Ch. 10: Consumption & Savings ECONOMICS 12

Consumption  Consumption is that part of an individual’s income that is spent on goods & services rather than saved.  Consumer demand determines what goods & services are produced

Consumption  Factors influencing consumer choice Income levels Fashion Custom Advertising

Consumption  Consumer protection  Goods and services much more complex than in the past, therefore vulnerable consumers need to be protected by: Government Better Business Groups Consumer Protection Groups

Consumption  Consumer credit The ability to buy now and pay later Other sources of credit include bills we receive and pay well after we have used the product (e.g. hydro, telephone) Credit cards such as Visa and MasterCard are very popular, but unpaid balances have punitive interest payments of 18.5 %

Consumption  Consumer credit Charge accounts like a Sears card are growing less popular as they become credit cards (e.g. Canadian Tire) Conditional sales contracts are installment payments that if not paid allow the seller to repossess the product sold

Consumption  Spending patterns of Canadians incomes ↑  expenditures ↑ < savings ↑ expenditures as a percentage of income decrease as income rises e.g. spend $12,000 of a $12,000 income which is 100% whereas spend $40,000 of a $60,000 income which is 66%

Consumption  Personal finances Good idea to develop a budget or financial plan showing expected income & expenditures it helps control your consumption to avoid debt caused by poor purchasing decisions

Savings  Savings are that part of current income that is not spent  Loans Banks, trust companies, and credit unions borrow money from individual Canadians (e.g. personal chequing account, chequing / savings account, savings account, guaranteed investment certificates)

Savings  Loans Governments borrow money through savings bonds (e.g. Canada Savings Bonds) Life insurance savings Corporate bonds

Savings  Equities Stocks or ownership in a corporation offer a high return, but risk of losing investment can be high Real estate offers homeowner’s equity, the difference between the value of the house and outstanding loans plus there is no capital gains tax on the increased price a home seller may receive

Savings  Mutual / Investment Funds Safer investment because of diversification and professional management E.g. equity funds, bond funds, mortgage funds, money market funds, balanced funds

Savings  Life Insurance A contract in which one party (the insurer) agrees to pay another (the insured) a sum of money in the event of a specific loss (e.g. death) Term insurance, Straight-life / Whole-life insurance, Limited-pay life insurance

Savings  Share ownership among Canadians image of Canadians being very conservative and adverse to risk ownership of stocks ↑  16% to 21 % of the population between % own equity funds

Savings  Registered Retirement Savings Plans Method of reducing taxable income and saving for retirement  You and your investments Decide on reasonable financial objectives (e.g. 3 bedroom house, minivan, Florida vacation) greater risk = greater potential returns less risk = less potential returns

Savings  You and your investments Income large enough? Future income? Age? Time, interest, knowledge in investments? Tax situation? Risk tolerance?