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Consumers in the Economy. Income vs. Wealth. Income. Wealth. Accumulated assests Financial or Porperty. Wages Salary Interest Returns Any cash flow items. Types of Income. Gross Income Earnings before taxes are deducted Disposable Income - PowerPoint PPT Presentation
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Consumers in the Economy
Income vs. WealthIncome
Wages
Salary
Interest
Returns
Any cash flow items
Wealth Accumulated assests
Financial or Porperty
Types of Income Gross Income
Earnings before taxes are deducted
Disposable Income Amount of paycheck after taxes are deducted
Discretionary Income Income used to pay for luxuries or
nonessential goods
Inflation Increases the general level of prices
CPI – Consumer Price Index http://www.usinflationcalculator.com/inflati
on/current-inflation-rates/
Purchasing Power Dollar value of how much an indiiduals
money will really buy
Inflation decreases Purchasing Power
PP = Income – (Income x Inflation rate)
So Why Save??1. Borrow less on big ticket items2. Increase wealth over time3. In case of emergencies
4. Factors:1. AMOUNT saved2. LENGTH OF TIME money is saved3. INTEREST RATE earned
Interest RatesSavings
You want a high interest rate on savings!
Simple interest (specific period) I=Prin x Rate x Time $5000 x .07 x 1 yr = $350 $5000 x .07 x 2 yr = $700
Future value (int. not compound)
FV=PV x (1 + Rate) x Time
Borrowing Want a low interest rate on
borrowing
Takes away from Purchasing Power (higher interest rate)
Interest Simple – interest based on original amount
Compound – interest payment is added to principle every time period
Yield – actual amount received on savings Yields are highter when compounded more
often
What do we think about when we are making investment
decisions?1. RISK - “Will I lose my investment?”2. RATE – “What will I earn on my
investment?”3. LIQUIDITY – “How quickly can I turn my
investment into cash?”
How easy can I get cash?
Liquidity!! Speed at which you can convert
investment into cash
Liquid>>>>>>>>>>>>>>>>>>>>>>>Illiquid
Cash, savings, CD, stocks, IRA’s, 401K
Trade offs- Risk vs. Rate at Return?
Risk Rate Liquidity
Savings
CD
IRA
401k
Stocks
Social Security When did it start?
What was the purpose for it?
How is it funded?
MarketsEquity
Stocks
Buy piece of co Profits-dividends Voting rights High rate of return
Bond Bonds
Lend money to corp/govt Pay interest rate Predictable income Types:
Corp. bonds Treasury
bonds/Savings Municipal
Personal Managed Investments
Money Markets Mutual fund Real Estate Beware:
Diversify
Capital Gains (sell investment for more than you bought it,….pay taxes)
Insurance – avoid losing money due to unforeseen circumstances (pay premiums)
Credit/Credit Worthiness
How consumers pay back money
3 C’s: Collateral – repossess if fail to repay Capacity – level of income, can they pay? Character – history of payments
Credit Cards Cost:
Opportunity cost – future spending limited Interest rates – annual percentage rate
high Annual fees – priviledge of having card Other fees – late pymt, exceed limit, cash
adv.