Unit 2 Review Spring 2017

incentives People are PREDICTABLE Two types of incentives : Positive and Negative Positive – something GOOD or POSITIVE happens (buy one get one free) Negative – something BAD or NEGATIVE happens (you get charged a fee for over- withdrawing from your bank account)

Financial institutions 4 types: Commercial Banks, Credit Unions, Savings and Loan Banks, and Payday Loan Companies Each one offers something different – so CHOOSE the one that works best for you All financial institutions want to make money – HELLOOOOOO! They do this by LOANING MONEY! They LOAN you $5000 at 3% interest for 3 years. You pay the loan back … 5000 x .03 x 3 = $450 When you pay back the loan, you pay the amount you loaned (the $5000) – this is called the PRINCIPLE You also have to pay back the 3% (the cost to borrow the money) which was $450 – this is the INTEREST The bank loaned you $5000 and MADE $450!!! How did the bank get $5000 in the first place??? Mrs. Cooper deposited it last week! Why do I earn 1% interest by keeping my money in a savings account? So the bank can lend MY MONEY to YOU! This is called INTEREST EARNED!

Risk vs. return Ok, so you wanna invest and make money… well, there is almost ALWAYS a risk! Let’s say you can invest in Apple Inc. – their stock price is $115 per share – you purchase 100 shares for $11,500 …. Then you wait. Next year the stock price drops to $89 a share! If you SOLD your stocks today, you would only have $8,900  Meaning that you would have lost $2,600!! So, you decide to let it sit… five years later, your stocks are worth $146 a share – So you sell them! You get a check for $14,600 – You invested $11,500 and made $14,600 – so your total profit is $3,100

Saving & investment options Stocks Bonds Mutual funds

Inflation & taxes A general rise in prices Your grandmother bought a gallon of milk for $.59 in 1950… now a gallon of milk costs $1.89 Inflation is BAD – for almost everyone… banks LOVE it! Why???? Taxes are complicated but there are three main types… Progressive, Regressive, Proportional Progressive – as income goes up, so does the tax! For example, income tax. The more you make, the more taxes you pay! Regressive – as income goes up, the percentage of your income paid goes down. Think sales tax – the more money you make, the less a percentage of your income the tax is! Proportional – as income goes up, the taxed paid stays the same. Think city taxes – everyone pays .0975% - it is a proportion of your income

Credit The 3c’s – Character, Capacity, Collateral If you miss payments, the banks with RUIN your credit Bad credit is BAD If you loan money, you have to pay it back Credit helps you buy things that you want – houses, cars, boats… BUT, credit costs money – INTEREST

Interest Two types – SIMPLE and COMPOUND If you are borrowing, you want SIMPLE If you are investing, you want COMPOUND For example:

Simple interest

Compound interest

Insurance You need it – unless you can afford to replace everything that you own Types : auto, health, life, renters, homeowners, etc… To have insurance it costs money – usually a monthly payment If you need to use it, you have to file a claim Before insurance will pay you, you usually have to pay a deductible For example : I own a $500,000 house. I have it ensured and pay $200 a month and have a $5000 deductible. A tree falls on my house causing $120,000 of damage. I call Allstate, they cut me a check for $120,000 MINUS my deductible ($5000) So my total received is $115,000. Had I not had insurance, I would have needed to just have $115,000 laying around!