Personal Finance: Lesson 14 (SSEPF 1 a-c)
Spending, Saving, and Investment
Rational Decisions and Financial Planning
•Cost-benefit analysis involves weighing the marginal benefits you receive against each additional unit of money you spend
• a rational decisions involves delaying a small benefit now for a greater benefit later
•A need is something you must have in order to survive: food, clothing, shelter
•A want is something you would like to have
•Our wants are unlimited and market economies give us many choices to make
•An opportunity cost is what you give up in order to get something else.
•People need to decide how much of their income to spend now, how much to set aside as savings to achieve short-term goals, and how much to set aside to achieve long-term goals
•Savings are money deposits placed in a bank for future use and are very secure
•Interest is money banks pay you for the use of your savings (they loan them out to other customers)
•Investments are money you pay into a business with the expectation, but not the guarantee of future rewards
•Investments carry higher risks than savings but have the potential to earn higher returns
SHORT-TERM VS: LONG-TERM GOALS
What I Want What It Costs What I Can Do When I Can Get It
Short-Term Goal Prom $200 Earn and save 10 weeks (achievable in 6 Dress $20/2week from now months or less) from babysitting
Long-Term Goal Used $2,000 Save $10/week 1 year (takes a year or Car from allowance from now more to save for) and get after- . school job; save . . . $30/week
Financial Institutions for Saving
•Bank
–A corporation that stores deposits and makes loans
–Is a for profit business
–Pay less interest on savings than they charge for loans
–Certificate of deposits earn more interest than a regular savings account but you have to leave your money in the bank for a specific period of time
•Savings and Loan
–Gets most of its deposits from consumers rather than businesses
–Lends most of its money to home buyers
•Credit Unions
–A not-for profit financial institution that is owned and controlled by its members
–Deposits earn interest but only depositors are eligible to borrow money
•Most banks, savings and loan associations and credit unions are protected by the Federal Deposit Insurance Corporation (FDIC)
•The FDIC will insure savings deposits, CDs, etc. up to $250,000
•Demand deposits, which include checking accounts of any amount will be insured through the end of 2012, after that time, it the amount may be reduced to $250,000
•For testing purposes, at this time, we will use the old amount of $100,000
Investments: Higher Returns in Exchange for Higher Risks
•Bonds
–You lend money to corporations or governments when you buy bonds
–The bonds are issued for a certain amount of time and you will be paid interest periodically on your investment
–They earn a higher rate than savings accounts or CDs
–Are considered to be a safe investment because the issuers of the bonds are evaluated in advance to determine their credit worthiness, or their ability to repay the funds lent to them
–Low risk/low return
•Stocks
–Highest risk but the potential for the highest return
–Are shares of ownership in a corporation
–Stockholders receive dividends if their stocks earn a profit
–May be sold at any time
–Must pay capital gains tax on any profits you earn from the sale of stocks
–If the company goes bankrupt, you lose only the amount you have invested
•Mutual Funds
–Pool money from many different investors and use it to buy a variety of stocks and bonds (portfolio)
–Include a combination of high risk/high return investments and low risk/low return investments
–Investors will never lose all their many and have the potential to earn some high profits
--Make up the retirement plans of many different groups of workers and can also be purchased through . . individual accounts (usually through an insurance broker)