 bedroom, 1 bath house$1000-$1700
Vacant 3 bedroom, 2 bath house$1200-$2200
Accumulated wealth: initial money and/or assets you earn and
the money and assets you add to your initial wealth
How do you accumulate wealth?
 A savings account is, of course, a place to stash your money at a bank.
However, it can be far more than just a place to keep your cash. Used as part
of an overall financial plan, savings accounts can provide:
 A feeling of financial stability from knowing your principal is safe and the
interest income is reliable
 A pain-free way of tracking and accomplishing your savings goals
 A financial budgeting tool to help you cover unexpected expenses or selfinsure purchases
Disposable income: money you take home after taxes
are paid
Amount people save DEPENDS on THEIR INCOME
◦ Future income
◦ Current rates of interest
◦ Taxation
Income levels increase: typical households save and
invest more
Income levels decrease: people save and invest less
Expectations: what people think, or hope, will happen
in the future
◦ If consumers are feeling comfortable it will boost the economy
by spending more
Higher interest rates tend to promote savings
Higher interest rates = incentive to save
Government tax rates can encourage or discourage
Higher taxes on income earned from savings and
investments DISCOURAGE people from saving
CUTTING taxes on savings and investments
encourages people to set money aside for saving and
Banks, insurance companies, stock brokerages
work hard to persuade you to save or invest
money…MORE and MORE of your money.
Businesses try to encourage more spending,
stores, movies, etc.
YOUR CHOICE: Buy or Save, Buy and Save
Need to know: money you receive (income) and how
much you plan to spend
BUDGET: Personal financial plans
◦ Budget: summarizes an individual’s planned income and
spending over a specific time period
3 steps in creating a budget:
◦ Setting financial goals
◦ Estimating income
◦ Planning expenditures
Setting financial goals:
◦ Income
◦ Expenditure goals
 Example: work extra to meet goal
 Setting an aggressive income goal
 Possibly college tuition, car payment
Start with current expenses and add other expenses you
know you will be incurring
◦ Example: heating and air conditioning
◦ Example: college tuition
Part-time jobs
Interest on current savings
◦ Per diem
 List
all the things you are likely to buy or
pay for over the time period of your
 What
you need to save to meet your
longer-term goals
Safety: desk drawer vs. banks/saving
◦ Government sponsored insurance provided by
the Federal Deposit Insurance Corporation
 FDIC = guarantees the safety of any savings
account up to $100,00
Rate of return: refers to the percentage of
interest or the amount of dividends paid on
savings or on an investment
◦ Dividends: products distributed to stockholders
Greater rate of return = riskier the investment
◦ WHY???
Let's say you invest $100 in stock, which is called your
capital. One year later, your investment yields $110. What
is the rate of return of your investment? We calculate it by
using the following formula:
((Return - Capital) / Capital) × 100% = Rate of Return
◦ (($110 - $100) / $100) × 100% = 10%
 Your rate of return is 10%.
There are two ways to measure the rate of return on an
◦ Average annual rate of return (also known as average annual
arithmetic return)
◦ Compound rate of return (also called average annual geometric
Stock: ownership in a corporation
Biggest concern:
 If the price of a company’s stock falls, you can lose much of the money
you used to buy the stock = MARKET RISK
Market risk: potential decrease in the value of a stock in a
stock market
Inflation: general RISE on OVERALL prices
◦ Purchasing power of your money decreases
One of the main reasons to put your savings into a bank
is to earn INTEREST
Interest: income earned by allowing a person or
institution, such as a bank, to use your money
Interest: % of the principal
Principal: initial amount of savings
ROR: Rate of return: % of the amount on deposit –
usually for a period of one year
◦ Deposit = $1000
◦ Account = paying 5% annually
◦ Earnings = $50 in interest over a year
 ROR = 5%
Compound interest: interest calculated on the sum of
savings plus the accumulated interest
◦ The interest earned is kept in savings
To receive CI:
◦ Leave both your initial savings
◦ The interest earned in your account
Liquidity: the ease with which any asset, such as
savings or stock, can be converted to cash
◦ The easier it is to withdraw your funds = the greater your
HOWEVER: liquidity usually has a cost
◦ The easier it is for you to withdraw your money from a
bank/savings institution – the lower interest rate your likely to
◦ WHY???
If a savings institution – which
makes loans from money
saved, CANNOT depend on
having that money on hand to
Savings deposits: banks, savings/loans firms, credit
◦ $100,000 savings: if the bank fails the government will pay the
amount you have in savings up to a max of $100,000
Passbook savings account: safety and liquidity
◦ Pay a relatively low interest rate
◦ Minimum balance requirement = low
◦ Liquidity = good, can withdraw money easily
CD: receipt issued by a bank to a person depositing
money in an account for a specified period of time at a
FIXED rate of interest.
◦ Require to leave their money on deposit for a specified
period of time, 6 months, 1 year
◦ CD’s pay a higher rate of interest
 Your best trade-off with a CD is that you give up liquidity
for a higher interest rate.
Money market deposit account: insured deposit or to
write a limited number of checks within a defined time
Use your money market funds to participate in the
“money market”
“Money market”: consists of short-term loans – usually
one year or less
◦ Banks makes its money on the interest it receives on the loans
ROI: the depositor (you) receives on these
accounts is higher than a Passbook Savings
Account and lower than a CD
Accounts are safe and offer liquidity
Investing in these types of funds provides tax
Tax deferment: payment of taxes on interest
after the interest is earned – often upon
Pension funds: various retirement accounts
that people receive through their employers
IRA: Individual Retirement Account:
◦ Type of retirement account that an individual can establish with a
bank, an insurance company, or a brokerage firm
401 K Plan: for-profit company’s retirement plan that
allows an employee to save up to a certain amount of
income per year and avoid paying taxes on the income until
is withdrawn
◦ Employers will often match a percentage of the employee’s 401K
ESOP: Employee Stock Ownership Plan: an employersponsored retirement plan that allows employee’s to
purchase the employer’s stock
◦ Often at a reduced price
Corporate stocks:
◦ Share of stock: share of ownership in a corporation
◦ Dividends: profits distributed to stockholders
Corporate bonds:
◦ Bond: promise to repay borrowed money to a lender at a fixed
rate of interest at a specified time
Mutual funds: a pool of money used by a company to
buy assets – such as stocks and bonds – on behalf of its
Mutual fund companies: special investment companies
in which people “pool” their savings to make a variety
of investments.
◦ Ex: own stock in 200 different firms
◦ Tends to be less risky (not just one avenue)
Issued by the U.S. Treasury
Savings Bonds: debts of the federal
◦ Have face values
 This amount will be paid to the bondholder
when the bond matures
 Bonds issued at a discount: SOLD at a price
BELOW the face of value of the bond
Credit: the ability of a customer to buy goods or
services before paying for them – BASED ON AN
AGREEMENT to pay later
◦ Ex: car loans, mortgages
2 strings attached:
◦ Must repay the principal: original amount borrowed
◦ Pay the interest: amount of money charged for borrowing the
Finance charge:
◦ Total amount paid to use credit
◦ Includes interest costs and any other fees – a
service charge that the seller or lender may be
entitled to add to the loan
APR: Annual Percentage Rate:
◦ cost of credit calculated as an annual percentage of
the principal borrowed
Immediate possession: enjoy good and services
immediately rather than postponing or do without them.
Flexibility: allows people to time their purchases to take
advantage of sale items or other bargains, even when their
funds are low
Safety: safe and convenient means for people to carry their
purchasing power while shopping or traveling.
◦ Rather than carrying cash: lost or stolen
Emergency Funds: cushion in case of emergency.
◦ Car breaks down.
Character reference: pattern of a person’s payment of bills
is recorded, called a credit history
Overspending: make it too easy to spend money.
◦ Debt mounts, and it is difficult to make the needed monthly
Higher cost: stores that accept credit cards pay the
credit card companies a fee.
◦ Handling the paperwork associated with credit purchases can
be expensive for merchants.
 As a result, stores that accept credit cards typically charge higher
prices than those who sell their products only for cash.
Impulse buying: ignore sales and special prices
because they can buy on credit whenever they want to.
Lenders look at 3 things to judge a person’s credit:
◦ Character: personal qualities
 Honesty and willingness to repay debts
 Record
◦ Capacity: capability – measure of your ability to repay debts
 Know about your income sources
 How much you earn
 Financial obligations
◦ Capital: what people own
 Money in the bank or tangible property (a house)
 More you own the easier it is to repay debts
 Capital used for security is called collateral
Collateral: capital acceptable to a lender for a loan
◦ Ex: automobile is the collateral for an auto loan
 Failure to pay = take it away
Co-signer: a person who has a good credit rating and
who guarantees to pay off your loan if you cannot.
Good consumer choice: means looking for quality products at the lowest
possible prices
Government and Consumers:
◦ The right to safety: have the right to be protected from unsafe products
◦ The right to be informed:
 Exactly what they are buying
 The terms of the sale and any guarantees accompanying it
 The kinds of risks that might be involved in the use of a product
◦ The right to choose:
 Competition is the backbone in free enterprise
 It is illegal to restrict market competition
◦ The right to be heard:
 Business and government recognize the need to learn what consumers are thinking
 (800) numbers or website addresses for customer service
Satisfied consumers = key to financial success
◦ Pay attention to consumer satisfaction
◦ Try and avoid complaints
◦ Respond quickly when consumers point out problems
BBB: Better Business Bureau
◦ International organization sets standards for business

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