Consumers in the Economy
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Transcript of Consumers in the Economy
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Consumers in the Economy
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Income vs. WealthIncome
Wages
Salary
Interest
Returns
Any cash flow items
Wealth Accumulated assests
Financial or Porperty
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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
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Inflation Increases the general level of prices
CPI – Consumer Price Index http://www.usinflationcalculator.com/inflati
on/current-inflation-rates/
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Purchasing Power Dollar value of how much an indiiduals
money will really buy
Inflation decreases Purchasing Power
PP = Income – (Income x Inflation rate)
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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
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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)
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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
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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?”
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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?
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Risk Rate Liquidity
Savings
CD
IRA
401k
Stocks
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Social Security When did it start?
What was the purpose for it?
How is it funded?
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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
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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)
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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
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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.