Chapter 6 Consumers Savers and Investors Gross Domestic

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Chapter 6 Consumers, Savers, and Investors

Chapter 6 Consumers, Savers, and Investors

Gross Domestic Product aka GDP • is the final value of all goods and

Gross Domestic Product aka GDP • is the final value of all goods and services produced in the country in a given year • is a means of measuring the size of a nation’s economy

Consumption as a Percentage of Gross Domestic Product U. S. GDP 2014 $17 trillion

Consumption as a Percentage of Gross Domestic Product U. S. GDP 2014 $17 trillion Image credit: Figure 1 in "Measuring the Size of the Economy: Gross Domestic Product" by Open. Stax. College, CC BY 4. 0

Do you know someone who: • • Lives paycheck to paycheck? Saves part of

Do you know someone who: • • Lives paycheck to paycheck? Saves part of their paycheck regularly? Invests in the stock market? Is in serious credit card trouble? DECISIONS

Consumers �Anyone who buys goods and services for personal use.

Consumers �Anyone who buys goods and services for personal use.

Sources of Income �Income From Work ◦ Wages are earnings paid by the hour

Sources of Income �Income From Work ◦ Wages are earnings paid by the hour or item of production. (piece work)

◦ Salaries are earnings paid weekly, monthly or annually.

◦ Salaries are earnings paid weekly, monthly or annually.

�Income Wealth from ◦ Rent ◦ Interest on savings ◦ Selling assets

�Income Wealth from ◦ Rent ◦ Interest on savings ◦ Selling assets

Worth: How wealthy am I? �Individual’s wealth after debts and other obligations �Net

Worth: How wealthy am I? �Individual’s wealth after debts and other obligations �Net

Wealth Accumulation �Disposable Income:

Wealth Accumulation �Disposable Income:

Wealth through Investing And Saving �According to the Economic Report of the President, US

Wealth through Investing And Saving �According to the Economic Report of the President, US consumers invest less than 1% of their income. �recommended that people invest as much as 10% of their income.

How much People Invest and Save �How much people invest or save depends on

How much People Invest and Save �How much people invest or save depends on the following: ◦ Their income level.

◦ Expectations: ◦ If people believe the future is bright they spend more. ◦

◦ Expectations: ◦ If people believe the future is bright they spend more. ◦ Conversely, if people are worried about their future they save more.

◦ Current interest rates ◦ Tax Laws: ●Raising taxes on interest income discourages savings

◦ Current interest rates ◦ Tax Laws: ●Raising taxes on interest income discourages savings and cutting taxes on interest income encourages savings.

A Budget Leads to Saving and Investing �budget = personal financial plan. �It is

A Budget Leads to Saving and Investing �budget = personal financial plan. �It is balanced when income and expenditures are equal.

�A deficit occurs when expenditures exceed income. �A surplus exists when income exceeds expenditures.

�A deficit occurs when expenditures exceed income. �A surplus exists when income exceeds expenditures.

The Process of Budgeting � 3 steps: ◦ 1. Setting financial goals ◦ 2.

The Process of Budgeting � 3 steps: ◦ 1. Setting financial goals ◦ 2. Estimating Income ◦ 3. Planning Expenditures

Saving and Investing �When deciding where to invest your money, there are three factors

Saving and Investing �When deciding where to invest your money, there are three factors you should always consider…

#1 = Safety Banks = safe. Under the mattress = not safe Stock Market

#1 = Safety Banks = safe. Under the mattress = not safe Stock Market = less safe

Safety � Stocks, for example, have market risk associated with them. � The value

Safety � Stocks, for example, have market risk associated with them. � The value of stock can rise and fall dramatically, especially in the short term.

#2 = Rate of Return �Interest is your reward for giving up money and

#2 = Rate of Return �Interest is your reward for giving up money and allowing a financial institution to use it. �Compound interest —computed on the sum of savings you deposit (principal) plus the accumulated interest measured at regular intervals.

#3 = Liquidity �A measurement of how quickly you can convert your savings to

#3 = Liquidity �A measurement of how quickly you can convert your savings to cash. �Some investments are more liquid than others.

Liquidity � Liquid assets—Checking account, savings account, homes, cars. � Non-liquid assets— 401 k

Liquidity � Liquid assets—Checking account, savings account, homes, cars. � Non-liquid assets— 401 k investment plans, mutual funds, IRA’s (Individual Retirement Accounts)

Where People Put Their Savings

Where People Put Their Savings

Savings Deposits �Very safe investments with low rates of return. �Checking Accounts—Low interest and

Savings Deposits �Very safe investments with low rates of return. �Checking Accounts—Low interest and high liquidity �Certificates of Deposit (CD’s)— Higher interest, less liquid

Money Market Deposit Accounts �Insured deposits that allow you to write a limited amount

Money Market Deposit Accounts �Insured deposits that allow you to write a limited amount of checks. �Offer much liquidity, but lower interest rates than a CD.

Pension and Retirement Funds �Funds that are invested in stocks, mutual funds, etc. �Examples:

Pension and Retirement Funds �Funds that are invested in stocks, mutual funds, etc. �Examples: IRA, 401(k), 403(b), Employee Stock Ownership Plans (ESOP). �Usually tax deferred —meaning you don’t pay taxes on the interest you earn.

Corporate Stocks � One share of stock=one part ownership in a company. � Profits

Corporate Stocks � One share of stock=one part ownership in a company. � Profits are sometimes given to the shareholder in the form of a dividend. � As company’s grow, the value of stocks also grow.

Corporate Bonds �IOU’s issued by a company to a bondholder. �Bonds can rise or

Corporate Bonds �IOU’s issued by a company to a bondholder. �Bonds can rise or fall depending on the success of a company.

Mutual Funds �Special investment companies where people pool their money to make a variety

Mutual Funds �Special investment companies where people pool their money to make a variety of investments. �A mutual fund company may own stock in over 300 firms.

US Savings Bonds �When the US treasury borrows money from you. �Sold at a

US Savings Bonds �When the US treasury borrows money from you. �Sold at a discount (usually half the face value) and then can be redeemed when they mature.

Other Investments �Appreciable Assets—Buying something that you think will be worth more in the

Other Investments �Appreciable Assets—Buying something that you think will be worth more in the future. �Foreign exchange—Other country’s currency. �Commodities—Precious metals and gems

Consumer Credit �Allows you to enjoy goods and services before you pay for them

Consumer Credit �Allows you to enjoy goods and services before you pay for them fully. �When you borrow money, you must pay the principal plus interest.

Consumer Credit �Principal—The amount that is borrowed. �Interest—The cost of borrowing money, usually defined

Consumer Credit �Principal—The amount that is borrowed. �Interest—The cost of borrowing money, usually defined by APR (Annual Percentage Rate)

Kinds of Credit Available �Home Mortgages �Auto and Consumer Loans �Store Charge Accounts �Credit

Kinds of Credit Available �Home Mortgages �Auto and Consumer Loans �Store Charge Accounts �Credit Cards

Obtaining And Using Credit �Credit worthiness is judged by the following characteristics: ◦ Character

Obtaining And Using Credit �Credit worthiness is judged by the following characteristics: ◦ Character (record of repayment) ◦ Capacity to repay debts ◦ Capital—what you own

Why Establish Credit? �Must prove that you can handle financial obligations.

Why Establish Credit? �Must prove that you can handle financial obligations.

Proving Credit Worthiness �Open and be responsible with a checking and savings account. �School

Proving Credit Worthiness �Open and be responsible with a checking and savings account. �School �Open Loans. a charge account/credit card and pay the entire balance off every month!