AIM: HOW CAN INDIVIDUAL ECONOMIC DECISIONS SHAPE A PERSONS FINANCIAL FUTURE? Do Now: List all of your expenses for a single month. BUDGETING Getting control of what you spend *when managed well, money makes life easier but when managed poorly, it can cause great stress and create significant obstacles. Budgets help people keep track of the money coming in and how they spend that money over time. 5 BASIC ELEMENTS OF BUDGETS 1. Income the source of all household spending 1. NET INCOME VS. GROSS INCOME 2. Fixed Expenses = necessary costs that occur monthly or annually. 3. Planned Expenses = purchases or investments youre planning for over a long period of time. 4. Variable Expenses = necessities must be planned for regularly, but in more unpredictable amounts. 5. Financed Payments = payments for credit cards, loans or lines of credit EXAMPLE BUDGET FINDING WHERE YOUR MONEY GOES 1. List the bills you pay every month (cell phone, Internet access, insurance, etc.) 2. For one month, list everything you buy, including the price you paid no matter how little an item costs. TOP 10 WAYS TO BE BUDGET SMART 1. Educate yourself about all aspects of your own finances. 2. Cut back on discretionary spending. 3. Improve your credit score so getting credit costs you less. 4. Audit yourself! Regularly set aside time to plan and manage your own finances. 5. Shop online for great values. 6. If youre going to use credit cards, use credit cards that give you cash back on purchases. 7. Avoid ATM fees: use ATMs that are a part of your bank. 8. Bundle bills (like internet, cable, and phone) to get discounts. 9. Choose investments that will cost you less in fees. 10. Save your money put it away in savings or investments. ACTIVITY Ms. Rs Monopoly AIM: WHAT DECISIONS DO WE MAKE AS CONSUMERS? WHY ARE THESE DECISIONS IMPORTANT? Do Now: Return to your Monopoly group, relocate your final number and use your M $ to make change with Ms. Rappoccio. With the remaining amount of money from your salary, decide how you would spend it. THE CHOICES CONSUMERS MAKE Trade-Offs = alternative that must be given up when one choice is made rather than another DECISION MAKING GRID Criteria Alternative 1. May require further expenditure 2. Will probably last a long time 3. Will impress your friends 4. Requires parental (spousal) approval 5. Can be used multiple times 1. Go to friends wedding. 2. Buy new iPhone 3. Take trip with friends during Spring Break 4. Buy a car CONSUMER CHOICES 1. Problem recognition: Perceiving a need. 2. Information search: seeking value 3. Evaluation of alternatives: assessing value 4. Purchase decision: buying value 5. Postpurchase behavior: value in consumptions or use BUYING DECISIONS Impulse Buying: purchases that occur with no planning or forethought Low-involvement products: products that carry a low risk of failure and/or have a low price tag for a specific individual or group making the decision. High-involvement products: products that carry a high price tag or high level of risk to the individual or group making the decision. WHY WE BUY WHAT WE BUY PEERS HABIT ADVERTISING ACTIVITY Consumer Choices AIM: WHAT INSTITUTIONS INFLUENCE AN INDIVIDUALS ECONOMIC DECISIONS? Do Now: You just stumbled across $500 and decide to save it. How do you go about doing so? FINANCIAL INSTITUTIONS group that channels savings to investors, Savings = the dollars that become available for investors to use when others save Includes banks, insurance companies, savings and loans associations credit unions COMMERCIAL BANKS Most common and safest financial institution. Interest = payment made for the use of borrowed money Interest rate = the price of credit to a borrower Federal Reserve System (Fed) = privately owned, publicly controlled, central bank of the United States Federal Deposit Insurance Corporation (FDIC) = the U.S. government institution that provides deposit insurance on the depositors account CREDIT UNIONS Nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services NONBANK FINANCIAL INSTITUTIONS Finance Companies (ex: appliances and cars) Life Insurance Companies Investment Banks AIM: WHAT DECISIONS DO WE MAKE AS DEPOSITORS? WHY ARE THESE DECISIONS IMPORTANT? DO NOW: Review of Simple v. Compound worksheet. AIM: WHAT DECISIONS DO WE MAKE AS BORROWERS? WHY ARE THESE DECISIONS IMPORTANT? Do Now: Think about your last purchase. How did you pay for it? Did you use cash, debit, credit or did you write a check? ARE YOU CREDITWORTHY? Creditors persons or institutions to whom money is owed Collateral something of value that a borrower lets the lender claim if the loan is not repaid ARE YOU CREDITWORTHY? 1. Payment history (whether or not you pay your bills on time) 2. Amount owed to current creditors (whether you have a car payment or a balance on a store credit card) 3. Length of credit history (in general, the longer youve had access to credit and paid your bills on time, the better) 4. Types of credit used (e.g car and mortgage payments are often viewed as better debt than consumer credit card debt) 5. Number of open accounts (lenders can be wary of borrowers with too much credit available) CREDIT SCORES Request your free credit report once every 12 months Review your credit report DEBT something, typically money, that is owed or due. Can lead to bankruptcy = chapter 7 and chapter 13 IDENTITY THEFT When your private financial information gets into the wrong hands. AIM: WHAT ARE THE VARIOUS FORMS OF CONSUMER CREDIT? DO NOW: Which is the best type of credit card? Why? GAP Store Card, American Express, or Chase Visa APPLYING FOR A CREDIT CARD costs: Annual Percentage Rate (APR) Grace period Annual fees Transaction fees Balancing computation method for the finance charge features: Credit limit How widely the card is accepted What services and features are available college lesson 5 - slide 5-A CALCULATING FINANCE CHARGES average daily balance: You pay interest on the average balance owed during the billing cycle. The creditor figures the balance in your account on each day of the billing cycle, then adds together these amounts and divides by the number of days in the billing cycle. adjusted balance: You pay interest on the opening balance after subtracting the payment or returns made during the month. previous balance: You pay interest on the opening balance, regardless of payments made during the month. past-due balance: No finance charge is added if the full payment is received within the grace period. If it is not received, a finance charge for the unpaid amount is added on to your next bill. college lesson 5 - slide 5-B EXAMPLES OF FINANCE CHARGES average daily balance adjusted balance previous balance monthly1.5% rates18% previous balance$400 payments$300 On 15th day (new balance =$100) average daily balance$250*N/A finance charge $3.75 (1.5% x $250) $1.50 (1.5% x $100) $6.00 (1.5% x $400) * To figure average daily balance: ($400 x 15 days) + ($100 x 15 days) = $250 x 30 days WHAT TO DO IF YOURE DENIED CREDIT if you think the reasons for the denial are valid: Ask the creditor if you can provide additional information or arrange alternate credit terms. Apply to another creditor whose standards may be different. Do the things you need to do to improve your creditworthiness (pay bills on time, increase income, reduce spending, obtain a secured card, etc.) and then reapply. if you are not sure whether the reason for the denial is valid: Ask the creditor to explain why you were denied. Review your credit history. If you find your credit history contains errors, take steps to correct the errors. if you believe the reason for the denial is invalid and that the creditor has discriminated against you: Notify the federal enforcement agency whose name you were given by the creditor. The federal enforcement agency will investigate and report back to you. If you can afford it, hire an attorney to file suit against the creditor. If the court determines the creditor did discriminate, the creditor will be required to pay you actual damages plus punitive damages. college lesson 5 - slide 5-E READING A CREDIT CARD STATEMENT DEALING WITH BILLING ERRORS fair credit billing act (1974) Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts. You can challenge a billing statement for errors such as charges for unauthorized purchases, charges for items that were never delivered, failure to credit a payment, etc. You must notify the creditor of a disputed item within 60 days. Creditor must investigate and, within two billing periods, either correct the mistake or explain why the charge is not in error. You cannot be billed for or forced to pay the disputed amount until the creditor has finished the investigation. If it is determined that you are responsible for the bill, you must be given the usual amount of time to pay it. Your credit history is protected during the dispute process. Creditor must supply customers with a statement of their rights at the time the account is opened and at least twice a year thereafter. college lesson 5 - slide 5-G OTHER CREDIT CARD PROTECTIONS prompt credit for payment A card issuer must credit your account on the day the issuer receives your payment, unless the payment is not made according to the creditors requirements. refunds of credit balances When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or receiving a refund. unauthorized charges If you report your card lost before it is used, you cannot be held responsible for any unauthorized charges. If your card is used before you report it lost, you are liable for $0 if reported within two business days. After that, youre liable for no more than $ disputes about merchandise or services In some circumstances, you have the right to withhold payment for unsatisfactory merchandise or services. college lesson 5 - slide 5-H CREDIT CARD DOS AND DONTS shop around Look at various sources. read and understand the contract Read the contract carefully. Dont rush into signing anything. Once a contract is signed, get a copy of it. Know the penalties for missed payments. know your cost Figure out total price when paying with credit. Make the largest payments possible. Know the penalties for missed payments. Buy on installment credit only after you have evaluated all other possibilities. Dont be misled into thinking small payments will be easy. college lesson 5 - slide 5-I HOW MUCH CAN YOU AFFORD? (THE RULE) never borrow more than 20% of your yearly net income If your net income (money after taxes) is $400 a month, then your net income in one year is: 12 x $400 = $4,800 Calculate 20% of your annual net income to find your safe debt load. $4,800 x 20% = $960 So, you should never have more than $960 of debt outstanding. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should. monthly payments shouldnt exceed 10% of your monthly net income If your take-home pay is $400 a month: $400 x 10% = $40 Your total monthly debt payments shouldnt total more than $40 per month. Note: Housing debt (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans, and credit cards. college lesson 5 - slide 5-J ACTIVITY DIRECTIONS 1. Make a group, grab a piece of chart paper, a marker and a stack of handouts. 2. Read picked document, tape one copy to chart paper. 3. Answer the following question on your chart paper: Is it financially responsible (according to doc.) to use a credit card? 4. Do a drive by of other chart papers. 5. Return to computers go to class blog and hold silent discussion Leave ONE comment Leave ONE reply Anything else is counted as EXTRA CREDIT (legit responses only) AIM: WHAT ARE THE DECISIONS WE MAKE AS INVESTORS? WHY ARE THESE DECISIONS IMPORTANT? DO NOW: What would you do with $100,000? How much is $100,000? Go shopping online and come up with a list of merchandise you would buy. You can buy toys, clothes, food, cars anything you want. You can buy multiple quantities of the same item. It is up to you. The only thing you must do is spend the entire $100,000.