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.