Post on 16-Aug-2020
transcript
LEARNING OBJECTIVESSSEPF1 THE STUDENT WILL APPLY
RATIONAL DECISION MAKING TO
PERSONAL SPENDING AND SAVING
DECISIONS
SSEPF2 THE STUDENT WILL EXPLAIN
THAT BANKS AND OTHER FINANCIAL
INSTITUTIONS ARE BUSINESSES THAT
CHANNEL FUNDS FROM SAVERS TO
INVESTORS
SSEPF3 THE STUDENT WILL EXPLAIN
HOW CHANGES IN MONETARY AND
FISCAL POLICY CAN HAVE AN
IMPACT ON AN INDIVIDUAL’S
SPENDING AND SAVING CHOICES
SSEPF4 THE STUDENT WILL EVALUATE THE COSTS AND BENEFITS OF USING CREDIT
SSEPF5 THE STUDENT WILL DESCRIBE HOW INSURANCE AND OTHER RISK-MANAGEMENT STRATEGIES PROTECT AGAINST FINANCIAL LOSS
SSEPF6 THE STUDENT WILL DESCRIBE HOW THE EARNINGS OF WORKERS ARE DETERMINED IN THE MARKETPLACE
RISK AND RETURN• INVESTMENT AND SAVINGS OPTIONS ARE BASED ON THE
CONCEPTS OF RISK AND RETURN
• RISK IS THE POTENTIAL FOR AN INVESTMENT TO LOSE MONEY
• INVESTING IN A BUSINESS COMES WITH THE RISK OF LOSING MONEY
BECAUSE THAT BUSINESS MAY NOT EARN A PROFIT IN THE FUTURE!
• RETURN IS THE ANTICIPATED EARNINGS THAT YOU HOPE TO MAKE
THROUGH AN INVESTMENT
• EVEN THOUGH YOU MIGHT EXPERIENCE RISK IN AN INVESTMENT, YOU HOPE
THAT THE POTENTIAL RETURN WILL OUTWEIGH THE RISK
!
FINANCIAL INSTITUTIONS FOR SAVINGS• THERE ARE MANY OPTIONS FOR PEOPLE WHO WANT TO DEPOSIT
THEIR MONEY AS SAVINGS!
• THEY COULD USE A BANK: A CORPORATION THAT STORES DEPOSITS AND
MAKES LOANS IN ORDER TO EARN A PROFIT
• THEY COULD USE A SAVINGS AND LOAN ASSOCIATION: SIMILAR TO A
BANK, BUT IT GETS MOST OF ITS DEPOSITS FROM CONSUMERS, RATHER
THAN BUSINESSES, AND LENDS MOST OF ITS MONEY TO HOME BUYERS
• OR, THEY COULD ALSO USE A CREDIT UNION: A NOT-FOR-PROFIT
FINANCIAL INSTITUTION THAT IS OWNED AND CONTROLLED BY ITS
MEMBERS, USUALLY PEOPLE WHO WORK IN THE SAME COMPANY OR
CORPORATION
RISK & RETURNRISK SAVINGS/INVESTMENT OPTION RETURN
Lowest
Low
Pretty Low
Medium
High
Lowest
Low
A Little More
High
Highest
Savings/Savings Account
Investment/Certificate of Deposit
Investment/Bonds
Investment/Mutual Fund
Investment/Stocks
PROTECTION AGAINST BANK FAILURES
• SO, EVEN A SAFE INVESTMENT LIKE A CHECKING ACCOUNT HAS SOME
SMALL LEVEL OF RISK, WHICH IS WHY THE GOVERNMENT SET UP THE
FEDERAL DEPOSIT INSURANCE COMPANY (FDIC) AFTER THE GREAT
DEPRESSION
• THE FDIC INSURES BANK ACCOUNTS UP TO $250,000 PER DEPOSITOR!
• SO, EVEN IF YOUR BANK GOES BANKRUPT, AS LONG AS YOUR
ACCOUNT IS UNDER $250,000, YOUR MONEY IS SAFE!
• THIS PROGRAM PUT CONFIDENCE BANK IN AMERICAN CONSUMERS
WHO WERE NERVOUS ABOUT DEPOSITING MONEY IN BANKS
TYPES OF INVESTMENTS
• THE THREE MOST IMPORTANT TYPES OF INVESTMENTS ARE BONDS,
STOCKS, AND MUTUAL FUNDS
• BONDS: YOU ARE LENDING MONEY TO A CORPORATION, THE
FEDERAL GOVERNMENT, A STATE OR CITY, OR AN ORGANIZATION
INVOLVED IN PUBLIC WORKS
• AS TIME PASSES, THE BOND ISSUER PAYS YOU SOME INTEREST PAYMENTS
AND THEN REPAYS THE FULL PRICE OF THE BOND WHEN IT “MATURES”
(USUALLY SEVERAL YEARS LATER)
• THE BOND ISSUER THEN USES THIS MONEY TO FUND ITS PROJECTS
TYPES OF INVESTMENTS
• THE INVESTMENTS WITH THE HIGHEST POTENTIAL REWARDS ARE
ALSO THE RISKIEST – STOCKS
• WHEN YOU BUY STOCKS, YOU ARE BUYING SHARES OF OWNERSHIP IN
A CORPORATION
• IN RETURN FOR THIS INVESTMENT, YOU EARN DIVIDENDS, OR YOUR
SHARE OF THE COMPANY’S PROFITS
• YOU CAN SELL YOUR STOCK AT ANY TIME AND KEEP ANY PROFIT YOU
EARN IF THE VALUE OF YOUR STOCK INCREASED
• THIS EARNING IS CALLED CAPITAL GAINS
TYPES OF INVESTMENTS
• TO AVOID SOME OF THE RISK INVOLVED WITH STOCKS, INVESTORS
MAY CHOOSE MUTUAL FUNDS
• A MUTUAL FUND POOLS MONEY FROM MANY INVESTORS AND USES IT
TO BUY A VARIETY OF STOCKS AND BONDS
• THIS IS CALLED A PORTFOLIO
• THE PORTFOLIO OFFERS A COMPROMISE BY INCLUDING SOME LOW-
RISK, LOW-RETURN STOCKS AS WELL AS HIGH-RISK, HIGH-RETURN
STOCKS
• THIS WAY, INVESTORS CAN NEVER LOSE ALL OF THEIR MONEY, BUT THEY
STILL HAVE THE CHANCE TO EARN HIGH PROFITS
CAUSES OF INFLATION• REMEMBER: INFLATION HAPPENS! WE’VE JUST GOT TO DEAL WITH IT!
• BUT, ECONOMISTS HAVE CONCLUDED THAT THE TWO MAIN CAUSES OF
INFLATION ARE:
(1) A RAPID INCREASE IN AGGREGATE DEMAND
• IF AGGREGATE DEMAND RISES FASTER THAN PRODUCERS CAN
SUPPLY GOODS AND SERVICES, THE RESULT IS SHORTAGES, WHICH
LEAD TO HIGHER PRICES
• THIS IS CALLED DEMAND-PULL INFLATION
(2) A RAPID FALL IN AGGREGATE SUPPLY
• IF AGGREGATE SUPPLY FALLS SUDDENLY BECAUSE OF A NATURAL
DISASTER, WHILE DEMAND STAYS THE SAME, THERE WILL ALSO BE
SHORTAGES AND HIGHER PRICES
• THIS IS CALLED COST-PUSH INFLATION
EFFECTS OF INFLATION• WHEN INFLATION IS HIGH, THE PURCHASING POWER OF THE
DOLLAR DECLINES
• THIS MEANS, YOUR DOLLAR IS WORTH LESS
• THIS AFFECTS CONSUMERS WHEN THEIR INCOME DOES NOT
INCREASE AS FAST AS THE INFLATION RATE DOES!
• IF YOU ARE ON A FIXED MONTHLY INCOME, OR ARE UNDER A SALARY
CONTRACT, THEN YOU LOSE PURCHASING POWER
• SOME PEOPLE HAVE COST-OF-LIVING ADJUSTMENTS IN THEIR WAGES
TO COUNTERACT THE EFFECTS OF INFLATION
• THOSE WHO SUFFER THE MOST FROM INFLATION ARE LOW-INCOME
FAMILIES: THEY MUST SPEND MORE AND MORE OF THEIR LIMITED CASH
ON NECESSITIES
DIFFERENT KINDS OF TAXES• REMEMBER: ONE FISCAL POLICY THAT THE GOVERNMENT MAY
ENACT IS TO INCREASE TAXES IN ORDER TO SLOW DOWN
CONSUMER DEMAND
• TAXES ARE CATEGORIZED BASED ON THE RELATIVE EFFECTS THEY
HAVE FOR PEOPLE WITH HIGH INCOMES AND PEOPLE WITH LOW
INCOMES
• THERE ARE THREE MAIN TYPES OF TAXES:
• PROPORTIONAL TAXES
• PROGRESSIVE TAXES
• REGRESSIVE TAXES
PROPORTIONAL TAXES• TAXES IN WHICH PEOPLE WITH HIGHER INCOMES PAY THE SAME
PROPORTION, OR PERCENTAGE, OF THEIR INCOMES AS PEOPLE
WITH LOW INCOMES
• THIS IS ALSO KNOWN AS A FLAT TAX – BECAUSE EVERYONE PAYS THE
SAME FLAT RATE
• VERY FEW TAXES IN THE US ARE PROPORTIONAL
• ONE EXAMPLE IS THE SOCIAL SECURITY TAX – IT IS PROPORTIONAL FOR
PEOPLE EARNING UP TO $102,000
• THIS MEANS THAT ALL PEOPLE UNDER $102,000 PAY THE SAME
PERCENTAGE TAX FOR SOCIAL SECURITY
• PROPORTIONAL TAXES HAVE THE SAME IMPACT ON THE RICH AND
THE POOR – THEY DO NOT REDISTRIBUTE INCOME FROM ONE
SOCIAL CLASS TO ANOTHER
AN EXAMPLE OF FLAT TAX
INCOME LEVEL FLAT TAX TAXES PAID
$1,000,000/YEAR 4% $40,000
$100,000/YEAR 4% $4,000
$50,000/YEAR 4% $2,000
$25,000/YEAR 4% $1,000
Do You Think This Is Fair?
PROGRESSIVE TAXES
• TAXES IN WHICH PEOPLE WITH HIGHER INCOMES PAY A LARGER
PROPORTION, OR PERCENTAGE, OF THEIR INCOME THAN PEOPLE
WITH LOWER INCOMES• THESE ARE ALSO KNOWN AS GRADUATED TAXES – OR TAXES THAT
GRADUALLY INCREASE AS INCOME GOES UP
• THE BEST EXAMPLE OF A PROGRESSIVE TAX IN THE US IS THE PERSONAL
INCOME TAX
• IN THEORY, PROGRESSIVE TAXES PLACE A HEAVIER BURDEN ON THE
RICH BECAUSE THEY PAY A HIGHER PERCENTAGE OF THEIR MONEY IN
TAXES
• A TRUE PROGRESSIVE TAX AIMS TO REDUCE INEQUALITIES IN
INCOME ACROSS SOCIAL CLASSES
PROGRESSIVE TAX EXAMPLE
REGRESSIVE TAXES
• TAXES IN WHICH PEOPLE WITH LOWER INCOMES PAY A LARGER
PROPORTION, OR PERCENTAGE, OF THEIR INCOME THAN PEOPLE
WITH HIGHER INCOMES
• THESE TAXES PLACE A GREATER BURDEN ON THE POOR
• THE BEST EXAMPLE IN THE US IS THE SALES TAX – EVEN THOUGH
EVERYONE PAYS THE SAME RATE OF SALES TAX, THIS TAX ACCOUNTS
FOR A HIGHER PERCENTAGE OF A POOR PERSON’S INCOME THAN A
RICH PERSON’S INCOME
• FOR THIS REASON, REGRESSIVE TAXES TEND TO INCREASE INCOME
INEQUALITIES
A COMPARISON OF TAXES
TAX BURDENS BY INCOME LEVEL
ADDITIONAL TAXES• IN THE US, MOST SALES TAXES ARE IMPOSED BY STATE OR LOCAL
GOVERNMENTS
• THE ONLY EXCEPTION IS AN EXCISE TAX, OR AN ADDITIONAL SALES
TAX PLACED ON SPECIFIC ITEMS THAT IS COLLECTED BY THE
FEDERAL GOVERNMENT
• THIS IS SOMETIMES CALLED A “SIN TAX” BECAUSE IT APPLIES TO ITEMS
SUCH AS ALCOHOL AND TOBACCO
• ANOTHER IMPORTANT TAX IS THE PROPERTY TAX
• IT IS IMPOSED ON LAND AND BUILDINGS AND IS USUALLY COLLECTED
BY LOCAL GOVERNMENTS
• THIS TAX USUALLY GOES TO SUPPORT LOCAL SCHOOLS
BUY NOW, PAY LATER
CREDIT IS THE ABILITY TO OBTAIN GOODS AND SERVICES NOW,
BASED ON AN AGREEMENT TO PAY FOR THEM LATER
CREDIT TAKES MANY FORMS – A BANK LOAN FOR MAJOR
EXPENSES, SUCH AS CARS, HOUSES, AND EDUCATION; OR
CREDIT CARD PURCHASES FOR SMALLER ITEMS SUCH AS
FOOD, CLOTHING, AND GAS
CREDIT IS CONVENIENT – ALLOWING US TO ENJOY GOODS
BEFORE WE ACTUALLY PAY FOR THEM
BUT, IF YOU AREN’T CAREFUL, CREDIT CAN ALSO LEAD TO
SPIRALING DEBT THAT CAN DESTROY YOUR FINANCIAL
HEALTH!
BECOMING CREDITWORTHY
IT IS IMPORTANT TO BUILD A GOOD HISTORY OF USING CREDIT – IT
CAN AFFECT THE INTEREST RATES YOU GET ON LOANS, OR YOUR
ABILITY TO OPEN CREDIT CARDS
BEING ABLE TO USE CREDIT WISELY AND BEING A RELIABLE DEBTOR
(SOMEONE WHO TAKES OUT CREDIT) IS KNOWN AS BEING
CREDITWORTHY
BANKS AND CREDIT CARD COMPANIES DECIDE YOUR
CREDITWORTHINESS BASED ON TWO UNDERLYING QUESTIONS:
1. ARE YOU ABLE TO PAY THE MONEY BACK?
2. ARE YOU LIKELY TO PAY THE MONEY BACK?
1. CAN YOU PAY?
IN ORDER TO DETERMINE IF YOU HAVE THE ABILITY TO PAY BACK A LOAN, THE BANK WILL INVESTIGATE:
WHERE YOU WORK
HOW MUCH YOU EARN
HOW MUCH MONEY YOU CURRENTLY HAVE SAVED
WHAT YOUR CURRENT EXPENSES ARE
HOW MANY PEOPLE DEPEND ON YOU FOR THEIR BASIC NEEDS
HOW MUCH YOU ALREADY OWE IN DEBTS
WHAT PROPERTY YOU OWN THAT CAN BE USED AS COLLATERAL, OR SOMETHING THE BANK COULD TAKE AWAY FROM YOU IF YOU DO NOT REPAY THE LOAN
2. WILL YOU PAY?
TO DETERMINE IF YOU WILL PAY BACK THE LOAN IS A LITTLE MORE TRICKY
SO, TO DECIDE IF YOU ARE LIKELY TO PAY, THE BANK WILL LOOK AT YOUR EMPLOYMENT HISTORY AND YOUR CREDIT HISTORY, OR HOW WELL YOU HAVE MANAGED YOUR BILLS AND CREDIT IN THE PAST
YOUR CREDIT HISTORY IS RECORDED WITH CREDIT BUREAUS, WHICH ARE COMPANIES THAT COLLECT FINANCIAL INFORMATION ON EVERY BILL-PAYING ADULT IN THE NATION
YOUR CREDIT HISTORY SHOWS HOW RELIABLE YOU ARE!
YOUR RELIABILITY IS SHOWN THROUGH A CREDIT SCORE –THE HIGHER THE SCORE, THE MORE LIKELY YOU ARE TO GET A LOAN
THE COST OF BORROWING MONEY
INTEREST IS THE COST OF USING MONEY – WE’VE TALKED ABOUT
EXAMPLES OF INTEREST IN PAST UNITS
INTEREST IS USUALLY EXPRESSED AS AN INTEREST RATE, OR A
PERCENTAGE OF THE TOTAL AMOUNT OWED
THERE ARE SEVERAL THINGS YOU SHOULD LEARN ABOUT DIFFERENT
TYPES OF INTEREST:
IS THE INTEREST RATE QUOTED AN ANNUAL RATE (AMOUNT PER YEAR) OR
PER MONTH?
IS THE INTEREST RATE FIXED OR VARIABLE?
A FIXED INTEREST RATE NEVER CHANGES, BUT A VARIABLE INTEREST RATE CAN
GO UP AT ANY TIME
IS THE INTEREST CALCULATED AS SIMPLE INTEREST OR COMPOUND
INTEREST?
SIMPLE AND COMPOUND INTEREST
SIMPLE INTEREST MEANS THAT
YOU ARE CHARGED INTEREST
ONLY ON THE ORIGINAL
AMOUNT OF THE LOAN
COMPOUND INTEREST MEANS
THAT YOU PAY INTEREST ON ANY
REMAINING PRINCIPLE AND THE
PREVIOUSLY CHARGED INTEREST
ON IT
CAN BE COMPOUNDED
MONTHLY OR YEARLY
Compound Interest• Hard on borrowers• Good for investors
ANOTHER WAY TO LOOK AT IT