Economics Personal Finance Personal Finance Economics SSEPF1 The student will apply rational decision making to personal spending and saving choices. a. Explain that people respond to positive and negative incentives in predictable ways. b. Use a rational decision making model to select one option over another. c. Create a savings or financial investment plan for a future goal. SSEPF1a. Explain that people respond to positive and negative incentives in predictable ways. • Acting as consumers, producers, workers, savers, investors, and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide the highest possible returns to them. SSEPF1 a. Explain that people respond to positive and negative incentives in predictable ways. (continued) • Small and large firms, labor unions and educational, and other not-for-profit organizations have different goals and face different rules and constraints. These goals, rules, and constraints influence the benefits and costs of those who work with or for those organizations, and, therefore, their behavior. Question: Why do people respond to positive and negative incentives in predictable ways? • Positive and negative incentives make people predictable because they are designed to motivate or discourage people from doing things. (people seek positive outcomes and avoid negative ones.) For example, people generally do what is required at their jobs to stay employed. SSEPF1b. Use a rational decision making model to select one option over another. • Steps in the rational decision-making model. – Define the problem or situation. – Identify criteria for process and results. – Consider all possible solutions. – Calculate consequences against likelihood of satisfaction. – Choose best decision. SSEPF2 The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors. a. Compare services offered by different financial institutions. b. Explain reasons for the spread between interest charged and interest earned. c. Give examples of the direct relationship between risk and return. d. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. SSEPF2a. Compare services offered by different financial institutions. SSEPF2a What Banks and Credit Unions offer (continued) • • • • • Loans Credit accounts Savings accounts Checking accounts Certificates of deposit (CDs) • instant credit companies, title loans, payday loan companies --- offer quick money at high rates. • Types of Financial Loans and Associated Terms • 1. MORTGAGE (HOME) LOAN: Since the cost of a house is often quite high, many people receive a loan called a mortgage to pay for a house. Mortgages are loans that are usually paid out over a considerable length of time, such as ten, fifteen, or thirty years. Most mortgages are fixed; the interest rate is set at the time of the loan and does not change. The fixed rate allows households to know how much payments will be for the life of the loan; if the loan was at a variable rate, fluctuations in the interest rate might cause financial turmoil for the household. • 2. CONSUMER LOAN: Sometimes people just need a little extra money. The money might be used to buy a new car, for some type of home repair, or just to throw a really, really great birthday party. Consumer loans are not as large as most home loans, and they often have an interest rate that is a little higher than a home loan. Also, the duration of most of these loans is relatively short, averaging around 1-5 years in length. • 3. CREDIT CARD: Credit cards allow people to purchase goods and services easily. When traveling, you can carry these strips of plastic instead of a great deal of currency that could be stolen. Although credit cards are convenient, consumers pay for this convenience with high interest rates. Interest rates around 18% are not uncommon, and the rates are variable, so consumers often find themselves holding a large amount of high-interest credit card debt if they are not careful with their spending habits. Interest on a credit card typically accrues on a monthly basis. • 4. CREDIT UNIONS: A non-profit financial institution that is owned and operated entirely by its members. Credit unions provide financial services for their members at discounted rates. Services include savings, checking, and lending. To join a credit union, a person must ordinarily belong to a participating organization, such as a college alumni association, labor union, or large company. SSEPF2b. Explain reasons for the spread between interest charged and interest earned. What is the difference between interest charged and interest earned? – Interest charged- money you have to pay for borrowing money – Interest earned- money you are paid for keeping your money with the bank SSEPF2b. Explain reasons for the spread between interest charged and interest earned. (continued) • There is a spread between interest earned and interest charged because banks make money off of charging interest on loan to people…. and they have to have to limit the amount the pay out in interest to maintain profit. ((Banks also used deposited funds to invest and loan out)) SSEPF2c. Give examples of the direct relationship between risk and return. • What is the relationship between risk and return? – Higher the risk, higher the gain, higher the loss. – Lower the risk, lower the gain, lower the loss. • Stocks are the most risky,,,but also the most profitable. • While Government Bonds are not risky at all but do not profit fast or at an extremly high rate. SSEPF2c. Give examples of the direct relationship between risk and return. (continued) There are five basic types of investments. • They are listed below from LEAST RISK to MOST RISK. • • • • • 1. U.S. GOVERNMENT BONDS: When you invest in a US Government bond, you are loaning the government a sum of money in return for income. In return for the loan, you get an interest rate payment and a promise to pay the loan back. And because the government gives you a promise to pay it back, a bond is still considered a conservative investment. 2. CERTIFICATES OF DEPOSIT (CDs): An investment whereby you lend a bank a set amount of money, which is then invested insecurities or used for loans. For the use of your money, you are ensured the return of your principal at maturity and interest over the life of the CD. CDs are ensured by the Federal Depositor’s Insurance Corporation (FDIC). CDs work like bonds. 3. CORPORATE BONDS: Same as above, except a company issued the bond instead of the government. 4. MUTUAL FUNDS: A professionally managed, DIVERSIFIED investment that enables investors to pool money with other investors. A diversified investment such as a mutual fund may reduce risk since not all your ―eggs‖ are in one basket. 5. STOCKS: Types of securities representing ownership in a corporation. Stocks carry the most risk because if a company begins to lose business, or investors lose faith in the company, then the stock value decreases and the investor lose part or all of the original investment. SSEPF2c. Give examples of the direct relationship between risk and return. (Continued) SSEPF2d. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. • What are stocks, bonds and mutual funds? – Stocks- dividends or ownership in a corporation – Bonds- promise of payment on borrowed money with interest. These are issued by the gov. – Mutual funds- stock grouping/investment grouping- investments that places money and risk in multiple areas (or stocks) – (detailed in slide 14) • SSEPF3 The student will explain how changes in monetary and fiscal policy can have an impact on an individual’s spending and saving choices. • a. Give examples of who benefits and who loses from inflation. • b. Define progressive, regressive, and proportional taxes. • c. Explain how an increase in sales tax affects different income groups SSEPF3a. Give examples of who benefits and who loses from inflation. Groups that Benefit from Inflation: 1. People that owe the banks money. 2. Collectors of rare items because they become even more valuable. 3. People that rent a house or apartment with a fixed lease. 4. Professionals that sell much needed services because they can set outrageous rates….ex: doctors, lawyers. SSEPF3a. Give examples of who benefits and who loses from inflation. (continued) Losers: • 1. Savers---people saving money the value of it is getting lower. ((they could have spent it…oh well)) • 2. People on fixed incomes– oh no…I don’t have enough $ to meet my needs because gas is to X!?%#[email protected]# high. • 3. Lenders:: banks now the money the have loaned out is losing value as they are getting paid pieces of it. • 4. Landlords: Now I need to raise the rent, but the tenants are on a fixed lease…also my tenants may not be able to afford paying more. SSEPF3b. Define progressive, regressive, and proportional taxes. • What are the kinds of taxes? – Proportional- everyone pays the same % regardless of income – Regressive- higher the income, lower the % paid in taxes – Progressive- higher the income, higher the % paid in taxes SSEPF3c. Explain how an increase in sales tax affects different income groups High income groups are affected the most by sales taxes because they spend more money. Ex..more expensive house=higher sales tax….more expensive car=higher sales tax…more clothes…etc. Lower income groups are less affected because of the limited amount of spending in the 1st place. SSEPF3c Explain how an increase in sales tax affects different income groups. (continued) • Higher incomes pay more sales tax – they buy more. • Lower income pays less sales tax – they buy less. • • SSEPF4 The student will evaluate the costs and benefits of using credit. • a. List factors that affect credit worthiness. • b. Compare interest rates on loans and credit cards from different institutions. • c. Explain the difference between simple and compound interest rates. SSEPF4a. List factors that affect credit worthiness. SSEPF4a List factors that affect credit worthiness. (continued) • What are the factors that affect credit worthiness? – Credit score • • • • • • • • Income Payment history Savings Number of loans Assets Property Investments Amount of debt SSEPF4c. Explain the difference between simple and compound interest rates. INTEREST RATES: The interest rate is the percentage amount of payment by borrowers to the lender. It can also be the amount paid to bank customers by the bank. • SIMPLE interest rate= determined annually with the original loan amount. – Simple interest is only on the principal – Simple - $2000 at 3% quarterly 2000x.03=$60x4=$240 Compound interest is interest on the principal and other interest. –Compound - $2000 at 3% quarterly 2000x.03=60 ; –2060x.03= 61.80 ; – 2121.80x.03= 63.65 ; – 2185.45x.03= 65.56= –$2251.01 balance after compounded 4 times. Types of Insurance and Associated Terms • Insurance is a necessity in today’s society. Life is very unpredictable, from death to job-loss- Insurance is a way to safe guard ourselves and those around us. The following are the most common types of insurance: • 1. DISABILITY INSURANCE: these policies provide financial support in the event the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such payment as mortgages and credit cards. Insurance (continued 2) • 2. HEALTH INSURANCE: these policies will often cover the cost of private medical treatments. This is the most important of all insurance types. Without this, one trip to the emergency room for a broken arm could cost in excess of $2,000. A major accident could cost in excess of $50,000. Insurance (continued 3) • 3. LIABILITY INSURANCE: liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that indemnifies against the harm that a crashing car can cause to others' lives, health, or property. • The protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit commenced against the policyholder and payment on behalf of the insured with respect to a settlement or court verdict. • Liability policies typically cover only the negligence of the insured, and will not apply to results of willful or intentional acts by the insured. Insurance (Continued 4) • 4. LIFE INSURANCE = benefits to someone due to a death of another. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. (Annuities provide a stream of payments that have to be managed.) • Types of Life Insurance: • Term Life: provides a benefit in the event of death for a certain term of years (EX: 20 or 30 years). After which the policy lapses and the person is no longer covered in the event of death. The person will have to renew the policy later in life. One cannot withdraw money put into a term life policy. • Whole Life: the insurance policy does not end and the premiums paid each month gain value (like a savings account) so you can withdraw from it in later years. The premiums are more expensive than term life, but the policy has no end and you have access to extra cash later in life.