Unit 5 Personal Finance

STANDARD 1: 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.

Vocabulary, Standard 1 Incentive: Anything that encourages you to behave in a certain way. Cost-Benefit Analysis: An analysis of the cost effectiveness of different alternatives in order to see whether the benefits outweigh the cost. PACED. Investment Plan: A comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. What you’ll do with your money!

Budgeting Setting a Budget: Drawing up a plan for how you will spend your available funds. Food, House, Utilities, Car, Phone, Insurance. Approach: 1. Write down the total income you have to spend. 2. Allocate your money into how you’re going to spend it. Money Management: Clarifying where your money will be spent.

Savings and Income Savings: are disposable income (after taxes) minus consumption spending. What does that mean? Disposable income: = consumption + saving Saving: = disposable income – consumption VE4 Video- Money Management/Budget

Income What is income? 5 Types of Income: How do you get your income? 5 Types of Income: 1. Wages = money earned for services 2. Rent = money earned for the use of your property 3. Interest = money earned on your investments 4. Profit = money a business earns…more than the costs that they incurred. 5. Transfer Payments = cash or in-kind payments for doing nothing

Savings vs. Investments Monetary deposits secured for a later, undetermined use. Investment: Money used with the expectation of a return. http://www.econedlink.org/interactives/index.php?iid=234

Savings and Investment Options: Stocks: Share of ownership in a company. If company does well, you gain money. Vice Versa. Bonds: A promise to repay borrowed money to the lender at a fixed rate of interest. Fewer Risks. Offered by government and companies, investment that will be repaid with interest. Mutual Funds: Pool of money used by a company to purchase a variety of stocks and bonds. Gives them greater purchasing power. VE4 Video-Financial Markets

Savings and Investing Options: Savings Account: A place to keep your money that you intend to save, use at a later time. Certificate of Deposit: Issued by the bank where they keep a certain amount of money for a specific amount of time. Checking Account: Where you keep your money; withdraws and deposits. Always available.

Standard 2 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

Vocabulary: Standard 2 Risk and Return: See pyramid Stocks: An ownership share or shares of ownership in a corporation. Bonds: A certificate of indebtedness issued by a government or a publicly held corporation, promising to repay borrowed money to the lender at a fixed rate of interest and at a specified time.

Vocabulary: Standard 2 Mutual Funds: A pool of money used by a company to purchase a variety of stocks, bonds, or money market instruments. Provides diversification and professional management for investors. Interest Charged: The money paid to the borrower. Aka- finance charge. Interest Earned: Money earned by other money put in a financial institution.

Risk vs. Reward: Financial Pyramid http://www.econedlink.org/interactives/index.php?iid=233 Collectables Real Estate Stocks Mutual Funds, IRA’s CD’s or Bonds Savings Account Most Risky, Big Return Least Risky Little Return

Different Types of Institutions: Banks: Safe means of storing money. Checking accounts, savings accounts, CD’s, debit and credit cards, loans, mortgages. Credit Unions: Provides services to members. Savings and Loans: Not a bank, Focus on mortgages. Provides loans for private housing, housing projects, and new construction. PayDay Loan Company: Not a bank. Short-term borrowing. Individual borrows a small amount, but is charged an extremely high rate of interest. Takes portion of your pay check. http://www.econedlink.org/interactives/index.php?iid=229

Interest Interest: Fee paid by borrower. $$$$ Interest Charged: Money paid to borrow money. Interest Earned: Money earned by other money put it a financial institution. Simple Interest: Interest is determined annually on the original amount. Compound Interest: Interest is determined with the existing amount owed. http://www.econedlink.org/interactives/index.php?iid=227

Standard 3 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.

Vocabulary: Standard 3 Inflation: A rise in the general or average price level of all the goods and services produced in an economy. Can be caused by pressure from the demand side of the market, or pressure from the supply side of the market. Progressive Tax: A tax that takes a larger percentage of income from people in higher-income groups than from people in lower-income ones. The U.S. federal income tax is an example.

Vocabulary: Standard 3 – TAXES!! Progressive Tax: A tax that takes a larger percentage of income from people in higher-income groups than from people in lower-income ones. The U.S. federal income tax is an example. Regressive Tax: A tax that takes a larger percentage of income from people in lower-income groups than higher-income ones. Sales taxes and excise tax are examples. Proportional Tax: A tax that takes the same percentage of income from people in all income groups. AKA – Flat Tax.

Standard 4 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.

Vocabulary: Standard 4 Credit: The opportunity to borrow money or to receive goods are services in return for a promise to pay later. Simple Interest: interest that is not compounded: interest on an investment that is calculated once per period, usually annually, on the amount of the capital alone and not on any interest already earned. Compound Interest: Interest that is earned not only on the principal, but also on the interest already earned. Collateral: Something of value, often a house or car, pledged by a borrower as security for a loan. If borrower fails to make payments on the loan, the collateral may be sold; proceeds from the sale may then be used to pay down the unpaid debt.

Vocabulary: Standard 4 Character: In the context of credit transactions, character is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower’s handling of past debts and his or her stability in jobs and residences. Capacity: In the context of credit transactions, capacity is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower’s current and future earnings relative to current debt. High earnings and low debt, for example indicate a strong capacity to make payments on the loan in question.

3 C’s of Credit Credit = obtaining the use of money that you do not have. Obtaining credit means convincing an individual or a financial institution to voluntarily provide a loan to you in return for a promise to pay it back later, generally with an additional charge called interest. http://www.econedlink.org/interactives/index.php?iid=228  Advantage = it allows you to use or obtain a product today and pay for it later. Disadvantage = the loan has to be repaid. Lenders usually charge interest. Many people get into financial trouble because they are unable to control their spending.   How well you do on the 3Cs determines how big of a RISK you are to the lender and how much of a finance charge they are going to charge you.

3 C’s of Credit Character – information about you personally – how often you lay out of work, how many jobs you have had, are you late, do you pay your bills on time, do you have 100 credit cards, grades in school, etc… Capacity – ability – do you have the ability to repay the loan. The financial institution will ask to see all of your bills and your last couple of pay stubs. They will then compare how much discretionary money you have for this loan.   Collateral – tangible object the bank can take in replace of your loan repayment should you default on your loan. If Grandma gave you a ring worth $10,000, you could use that as collateral for a loan up to $10,000.

Credit Score

CREDIT

3 C’s of Credit Assessment: On a clean sheet of paper, write the 3Cs. Use an entire sheet of paper for the 3 words and make sure they are colorful. How do you stack up against the 3Cs right now? GET DETAILED! Co-Borrower List them and explain how you would convince a loan officer to give you a loan.

Common Forms of Credit Type of Credit Advantage Disadvantage Home Mortgage Increase in value Relatively low interest rate Interest is tax-deductible.    Long-term commitment Extensive Credit checks Car Loans Easier to work and earn money  Cars lose their value relatively quickly. College Loans Usually a good investment. Interest rates are generally low  Students sometimes borrow more than necessary. New graduates can face difficulty in repaying large loans.

Common Forms of Credit Personal Loans Allow individuals to purchase today that boat or vacation they want.  Relatively high interest rates. Some people borrow more than they can afford.   Credit Cards Convenient to use and useful in an emergency. Credit cards provide a record of charges.  

Inflation Inflation - A rise in the average price levels of goods and services in an economy   Negative Effects of Inflation Essentially money is becoming worth less and less. Peoples’ purchasing power is diminished If wages do not keep up with the rate of inflation people can’t afford as many goods and services…this decreases the overall standard of living!!

Inflation Who is hurt in particular??? People on fixed incomes – prices going up, wages not Lenders (aka creditors) – By the time $ is repaid, it isn’t worth as much as when they loaned it People who have money in savings accounts and domestic investments (People will stop saving!!!) Tax Payers – Inflation can bump you up into the next tax bracket! The general population is hurt by people trying to hoard as many goods as possible, creating ‘black markets’, and engaging in more risky/illegal activities to sustain a higher standard of living  

Inflation Who is helped by inflation??? Borrowers (aka: debtors) – If you borrow $ prior to inflation the $ becomes easier to pay back as wages go up with prices in the economy People who are invested in goods that hold their value (ie: real estate, jewelry, certain kinds of capital goods) People who are invested in foreign currency or businesses (This one way to beat inflation!)…of course this is assuming that the foreign country is not experiencing inflation also.

Standard 5 SSEPF5: The student will describe how insurance and other risk-management strategies protect against financial loss. a. List various types of insurance such as automobile, health, life, disability, and property. b. Explain the costs and benefits associated with different types of insurance; include deductibles, premiums, shared liability, and asset protection.

Insurance: Standard 5 5 Ways to Handle Risk 1. Avoid Risk = you risk losing money if you play the lottery. You can avoid this risk by not buying lottery tickets. 2. Retain Rick = You accept the risk of doing poorly on a test because you didn’t study. 3. Reduce Risk = You risk developing lung cancer if you smoke cigarettes. You reduce this risk if you don’t smoke cigarettes.

5 Ways to Handle Risk 4. Transfer Risk = You risk embarrassing yourself if you give a presentation if front of the entire school. You transfer the risk by asking someone else to give the presentation. 5. Share Risk = You risk making an unpopular choice if you select a disc jockey for the school prom by yourself. You share the risk if you ask others to join a committee to select the disc jockey.

Types of Insurance Automobile: Provides financial protection to the owners, operators and occupants of an automobile in case of accidents or damages. Health: Protects against financial loss caused by the costs of illness or accident. Life: Provides financial protection to a family when the insured, who is typically the major wage earner of the family, dies.

Types of Insurance Property: Protects the homeowner, land owners, etc… from loss caused by fire, theft and storm damage of the structure and the possessions within the structure. A liability-insurance feature protects the homeowner from loss when someone in injured on the homeowner’s property. Renter’s: Protects the renter from loss of personal possessions because of such risks as fire, theft or storm damage. Disability: Provides income during a specified period when a person is unable to work because of illness or an accident.

Vocabulary: Standard 5 Insurance: Automobile, Health, Life, Disability, and Property Life Insurance. A practice or arrangement whereby a company provides a guarantee of compensation for specified forms of loss, damage, injury or death. People obtain such guarantees by buying insurance policies, for which they pay premiums. The process allows for the spreading out of risk over a pool of insurance policyholders, with the expectation that only a few policyholders will actually experience losses for which claims must be made. Types of insurance include automobile, health, renter's, homeowner's, disability and life. http://www.econedlink.org/interactives/index.php?iid=231

Standard 6 SSEPF6 The student will describe how the earnings of workers are determined in the marketplace. a. Identify skills that are required to be successful in the workplace. b. Explain the significance of investment in education, training, and skill development. http://www.econedlink.org/interactives/index.php?iid=230

AND WE’RE DONE!!!