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Personal Finance Overview
People’s income, in part, reflect choices they
have made about education, training, skill
development, and careers. People with few skills
are more likely to be poor.
There are two methods for classifying how
income is distributed in a nation—the personal
distribution of income and the functional
distribution of income.
Government
Government often redistribute income directly
when individuals or interest groups are not
satisfied with income distribution resulting from
markets.
Transfer payments can be cash or in-kind
(noncash) benefits (such as food stamps,
housing subsidies, or gifts between friends
and family members).
Government also redistribute income indirectly as
side-effects of other government actions that
affect prices or output levels for various goods
and services.
Income
There are four basic categories of income:
wages, rent, interest, and profit
(corporate or proprietors income).
The majority of income earned in the U.S.
is from wages and salaries—income
earned working for an organization not
owned by the worker). The smallest
amount of income is earned from rental
income.
Personal Finance Economics
SSEPF1 The student will apply rational decision
making to personal spending and saving choices.
a. Explain that people respond to positive and negative
incentives in predictable ways.
b. Use a rational decision making model to select one
option over another.
c. Create a savings or financial investment plan for a
future goal.
Rational Decision Making
A framework for understanding and often formally
modeling social and economic behavior. Rationality,
interpreted as "wanting more rather than less of a
good", is widely used as an assumption of the behavior
of individuals in microeconomic models and analysis and
appears in almost all economics textbook treatments of
human decision-making.
In short, this simply means that an individual acts as if
balancing costs against benefits to arrive at action that
maximizes personal advantage (choose the alternative
that best meets your criteria).
a. Explain that people respond to positive and
negative incentives in predictable ways.
• People will decide to perform an act if
offered a positive incentive
– Ex. Complete chores for an allowance
• People will decide not to perform a task if
offered a negative incentive
- Ex. Most people do not commit crimes
because of the fear of going to jail
Rational Decision Making Model
Alternatives
Choice 1
Choice 2
Benefits
--------Decision
--------Opportunity Cost Choice 2
Choice 1
Benefits Forgone Benefits of choice 2 Benefits of choice 1
Ex. (riding the bus rather than riding with an unreliable friend to
school/work).
Remember, people are motivated by incentives
(positive = reward; negative = punishment).
b. Use a rational decision making model to
select one option over another.
Decision making model
Alternative
Alternative
Choice 1- Sleep late
Choice 2 –wake up early to
study
Benefits
Enjoy more sleep
Have more energy during the
day
Better grade on test
Teacher and parental approval
Personal satisfaction
Decision
Sleep late
wake up early to study
Opportunity Cost
Extra study time
Extra sleep time
Benefits Forgone
Better grade on test
Teacher and parental approval
Personal satisfaction
Enjoy more sleep
Have more energy during the
day
c. Create a savings or financial investment
plan for a future goal.
What I want
What It Costs
What I Can Do
Short-Term
Prom dress
Goal
(achievable in 6
months or less)
$200
Earn and save
10 weeks from
$20/ week from now
baby sitting
Long- Term
Goal (takes a
year or more to
save for)
$2000
Save $10/week 1 year from
from allowance now
and get afterschool job;
save $30/week
Used car
When I Can
Get It
QUESTIONS FOR REVIEW
1. Ted wants to be a doctor. He also wants to buy a
brand new car. Since both medical school and the new
car are very expensive, Ted cannot afford to do both. If
Ted decides that the benefits of going to medical school
will ultimately outweigh the gratification of buying a new
car, then the MOST rational thing Ted can do is
A.
B.
C.
D.
Use the money for medical school. Ans: A
Invest the money in bonds.
Buy the car.
Avoid using the car as a trade-off.
2. Rikki just about to complete high school. Before graduation
her parents tell her that, since she was a little girl, they have been
saving money to give her when she graduates. Rikki learns, upon
graduation, she will receive $50,000. Rikki must now decide what
is next for her in the future. Which would be the MOST rational
thing for Rikki to do?
A. Use the money to by the awesome new sports car she
desperately wants, then work her way through college.
B. Use the money to by the awesome new sports car and
get college loans to pay for her education.
C. Use the money to pay for college and continue to drive
her old used car.
D. Use the money to pay a part of her college tuition and a
down payment on the car and find a job to in order to
make payments on both her college tuition and car
payment.
Ans. C
SEPF2 The student will explain that banks and other
financial institutions are businesses that channel
funds from savers to investors.
a. Compare services offered by different financial
institutions.
b. Explain reasons for the spread between interest
charged and interest earned.
c. Give examples of the direct relationship between risk
and return.
d. Evaluate a variety of savings and investment options;
include stocks, bonds, and mutual funds.
“The Bank”
• Place to store money
• Kept in checking and savings deposits
• Also store other valuables: jewels,
stocks, documents (safety deposit boxes
in vault)
• Offers LOANS: mortgage, credit cards,
car, personal, business, …. etc.
• Interest creates a RETURN, yet still
includes RISK!!!
Sources of Loans & Credit
•
Types of Financial Institutions Include
…..
1) Commercial Banks: accept deposits &
lend $; transfer funds among banks,
businesses and individuals: today control
largest amount of $ and offer widest
range of services.
2) Credit Unions: formed by employees;
owned & operated by its members to
provide low-interest loans only to its
members.
3) Savings and Loan Association: similar to
commercial bank (deposits & loans); originally
called “building societies” for purpose of home
building.
4) Savings Bank: similar to S & L’s in that most of
their business comes from savings and home
loans; originally created to serve the “small
saver” overlooked by large banks.
5) Consumer Finance Companies: take over
contracts for installment debts from stores and
add fees for collection; PLUS …often used by
people unable to obtain credit from other
routes; higher interest rates!
QUESTIONS FOR REVIEW
1. Which of the following types of institutions will allow for both
deposits and lending money. It also controls the largest amount
of money and offers the widest range of services today?
A. Commercial Banks ***
C. Credit Unions
B. Consumer Finance companies D. Savings Bank
2. What is the difference between a Credit Union and a
Commercial Bank?
A. Credit Unions are owned and operated by its members
to offer higher interest rates on loans than Commercial
Banks.
B. Credit Unions are safer than Commercial Banks.
C. Credit Unions are owned and operated by its members
to offer lower interest rates on loans than Commercial
Banks. ***
D. Credit Unions are insured by the Federal Government
to insure deposits and Commercial Banks are not.
3. Frankie and Suzy are married and are planning to
build a home. Both have only been working in their job
for 4 years, where should they try to get a loan to build
their home?
A. Credit Union
C. Bank of America
B. Laurens Savings & Loan ***D. EZ Credit
4. John needs cash fast and does not have a job but
owns a 2005 Ford Mustang. Where would John most
likely get the cash he needs without having to verify
most of his current income?
A. Local Commercial Bank
C. Title Max ***
B. Heartland Mortgage Co.
D. Credit Union
“Reserve” Requirement
• Federal Reserve system requires banks to
keep certain amounts of money on hand
• A percentage of total deposits
• Current Reserve Requirement =
10 % of value of all checking and
savings accounts
Channeling Funds
from Savers to Investors
• Banks and other Financial Institutions are
BUSINESSES that channel funds from the
people who “save” money to people who
“borrow” for investment purposes.
• Can you think of a situation where this
would happen??
_____________________________
Savers Include …
• People seeking to save money through a
variety of means. How??
• Buying government securities such as
bonds (regularly offered) by investing in
them the investor is offered interest
• Buying corporation stock in exchange for
ownership in the company.
• Investing in mutual funds pooling
monies to increase purchasing power.
Investors Include …
People seeking to earn more (future) money through an
investment of present money.
• Stocks: ownership in a company (offered
dividends as a form of payment that might not be
guaranteed).
• Bonds: government securities (lent money out
to be paid interest on the loan).
• Mutual Funds: a collection of investments
(money combined with others and managed by one
group to increase purchasing power and profits).
• Business Start-Up: entrepreneurship
The Relationship
Between “Risk” and “Return”
• Risk: chance taken that money loaned will
be repaid by borrower
• Return: amount received through repayment
of original loan PLUS INTEREST
• Many loans are insured by …COLLATERAL
it is often property.
Examples of Risk and Reward
Investment
Income
Generated
Very steady
Growth
Potential
Good
Stocks
Variable (up
and down with
stock market)
Good (in a
good
economy)
Bonds
Very steady
Little or none
Savings
Risk Level
Low risk
(based on
interest rates)
High to
moderate risks
Low risk and
(but guaranteed to the safest
be paid and
maturity date)
Mutual Fund
Variable (up
and down with
stock market)
Combined with Low to variable
your investrisks
ment/Good
QUESTIONS FOR REVIEW
1. Which of the following will allow for good profit
returns if the economy is functioning at high level?
A. Mutual funds
C. Stocks ***
B. Savings
D. Bonds
2. Which sentence describes the risks and returns of
investing in stocks?
A. They offer the lowest risks and the lowest
potential returns.
B. They offer the highest risks and the highest
potential returns. ***
C. They offer the lowest risks, but the highest
potential returns.
D. They offer the highest risks, but the lowest
possible return.
Difference Between
“Interest Charged” and “Interest Earned”
• Why? = profit for bank as a business
• Interest Rate: the percentage amount of
payment by borrowers to the lender.
– Interest Charged: is determined on a loan amount or
credit account by the lender (lender makes profit).
– Interest Earned: is determined on a savings,
checking, etc. once your money is deposited and the
bank owes you (depositor makes profit).
• Two types: Compound Interest rate and
Simple Interest rate; Compound is greater
than Simple rate.
Questions for Review
1. Juan goes to the Southern Union Bank to get a loan. Juan
has an account at the bank on which he receives 2.2% annual
interest. Which of the following can be said of the rate of interest
he will pay on the loan that he takes out?
A. It will be lower than 2.2%.
B. Nothing can be known about it, because he has
not yet applied.
C. It will be higher than 2.2%.
Ans: C
D. He will be denied the loan.
2. On which of the following loans would one be MOST LIKELY to
pay the highest interest rate?
A. A home mortgage loan
B. An automobile loan
Ans: C
C. A credit card
D. A student loan for college
SSEPF3 The student will explain
how changes in monetary and
fiscal policy can have an impact
on an individual’s spending and
saving choices.
a. Give examples of who benefits and who
loses from inflation.
b. Define progressive, regressive, and
proportional taxes.
c. Explain how an increase in sales tax
affects different income groups.
Types of Income Taxes
1. Progressive tax—the tax rate increases as
income increases, meaning the wealthy pay a higher
percentage of their earnings than people less well off
(ex. U.S. personal income tax); tends to reduce
inequalities in income.
2. Regressive tax— people with lower income tend
to pay a larger proportion, or percentage of their income
that people with higher income; the tax rate decreases
as income increases (ex. sales tax). Most sales taxes
are imposed by state governments.
3. Proportional tax—known as a flat tax, does not
change with respect to changes in income (does not
redistribute income from one social class to another).
Sales Tax and Inflation
Sales Tax
Inflation
• A regressive tax because
• Simply stated, the
it affects the lower income
rising in prices. When
people with regard to a
inflation is high the
great proportion of their
purchasing power of
income going to pay taxes.
the dollar declines.
• To protect this, necessities
(such as food, clothing, and
medicines) are put in place
to be often sold tax free.
• The individuals with
lower income suffer from
this due necessities of
basic living cost.
• The alternative is excise
tax or “sin tax” on items
such as alcohol and
tobacco.
• Some union workers
have contracts with
their employers to
receive cost-of-living
adjustments to
counter the increasing
in prices.
Questions for Review
1. The BEST example of a regressive tax in the United States is
A. Personal income taxes.
C. Luxury taxes.
***
B. Sales taxes.
D. Property taxes.
2. Susan earns $70,000 annually and pays a tax of $8,500. John
earns $30,000 during the same period and pays taxes of $2,500.
The tax they both paid was a
A. Proportional tax.
C. Progressive tax. ***
B. Regressive tax.
D. Marginal tax.
3. How does high inflation cost affect consumer
spending and saving?
A. Consumers save more and spend less.
B. Consumers spend more and save less. ***
C. Consumers decrease both spending and
savings.
D. It has no effect on spending or saving.
SSEPF4 The student will evaluate
the costs and benefits of using
credit.
a. List factors that affect credit worthiness.
b. Compare interest rates on loans and
credit cards from different institutions.
c. Explain the difference between simple
and compound interest rates.
Credit Cards: Buy Now, Pay Later
Credit: Who needs it????
• The ability to obtain goods and services
now, based on an agreement to pay for them
later.
• Includes bank loans to pay major expenses
such as cars, houses, and higher education.
• It can lead to spiraling debt that can destroy an
individual’s or family’s financial health now and
in the future.
Are you CREDIT WORTHY???
• An important part of a being successful adult in the
U.S. is learning how to build a good credit history,
how to obtain credit at the lowest possible cost, or
interest rate, and how to use credit wisely.
• Factors that affect your credit worthiness are:
– Where you work, how much you earn, how much money
you have saved.
– What is your current expenses?
– How many people depend on your basic needs
(dependents)?
– How much you owe in debts?
– What property you own (collateral)?
Interest Rate (the cost of using credit)
Fixed or Variable
Fixed
• A fixed rate never
changes regardless
of your living
circumstances.
• Mostly on car or house
loans.
• Commercial banks/
Credit Unions
Variable
• A variable rate can go
up at any time
regardless of your
living expenses—
follows your payment
history, stock market,
etc.
• Mostly on credit cards,
title pawns, etc. usually
has an annual fee.
Difference Between
“Interest Charged” and “Interest Earned”
• Why? = profit for bank as a business
• Interest Rate: the percentage amount of
payment by borrowers to the lender
• Simple Interest: determined annually with
the original loan amount
• Compound Interest: future interest is
determined with the existing amount owed
• Compound rate is greater than simple
rate
Calculating Interest
Example 1. Simple Interest: The formula for
simple interest is I = P x r x t, where I is interest,
P is the principal, r is rate of interest, and t is time
period.
Simple interest for one year on $100 at 3
percent is 100 x .03 x 1 = $3
Simple interest for second year on $100 at
3 percent is 100 x .03 x 1 = $3
Total interest for two years = $6.
The account, therefore, is worth $106 after two
years of simple interest at 3 percent per annum.
Calculating Interest
Example 2. :Compound Interest The formula for
compound interest is A = P(1 + r)n, where A is the
money accumulated after n is years including
interest, P is the principal, r is the annual rate of
interest, and n is the number of years.
The step-by-step explanation for $100 for two years at 3
percent compound interest is:
Interest for year one = 100 x .03 x 1 = 3.00;
amount at end of year one = 100 + 3 = $103.00
Interest for year two = 103 x .03 x 1 = 3.09;
The total amount at end of year two = 103 + 3.09 =
106.09.
Questions for Review
1. George deposits $100,000 in Kennesaw Mountain Bank. A
year later, he borrows $100,000 from Kennesaw Mountain Bank
to finance his son’s college education. Which of the following
statements is true?
A. George did not have to prove he had collateral and
credit worthy.
***
B. George is being paid compound interest by the bank.
C. George is being charged a higher interest rate and
receiving high interest on his deposit.
D. George is earning more interested that he’s charged.
Which of the following people would benefit the most from
compound interest?
A. Someone applying for a home loan.
B. Someone who needs a car loan.
C. Someone investing their money in an mutual fund.
D. A borrower with a high credit score.
***
SSEPF5 The student will describe
how insurance and other riskmanagement strategies protect
against financial loss.
a. List various types of insurance such
as automobile, health, life, disability,
and property.
b. Explain the costs and benefits
associated with different types of
insurance.
Insurance
An investment in your possessions
• The purpose of insurance is to provide financial
protection against different kinds of risks one
faces in life.
• It involves transferring risks to others.
• An individual or household has something of
great value and wants to make sure that, if it is lost
or damaged, it will be financially covered.
• The cost/benefit associated with insurance is it
covers what you might lose. The money you pay
to the insurance company (usually monthly) is
assurance that if your possessions are lost
(either in full or in part) are covered and can be
replaced.
How does Insurance work?
• When you buy insurance, you receive an insurance
policy—a written agreement between you and the
insurance company.
– The policy explains the kinds of losses the company will
cover and how much you pay for the protection
(coverage limits—maximum covered and deductible
amounts—the amount you must pay before the company
will pay).
– NOTE: The higher your deductible the lower your
premium.
• Premium-amount of money you pay per month to
be insured.
• Claim-requested payment/filing on what you have
loss from the company.
Types of Insurances
1. Automobile—Most states require all drivers to have at least
minimum coverage on their vehicle. In order to protect you and/or
the other driver.
Liability coverage—to pay for personal injuries or property
damage.
Collision coverage—to pay for any damage to your own
car.
Uninsured motorist—to pay for your damages or injuries if
the other driver if uninsured.
2. Health—designed to pay for medical costs, expenses, etc. It is
very expensive. One can chose different coverage limits. Usually
employers offer to their employees.
3. Disability—set up to help provide people with an income in
case they become injured or unable to work at a job. It can
provide up to 60% of a person’s income until they can return to
work.
4. Life—designed to provide people with money in case a family
member unexpectedly passes away.
A. Term Life—simply pays the money of the policy to a
beneficiary (family member money goes to). It is cheaper
and pays a higher death benefit but the policy is for a
limited term. NO CASH VALUE
B. Whole Life—more expensive and less of a benefit
because it builds cash value like an investment. It
provides coverage for your whole life and the premium
never increases. CASH VALUE YOU CAN BORROW
5. Property/Homeowners—coverage on house or other property
in the event it is damaged or destroyed, often it will include liability
(for personal injuries). NOTE: Business have comprehensive
liability which covers a much wider range.
Questions for Review
1. If you switched to an insurance policy with a higher deductible,
you could probably expect,
A. A higher premium.
C. A lower premium. ***
B. A higher coverage limit
D. No coverage limit.
2. Of the following people, which one would probably pay the
highest rate for car insurance?
A. A 50-year old single man
C. An 18-year old boy ***
B. A 30-year old married woman D. An 30-year old woman
3. Which kind of insurance pays a monthly income to people who
are unable to work for an extended period?
A. Health insurance
C. Life insurance
B. Disability insurance *** D. Homeowner’s insurance
4. The cost you pay for insurance coverage is called your
A. Policy
C. Deductible
B. Premium
D. Coverage limit
***
SSEPF6 The student will describe
how the earnings of workers are
determined in the marketplace.
a. Identify skills that are required to be
successful in the workplace.
b. Explain the significance of
investment in education, training,
and skill development.
Workers’ Earnings
• Workers’ Earnings—how much employers pay
workers for their labor. Their earnings determine how
much money laborers have to spend and save/invest
for the future.
• The amount of money one makes in the labor market
is due to the skills, training, education, etc. This is
called the earning potential.
• People who are financially successful tend to earn
more money for their labor because they possess
special skills and/or training.
• Usually, the highest paid workers are college
educated, have good communication skills, show
respect for their peers and authority figures,
conduct themselves professionally, and have
actively sought to improve their skills with
additional training.
1. Sophie is the major income earner for her family. For this
reason, Sophie is concerned that her family would struggle
financially if she got hurt and could not work, or even worse, died
and was no longer around. Sophie asks you what steps she could
take to ease some of her concerns. The BEST answer you could
give her is to tell her to
Ans: C
A. Invest in liability insurance.
B. Invest in promising stocks.
C. Invest in life and disability insurance.
D. Invest in health and life insurance.
2. Kelly works for a large law firm in San Diego. Her boss informs
her that a promotion will be available in the next 4 months. Kelly
wants the job, so she works as hard as she can to impress her
boss and bring in profits for the company. Kelly is motivated by a
A. Negative incentive.
C. Rational decision.
Ans: B
B. Positive incentive.
D. List of alternatives.
3. Which of the following people will LIKELY find the highest
paying job in the workforce?
A. Someone with a high school diploma.
B. Someone with a college degree and additional training.
C. Someone with mediocre communications skills.
D. Someone with a history of bouncing from job to job.
Ans: B
4. Arthur gets high 2006 tax returns back from his accountant to
discover that he owes fewer taxes this year than last year. As a
result, he gets a refund check for $3000. What impact will this
have on Arthur?
A. He will be more likely to spend money on consumer
goods and services.
B. He will be less likely to spend money on consumer
goods and services.
C. He will not have to depend as heavily on subsidies as
he did the previous year.
Ans: A
D. He will pay fewer tariffs.
5. Annabelle is tired of making less than $40,000 a year. Which
of the following is the BEST way for Annabelle to raise her earning
potential?
A. Support subsidies that will protect US jobs.
B. Save more of her income.
C. Invest in capital.
Ans: D
D. Acquire more education and training.
6. In 2007, the United States experienced record numbers of
home foreclosures. In other words, because many people had
signed home loans that they ultimately could not afford to pay
back, record number lost their homes to lenders. Lenders were
able to take these homes because they home were
A. Illegally bought.
C. Collateral.
B. Uninsured.
D. Part of a housing surplus
Ans: C
Personal Finance Activity
1. PF/EQ1: Using the rational decision making model
explain in 1 paragraph how you completed
your Standard of Living budget based on
your monthly income. Rank choices on
budget to pay, list costs and benefits,
benefits forgone, etc.
2. PF/EQ2: Based on Visual 1 (Economic Cartoon 10
packet). Give a biographical sketch of your
educational level/life and describe your
ambitions to progress economically. You
can only progress one level.
***Your biographical sketch should be like an interview
for a better job***
**********DUE Wednesday, August 28th ************