ECONOMICS UNIT 5 –
PERSONAL FINANCE
INVESTMENT
• How many of you would like to invest money in the
future?
• Why?
• Who thinks they will purchase a car in the future?
INVESTMENTS
• Investment: the action or process of investing
money for profit or material result.
• Create a T-chart for good investments and bad
investments
• Take 5 minutes to make a list of good investments
and bad investments
• You will be sharing, and it will be turned in for a grade
RISK AND REWARD
• What is “risk” and “reward”?
• Risk: the possibility that something unpleasant or
unwelcome will happen; the possibility of financial
loss.
• Reward: a thing given in recognition of one's
service, effort, or achievement
FINANCIAL ASSETS AND INVESTMENTS
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Use your textbook to fill in the different types of investments.
They are found in chapter 11 (pg 271)
The definition for Certificate of Deposit is in chapter 10 (pg 259)
IRAs and 401k are not in the book
Asset
Definition
Advantages
Disadvantages
Individual
Retirement
Account (IRA)
Long term account set
up by
an individual to save
money for
their retirement
Long term, tax
sheltered (money
removed from
income before
yearly taxes),
don’t have to be
employed to
create
Heavy penalties
for early
redemption,
nontransferable
401K (pensions)
Account for a retiree
from their
specific company
Income security,
tax sheltered
Salaries
garnished, low
return, nontransferable,
if
company fails the
pension is gone
PERSONAL INVESTMENT GOALS
• Look at the chart you filled in the other day
• Using this information, you are going to create some
investment goals for 10 years and 20 years
• Criteria:
• Age
• Income
• Short term goals
• Long term goals
• Tolerance for risk
• Debt (think future debt)
TAXABLE INCOME
• Give them taxes packet; discuss each part and let
students answer questions
CREDIT
• Show Credit and Credit Cards
BENEFITS AND RISKS OF CREDIT
Benefits
Risks
The option of buying something today
and paying the money back over time,
rather than having to wait
Borrowing more than you can afford to
pay back
The flexibility to act on major purchases
and life opportunities that may require
more money than you have on hand
right now, like buying a computer or
borrowing for college
Damaging your credit report if you fail
to make payments on time
Easier to rent an apartment and to get
service from local utility companies
The possibility of paying costly late fees
Easier to rent a car and get a hotel
reservation
Paying interest can double the cost of
an item
Easier to purchase a car when you
have established credit
If you damage your credit, it is difficult
to repair and takes time.
Easier to get a cell phone
GOOD CREDIT VS. BAD CREDIT
• Good credit indicators:
• Making at least the minimum payment each month
• Paying your bills before the due date each month
• Making your payment each month, not skipping or missing
a month
• Keeping your balance below your credit limit
• Results:
• It will be easier to borrow money or get credit.
• You will not be assessed costly late fees or over your limit
fees.
• You will have more money to spend on other things.
GOOD CREDIT VS. BAD CREDIT
• Bad credit indicators:
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•
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Paying less than the minimum payment each month
Payments received after the due date
Skipping or missing payments for some month
Charging over your credit limit
Your debt is too large a percentage of your income
• Results:
• It will be difficult to borrow money when you need it.
• You will have to pay costly fees.
• You will have to pay more in interest adding to the cost of
the item
• Show How to Improve Your Credit
• Give Your Credit Score to complete
MONEY FOR COLLEGE
STEPS FOR FINANCIAL AID
• Fill out the FASFA
• Fill out any other forms your school requires
• Look up online for any extra scholarships or grants
you may qualify for
• Accept your reward amounts
FEDERAL GRANTS
• Federal Pell Grant
• Does not have to be repaid
• Based on financial need
• Usually only for undergrad (bachelor’s degree)
• Federal Supplemental Educational Opportunity
Grant
• For students with exceptional financial need
• “Campus-based” aid; not all schools participate
• Only so much money given to school – when it runs out, no
more to give
FEDERAL GRANTS
• TEACH Grant
• Money if you plan to become a teacher in a high-need field in
a low-income area
• You are required to teach for a certain length of time after you
get your degree or it becomes a loan
• You must take certain classes and get a specific job to meet
requirements for loan
• Iraq and Afghanistan Service Grants
• If your parent or guardian died as a result of military service in
Iraq or Afghanistan, you may be eligible
• You can not be eligible for a Federal Pell Grant because of
EFC but meet other requirements, your parent needed to die in
Afghanistan or Iraq after the events of 9/11, and you were
under 24 years old or enrolled in college at least part time
when the parent died
STUDENT LOANS
• MUST BE PAID BACK
• Given at a lower interest rate than regular bank
loans
• Can be very costly if you’re not careful
STUDENT LOANS
• Direct Loan:
• Federal loan
• Advantages:
• Borrowers have flexible repayment options
• Disadvantages:
• Not all schools participate and not everyone is eligible
• Direct PLUS Loan:
• Federal loan
• Advantages:
• Borrowers have flexible repayment options
• Parents may borrow for their dependent undergrad student
• Designed for graduate students
• Disadvantages:
• Borrower is fully responsible for paying the interest regardless of the
loan status
STUDENT LOANS
• Subsidized loan:
• Federal loan
• Advantages:
• Government pays the interest that accrues while the borrower is in
school
• Disadvantages:
• Based on financial need
• Unsubsidized loan:
• Federal and private loans
• Advantages:
• No requirement to demonstrate financial need
• Disadvantages:
• Borrower is full responsible for paying the interest regardless of loan
status
• Interest accrues from the date of disbursement
FINANCIAL INSTITUTIONS
FINANCIAL INSTITUTIONS
• Role of financial institutions:
• Intermediaries between savers and borrows
• Safe way to borrow and store money
• With deposits, provide commercial loans, personal loans,
mortgages, and issue credit cards
• Enable households and businesses to earn a return
on their savings, while providing necessary funds for
businesses to use for capital investment
• Provide loans, so families and businesses can
purchase what they need
SAVINGS IN THE ECONOMY
• Based on capital formation
• Capital formation – expansion of capital or capital goods,
through savings or through investment. More money in
savings leads to more resources for business investment,
rather than individual consumption
TYPES OF LOANS FOR CONSUMERS
• Open-end credit – a line of credit that can be used
repeatedly, within an established borrowing limit. (e.g., credit
card, home-equity line of credit) Finance charges apply to the
unpaid balance.
• Closed-end credit – a loan for a set amount that requires
regular payments at certain intervals. (e.g., vehicle loan,
student loan, mortgage) Finance charges are agreed upon at
the start of the loan.
• Secured loans – a loan that is obtained by offering an asset as
collateral to ensure repayment of the loan. Default on the
loan results in loss of the asset. (e.g., vehicle loan, mortgage)
• Unsecured loans – a loan that is obtained without the use of
collateral. Default results in collections and possible lawsuit.
(e.g., payday loans, student loans, credit cards)
COSTS/BENEFITS
• Declaring personal bankruptcy
• Costs
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Huge drop in credit score
Effects on record for 7-10 years
Automatic rejection for future credit
Still have to repay part of debt
Secured debt (mortgage, car) not discharged in bankruptcy
Could lose personal property
Could affect future employment, housing
Fees for attorneys, trustee, court
• Benefits
• Can help with problems arising from sudden or unexpected
catastrophe
• Can lower payments
• Can stop collection effort
COSTS/BENEFITS
• Buying Insurance
• Costs
• Money out of pocket
• Might not need it or use it
• Difficulty of comparing plans
• Benefits
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Legal requirements (e.g., auto insurance)
Coverage of unexpected expenses
Some plans build equity to borrow against
Possible tax credit to cover insurance premium
COSTS/BENEFITS
• Charitable giving
• Costs
• Money out of pocket
• Time
• Benefits
• Tax deductions
• Helping society
• Feel good
COSTS/BENEFITS
• Renting a Home
• Costs
• Abiding by requirements of the lease
• Opportunity cost of not building equity from property ownership
• Subject to possible rent increases
• Benefits
• Maintenance and upkeep costs are responsibility of the
landlord
• Easier mobility in terms of relocation
• Payment of property taxes is indirect
COSTS/BENEFITS
• Buying a Home
• Costs
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Large capital outlay to obtain a loan
Obligations to pay property taxes and insurance
Long term economic commitment to repay a mortgage
Costs of repairs and maintenance
Potential homeowner association fees
• Benefits
• Potential to accumulate equity and capital gains at the time of
sale
• Tax deductions for mortgage interest and property taxes
• Ability to customize the property to owner likes and needs
RENTING TO BUYING
• What to consider:
• Compare the benefits of renting and owning; consider
situations when owning or renting could be appropriate
(e.g., long term v. short term housing needs; market
conditions)
• Monetary requirements for owning a home; plan to achieve
requirements, including savings plan
• Personal net worth – assets minus liabilities; net worth
changes over time