PERSONAL FINANCE

Incentives-cost or benefit that motivates a decision or an action by consumers

•Prices•Wages• Interest Rates

Rational decision making model

P=What is the PROBLEM?A=What are ALTERNATIVES?C=What are the CRITERIA important to the decisionE=EVALUATE each alternativeD=Make a DECISION

Decision-Making Grid

Decision-Making Grid

Alternatives

Cost within Budget?

Acceptable to Parents?

Lasting Benefit?

Entertaining?

Go to Choir Practice

Yes Yes Yes Yes

Go Out to Dinner

No No No Yes

Watch T.V. Yes Probably No YesDo

HomeworkYes Yes Yes No

Go to Football

Game

Yes No No Yes

Savings-putting money away in an account for later use and to earn interest

• Savings (bank acct.)=investing because it pays rate of return

• Financial investment-save/invest money in financial assets such as bank acct., certificate of deposit (CD), stocks, bonds, & mutual funds

• Real investment-purchase of tangible goods to like equipment & homes

Saving/Investment Options• Stock-ownership by way of shares in a corporation

(pd. in dividends)• Bond-Certificate or IOU issued by gov. or publicly

held corp. with promise to repay with interest at a specific time

• Mutual Fund-pool of money used by a company to purchase stocks or bonds. Managed professionally & is diversified

*higher the risk the higher the return***Inflation helps people who borrowed (owe)& hurts people on fixed income or lenders**

Interest Charged vs Interest Earned*Banks pay customers for depositing money, then charge higher interest rate when loaning money*

Types of Financial InstitutionsInstitutions Services Provided

Commercial Banks*charge more interest on money they lend than interest they pay on saving accts=Profits*

Full service bank Checking/savings accts. Credit Cards-higher interest Loans Financial advice

Credit Unions (not for profit) For members Only Credit Cards Checking High-interest saving acct. Low-interest loans

Savings & Loans*originally for saving acct. & home mortgages*

Checking/saving acct. Typically Mortgage (home) loans Credit Cards

Others-Mortgage, Finance, Brokrage

Credit vs DebitCredit

-Based on credit report of credit worthiness

-A company allows you to spend money and pay it back later with interest-a fee charged for borrowing money

Debit (Check cards)

-Used like a credit card

-Money is withdrawn from a checking account at the time of purchase

Simple vs Compound Interest

• Simple interest-interest caluculated only on the principal (original amt.)

• Ex. Joe borrowed $3000 at an interest rate of 5% for 4 years. I=Prt (Interest=principal x rate x time) I=3000 x 5% x 4 I=3000 x .05 x 4 I=$600

• Compound interest-interest calculated on principal & accrued interest or “interest on interest”

• Ex. Joe borrowed $1000 at a compound interest rate of 10% for 3 years.

$1000 x 10%=100 ($1,100) $1100 x 10%=110 ($1,210) $1210 x 10%=121 ($1,331) to be paid back.

Insurance-guarantee by a company of compensation for a specific loss (damage, death, etc.)

Premium-amount paid to company at specific time insuring compensation for loss.

Skills for success in the workplace…

1) Basic Skills-reading writing, math, listening, etc.2) Thinking skills-ability to learn, reason, think, make decisions, problem solve, etc.3) Personal Qualities-individual responsibility, self-management, integrity, etc.

Investments in Education/training leads to higher standard of living

• Human capital-combination of a person’s education, skills, knowledge, training , talents, habits, etc.

• Human capital connected to higher wages & income

• In a country it is connected to productivity & economic growth