
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
◦
◦
◦
◦
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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:
◦ http://www.bls.gov/oes/current/oes_alph.htm

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
 RENT IN SANTA ROSA
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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?
◦ SAVE
 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
◦ INVEST

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
◦ POWERFUL FORCE IN THE ECONOMY
◦ If consumers are feeling comfortable it will boost the economy
by spending more

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Higher interest rates tend to promote savings
Higher interest rates = incentive to save
http://www.bankrate.com/comparerates.aspx

Government tax rates can encourage or discourage
savings

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
investing

Banks, insurance companies, stock brokerages
work hard to persuade you to save or invest
money…MORE and MORE of your money.
 IN CONTRAST

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

BE REALISTIC IN SETTING FINANCIAL GOALS!

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

Allowances

Gifts

Interest on current savings

Scholarship
◦ Per diem
 List
all the things you are likely to buy or
pay for over the time period of your
budget
 What
you need to save to meet your
longer-term goals

Safety: desk drawer vs. banks/saving
institutions
◦ Government sponsored insurance provided by
the Federal Deposit Insurance Corporation
(FDIC)
 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

Therefore:
◦ (($110 - $100) / $100) × 100% = 10%
 Your rate of return is 10%.

There are two ways to measure the rate of return on an
investment.
◦ Average annual rate of return (also known as average annual
arithmetic return)
◦ Compound rate of return (also called average annual geometric
return)

Stock: ownership in a corporation

Biggest concern:
◦ STOCK’S VALUE
 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

Ex:
◦ 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
 AND
◦ 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
liquidity

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
earn
◦ WHY???
If a savings institution – which
makes loans from money
saved, CANNOT depend on
having that money on hand to
lend – IT MUST PAY AT A
LOWER RATE OF INTEREST

Savings deposits: banks, savings/loans firms, credit
unions
◦ $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
period

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
deferment

Tax deferment: payment of taxes on interest
after the interest is earned – often upon
retirements

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
contribution

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
shareholders

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
government
◦ 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
principal

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
payments

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

Goals:
◦ 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
ethics