1. Consumers, Savers & Investors
Chapter 6
Consumers, Savers & Investors

2. Learning Goals
Outline the structure and importance of the financial system.
List the various types of securities.
Define financial market, and distinguish between primary and secondary financial markets.
Describe the characteristics of the major stock exchanges.
Discuss the organization and functioning of financial institutions.
Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit.
Evaluate the major features of regulations and laws affecting the financial system.
Describe the global financial system. 1 5 6 2 3 7 4 8

3. Spenders & Savers
Teens spent $159 billion in 2005! Almost 2/3s was spent on consumer goods & services

4. Gross Domestic Product
GDP is the final value of all goods & services produced in the country in one year
If a country can increase its GDP it will see an increase in its standard of living
The U. S. has the highest GDP in the world (it produces more goods & services than any other country)!

5. Sources of Income 2 Main Sources: Income from work:
Paid by wage (hourly or by unit of production)
or by a salary (paid weekly, monthly or yearly)
Income from wealth
Wealth is the value of the things you own.
Net worth is a person’s wealth after debts & other obligations have been subtracted
Use your wealth (interest) as income too!

6. Types of Income
Disposable Income (or net pay) is the money you take home after taxes are paid
(As a whole most Americans spent more than their disposable income in 2006!)
Discretionary income is what may be spent on extras

7. Factors Affecting Savings
Income
-People save & invest more as income
Expectations
- What people think, or hope, will happen
in the future
Current interest rates – higher interest promotes saving; lower interest does not
Taxes – tax rates encourage or discourage savings

8. Budget A budget can help you save money 3 Steps in preparing a budget:
Setting financial goals
Estimating income
Planning expenditures (a spending plan)

9. Advertising
Informs consumers, creates competition (lower prices) & pays for TV & newspapers
Advertising is expensive & can raise prices, it can lead people to buy things they don’t need and businesses may not be objective because they support TV & newspapers

10. The 4 P’s of Marketing
Product - a good or service being offered by a company. Ideally, a product should meet a certain consumer demand, or it should be so compelling that consumers believe they need it.
Promotion – give the customers “reasons” to buy your product instead of another company’s (“differentiation”)
Place – where can customers buy/get your product
Price – How much does it cost; emphasize your company’s pricing strategy (value, quality, etc.)

11. 3 Factors for Saving Safety - offers protection from risks
Rate of return - “the higher the risk, the greater the return.”
Liquidity – how easily it can be converted to cash
- The more liquid, the less the rate of
return

12. Compound Interest
Compound interest – interest calculated on the sum of savings plus the accumulated interest
$100 x .02 = $2
$102 x .02 = $2.04
$ x .02 = $2.08

13. The Rule of 72
A useful tool to see how long it will take your money to double
72 is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling:
For example: 72 divided by 2 = 36
(It would take 36 years for your money to double if the interest rate was 2%)

14. Types of Savings
Savings Deposits – low risk, very liquid, low interest
Certificate of Deposit (CD) – pays more interest because you agree to deposit money in an account for a specific time period
Money Market Deposit Accounts – interest-bearing checking account; your money is used in the money market

15. Types of Investments
Pension & Retirement Funds – These provide tax deferment (payment of taxes on interest after the interest is earned)
Corporate Stocks - shares of ownership in a corporation; most pay dividends & provide a way to invest to earn money over many years (if they appreciate)
Corporate bonds – IOUs to allow business expansion

16. Types of Investments
Mutual fund – a pool of money used by a company to buy assets (stocks or bonds)
U. S. savings bonds – one of the safest investments which allow the Federal government to borrow money
Risk is associated with investment but it can provide income for retirement!

17. What is credit?
Credit – the ability of a customer to buy goods & services now and pay for them later
Principal – the amount originally borrowed
Finance charge – the total amount paid to use credit
Annual Percentage Rate (APR) – is the cost of credit calculated as an annual percentage of the principal borrowed

18. Advantages of credit Immediate possession Flexibility Safety
Emergency funds
Character reference

19. Disadvantages of credit
Overspending
Higher cost
Impulse buying

20. Obtaining Credit The 3 C’s of Credit Worthiness:
1. Character – honesty & willingness to repay debts
2. Capacity – your ability to repay debts
3. Capital – or collateral is what people own

21. Consumer Protection
In 1962 President John F. Kennedy’s proposed a consumer “bill of rights” to Congress:
1. The right to safety
2. The right to be informed
3. The right to choose
4. The right to be heard

22. Federal Deposit Insurance
Enacted by the Banking Act of 1933
Restore public confidence in the banking system
Before deposit insurance, runs were common as people rushed to withdraw their money from the bank
Deposit insurance shifts the risk of bank failures from individuals to the FDIC

23. Savings Banks and Credit Unions
Offer a variety of consumer services
85% of their loans are real estate loans
Credit unions are cooperative financial institutions that are owned by depositors/members.
Credit unions are created to serve consumers.
Insured by National Credit Union Administration (NCUA) which functions the same as the FDIC

24. Non Depository Financial Institutions
Insurance Companies
Pension Funds
Finance Companies

25. The Role of the Federal Reserve
Created In 1913
Central bank of the United States
Regulate commercial banks
Perform banking-related activities for the U.S. Department of Treasury
Providing services for banks
Setting monetary policy

26. Organization of the Federal Reserve
12 Federal reserve districts
Own federal reserve bank
District banks are run by a nine-member board of directors.
The board of governors is the governing body.
Politically independent
Federal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates.

27. Check Clearing and the Fed
Americans still write billions of paper checks.
The process by which funds are transferred from the check writer to receiver
The multiple-step process is managed and cleared by the FED.
The Check Clearing for the 21st Century Act is making this process more electronic.

28. Monetary Policy Supply of money and credit
Measures of the money supply: M1 & M2
The FED requires banks to maintain reserves.
Set the discount rate
Open Market Operations

29. M1 & M2 Graphic

30. Regulation of the Financial System
Bank Regulation
Government Regulation of the Financial Markets
Industry Self-Regulation
Rules of conduct by professional organizations like National Association of Securities Dealers
Market Surveillance

31. The Financial System: A Global Perspective
The financial system is more connected.
Financial institutions are more global.
Only 3 of the 30 largest banks in the world are US institutions.
Most nations have a central bank.