PERSONAL FINANCE AND ECONOMICSChapter 20

Section 1

Managing Your Money

Consumer Rights

Consumers have rights, or protections, in the free enterprise system.

A consumer is someone who buys a good or service.

Two Types of Income

Consumers have two types of income to spend:

– Disposable Income: money left after taxes are paid

– Discretionary Income: money left after bills are paid and after all necessities have been bought and paid for

Protecting Consumer Rights

Consumerism: a movement to educate buyers about the purchases they make and to demand better and safer products from manufacturers

– Laws (ex. Pure Food and Drug Act)

– Private groups (Better Business Bureau)

Consumer Bill of Rights

– Right to a safe product

– Right to be informed

– Right to choose

– Right to be heard

– Right to redress

Consumer Responsibilities

Consumers have responsibilities as well as rights.

Smart Buying Strategies

– Gather information

– Use advertising carefully

– Determine the best value

– Comparison shopping is a buying strategy to get best buy for the money

– Look at brand name and generic items

– Balance costs and benefits

Other Responsibilities

– Initiate problem-solving process for faulty goods or services

– Keep warranty information

– A Warranty is the promise made by a manufacturer or a seller to repair or replace a product within a certain time period if it is faulty

– Respect rights of producers and sellers

– Report problems to government when a settlement cannot be reached

Making Buying Decisions

Buying a product or service costs more than money; it also costs the time it takes to make the purchase and the opportunity cost of not buying something else.

Making Buying Decisions

Many factors are involved in consumers’ buying decisions.

Steps:– Decide whether to buy

an item or not

– Invest time obtaining product information

– Balance opportunity cost

Section 2

Planning and Budgeting

Making a Budget and Sticking To It!

A budget is a record of money earned and spent to help you match expenses to income.

Basic Budgeting Terms

– Income is money received from labor, business, or property

– Expenses is money spent on goods and services

– Balance: leftover money

– Surplus: More income than expenses (good)

– Deficit: More expenses than income (bad)

How To Make A Budget

List what you spend.

Record what you earn.

Analyze the data. Try to have

surplus. Monitor spending.

Credit

Credit can be a valuable item in your financial toolbox; however, as with all tools, you have to know how to use it correctly.

Credit

Credit is money borrowed to pay for a good or service

Credit allows consumers to receive a good or service and pay for it later.

Recognizing Credit Terms– A lender gives money to a borrower.

– A lender charges interest, expressed as the annual percentage rate (APR).

– APR is the annual cost of credit expressed as a percentage of the amount borrowed

– A credit rating evaluates how well the borrower will repay the loan.

– The borrower may pledge collateral for the loan.

– Collateral is property or valuable item serving as security for a loan

Sources of Credit

– Usually require down payment

– Banks, savings and loans, credit unions, finance companies offer credit

– Most common—credit cards

– Can charge high interest rates

Benefits of Credit

Allows you to get what you want sooner

Teaches financial discipline

Drawbacks to Credit

Spending more than you can afford

Bankruptcy is the inability to pay debts

Poor credit rating

Your Responsibility As A Borrower– Have a plan to

make payments

– Use budget skills

– Understand credit agreement

Section 3

Saving and Investing

Saving For The Future

To save is to set aside income for later use.

Why Save?

– Money for large purchases

– Emergency aid

– Luxuries

– Benefits the whole economy

Saving Regularly

– Automatic deposits into savings accounts

– Budgeting for savings

– Earning interest by saving through financial institutions

– Interest is the payment people receive when they lend money or allow someone else to use their money

Deciding About Your Saving– Trade-offs:

Less to spend today

More to spend tomorrow

Types of Savings

Many ways exist for people to save portions of their incomes.

Savings Accounts

Savings accounts– Earn low interest

on principal

– Financial institutions loan the money to others

Checking Accounts

Checking Accounts

– Money for purchases

– Must keep careful records

– Debit cards allow paperless money transfer

Money Market Accounts

– Money Market Accounts

Allows you to write checks, like a checking account

Pays interest like a savings account

Certificates of Deposit

– Certificates of Deposit

Type of time deposit

Agreement to leave money in financial institution for a set amount of time

Investments

Making wise investments in a variety of stocks and bonds is an important part of achieving long-term financial goals.

Investing in stocks and bonds leads to higher returns than other types of savings.

Returns is the profit earned through investing

Stocks

– Shares of stock provide partial ownership in a company

– A stock is an ownership share of a corporation

– Stock prices may go up or down, based on company performance.

– Investors may earn dividends.– Dividend is the payment of a

portion of a company’s earnings

– Higher possible return, but at greater risk

Bonds

– A bond is a contract to repay borrowed money with interest at a specific time in the future

– Loans money to company or government

– Pays set rate of interest over several years

– U.S. government bonds are a very safe investment.

Mutual Funds

– Mutual Funds are pools of money from many people who are invested in a selection of individual stocks and bonds chosen by financial experts.

– Pools money to invest in different stocks and bonds

– Chosen by financial experts

– Less risk than investment in individual stocks

Section 4

Achieving Your Financial Goals

What Kind Of Spender Are You?

Careful spenders avoid pitfalls, such as impulse buying, on their way to meeting their financial goals.

Impulse buying is purchasing an item on the spot because of an emotional rather than planned decision

Setting financial goals can help you spend money wisely.

Evaluate your spending to help you meet financial goals.

Impulse Buying

Beware of impulse buying.

– Try not to buy too quickly based on emotions.

– Some impulse-buying is okay. Too much is bad.

– Follow guidelines to avoid too much impulse buying.

Your Goals and Your Buying Decisions

The buying decisions you make can have a major impact on your life and career choices.

Consider goals when buying items.

Now or Later?

Long-term goals can conflict with short-term goals.

Must balance long and short-term goals.

Long-term planning can improve finances down the road (e.g., saving for college will lead to higher income later)

Chapter Summary

Buying Strategy

Making consumer decisions involves deciding the following:

• whether to spend your money

• what you will purchase

• how to use your purchase

Comparison shopping involves making comparisons among brands, sizes, and stores.

Consumerism

Consumer Rights Include: the right to safety

the right to be informed

the right to choose

the right to be heard

the right to redress

Budget

• A budget is an organized plan for spending and saving money.

• What you do with the information in a budget is up to you. No one can force you to spend less and save more unless you want to.

Credit

• When buying on credit, the amount you will owe is equal to the principal plus interest.

• Financial institutions that provide credit include commercial banks, savings and loan associations, and credit unions.

Saving and Investing

• It is important to get into the habit of saving.

• Individuals have many places to invest their savings, including savings accounts and certificates of deposit.

• Shares of stock entitle the buyer to a certain part of the future profits and assets of the corporation that is selling the stock.