Chapter 6Consumers, Savers,

and Investors

Anyone who buys goods and services for personal use.

Consumers

Income From Work◦Salaries and Wages

Income from Wealth◦Rent, interest on savings, selling assets

Sources of Income

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.

Wealth through Investing And Saving

How much people invest or save depends on the following:◦Their income level.◦Expectations◦Current interest rates◦Tax Laws

How Much People Invest and Save

budget = personal financial plan.

It is balanced when income and expenditures are equal.

A Budget Leads to Saving and Investing

A deficit occurs when expenditures exceed income.

A surplus exists when income exceeds expenditures.

A Budget Leads to Saving and Investing

3 steps:◦1. Setting financial goals

◦2. Estimating Income

◦3. Planning Expenditures

The Process of Budgeting

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

Saving and Investing

Banks = safe.

Under the mattress = not safe

Stock Market = less safe

#1 = Safety

Stocks, for example, have market risk associated with them.

The value of stock can rise and fall dramatically, especially in the short term.

Safety

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.

#2 = Rate of Return

A measurement of how quickly you can convert your savings to cash.

Some investments are more liquid than others.

#3 = Liquidity

Liquid assets—Checking account, savings account, homes, cars.

Non-liquid assets—401k investment plans, mutual funds, IRA’s (Individual Retirement Accounts)

Liquidity

Where People Put Their Savings

Very safe investments with low rates of return.

Checking Accounts—Low interest and high liquidity

Certificates of Deposit (CD’s)—Higher interest, less liquid

Savings Deposits

Insured deposits that allow you to write a limited amount of checks.

Offer much liquidity, but lower interest rates than a CD.

Money Market Deposit Accounts

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.

Pension and Retirement Funds

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 Stocks

IOU’s issued by a company to a bondholder.

Bonds can rise or fall depending on the success of a company.

Corporate Bonds

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.

Mutual Funds

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.

US Savings Bonds

People pay a monthly premium to ensure their family is cared for in the event of an emergency.

Life Insurance

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

Other Investments

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 by APR (Annual Percentage Rate)

Consumer Credit

Home MortgagesAuto and Consumer LoansStore Charge AccountsCredit Cards

Kinds of Credit Available

Credit worthiness is judged by the following characteristics:◦Character (record of repayment)

◦Capacity to repay debts

◦Capital—what you own

Obtaining And Using Credit

Must prove that you can handle financial obligations.

Why Establish Credit?

Open and be responsible with a checking and savings account.

School Loans.

Open a charge account/credit card and pay the entire balance off every month!

Proving Credit Worthiness

Ways to use life insurance policies:◦Create an estate◦Create a college fund◦Fund a business transfer◦Pay off a home mortgage◦Guarantee loans

Life Insurance

Auto Homeowners Liability Health Disability

Other Kinds of Insurance