LEARNING OBJECTIVESSSEPF1 THE STUDENT WILL APPLY

RATIONAL DECISION MAKING TO

PERSONAL SPENDING AND SAVING

DECISIONS

SSEPF2 THE STUDENT WILL EXPLAIN

THAT BANKS AND OTHER FINANCIAL

INSTITUTIONS ARE BUSINESSES THAT

CHANNEL FUNDS FROM SAVERS TO

INVESTORS

SSEPF3 THE STUDENT WILL EXPLAIN

HOW CHANGES IN MONETARY AND

FISCAL POLICY CAN HAVE AN

IMPACT ON AN INDIVIDUAL’S

SPENDING AND SAVING CHOICES

SSEPF4 THE STUDENT WILL EVALUATE THE COSTS AND BENEFITS OF USING CREDIT

SSEPF5 THE STUDENT WILL DESCRIBE HOW INSURANCE AND OTHER RISK-MANAGEMENT STRATEGIES PROTECT AGAINST FINANCIAL LOSS

SSEPF6 THE STUDENT WILL DESCRIBE HOW THE EARNINGS OF WORKERS ARE DETERMINED IN THE MARKETPLACE

RISK AND RETURN• INVESTMENT AND SAVINGS OPTIONS ARE BASED ON THE

CONCEPTS OF RISK AND RETURN

• RISK IS THE POTENTIAL FOR AN INVESTMENT TO LOSE MONEY

• INVESTING IN A BUSINESS COMES WITH THE RISK OF LOSING MONEY

BECAUSE THAT BUSINESS MAY NOT EARN A PROFIT IN THE FUTURE!

• RETURN IS THE ANTICIPATED EARNINGS THAT YOU HOPE TO MAKE

THROUGH AN INVESTMENT

• EVEN THOUGH YOU MIGHT EXPERIENCE RISK IN AN INVESTMENT, YOU HOPE

THAT THE POTENTIAL RETURN WILL OUTWEIGH THE RISK

!

FINANCIAL INSTITUTIONS FOR SAVINGS• THERE ARE MANY OPTIONS FOR PEOPLE WHO WANT TO DEPOSIT

THEIR MONEY AS SAVINGS!

• THEY COULD USE A BANK: A CORPORATION THAT STORES DEPOSITS AND

MAKES LOANS IN ORDER TO EARN A PROFIT

• THEY COULD USE A SAVINGS AND LOAN ASSOCIATION: SIMILAR TO A

BANK, BUT IT GETS MOST OF ITS DEPOSITS FROM CONSUMERS, RATHER

THAN BUSINESSES, AND LENDS MOST OF ITS MONEY TO HOME BUYERS

• OR, THEY COULD ALSO USE A CREDIT UNION: A NOT-FOR-PROFIT

FINANCIAL INSTITUTION THAT IS OWNED AND CONTROLLED BY ITS

MEMBERS, USUALLY PEOPLE WHO WORK IN THE SAME COMPANY OR

CORPORATION

RISK & RETURNRISK SAVINGS/INVESTMENT OPTION RETURN

Lowest

Low

Pretty Low

Medium

High

Lowest

Low

A Little More

High

Highest

Savings/Savings Account

Investment/Certificate of Deposit

Investment/Bonds

Investment/Mutual Fund

Investment/Stocks

PROTECTION AGAINST BANK FAILURES

• SO, EVEN A SAFE INVESTMENT LIKE A CHECKING ACCOUNT HAS SOME

SMALL LEVEL OF RISK, WHICH IS WHY THE GOVERNMENT SET UP THE

FEDERAL DEPOSIT INSURANCE COMPANY (FDIC) AFTER THE GREAT

DEPRESSION

• THE FDIC INSURES BANK ACCOUNTS UP TO $250,000 PER DEPOSITOR!

• SO, EVEN IF YOUR BANK GOES BANKRUPT, AS LONG AS YOUR

ACCOUNT IS UNDER $250,000, YOUR MONEY IS SAFE!

• THIS PROGRAM PUT CONFIDENCE BANK IN AMERICAN CONSUMERS

WHO WERE NERVOUS ABOUT DEPOSITING MONEY IN BANKS

TYPES OF INVESTMENTS

• THE THREE MOST IMPORTANT TYPES OF INVESTMENTS ARE BONDS,

STOCKS, AND MUTUAL FUNDS

• BONDS: YOU ARE LENDING MONEY TO A CORPORATION, THE

FEDERAL GOVERNMENT, A STATE OR CITY, OR AN ORGANIZATION

INVOLVED IN PUBLIC WORKS

• AS TIME PASSES, THE BOND ISSUER PAYS YOU SOME INTEREST PAYMENTS

AND THEN REPAYS THE FULL PRICE OF THE BOND WHEN IT “MATURES”

(USUALLY SEVERAL YEARS LATER)

• THE BOND ISSUER THEN USES THIS MONEY TO FUND ITS PROJECTS

TYPES OF INVESTMENTS

• THE INVESTMENTS WITH THE HIGHEST POTENTIAL REWARDS ARE

ALSO THE RISKIEST – STOCKS

• WHEN YOU BUY STOCKS, YOU ARE BUYING SHARES OF OWNERSHIP IN

A CORPORATION

• IN RETURN FOR THIS INVESTMENT, YOU EARN DIVIDENDS, OR YOUR

SHARE OF THE COMPANY’S PROFITS

• YOU CAN SELL YOUR STOCK AT ANY TIME AND KEEP ANY PROFIT YOU

EARN IF THE VALUE OF YOUR STOCK INCREASED

• THIS EARNING IS CALLED CAPITAL GAINS

TYPES OF INVESTMENTS

• TO AVOID SOME OF THE RISK INVOLVED WITH STOCKS, INVESTORS

MAY CHOOSE MUTUAL FUNDS

• A MUTUAL FUND POOLS MONEY FROM MANY INVESTORS AND USES IT

TO BUY A VARIETY OF STOCKS AND BONDS

• THIS IS CALLED A PORTFOLIO

• THE PORTFOLIO OFFERS A COMPROMISE BY INCLUDING SOME LOW-

RISK, LOW-RETURN STOCKS AS WELL AS HIGH-RISK, HIGH-RETURN

STOCKS

• THIS WAY, INVESTORS CAN NEVER LOSE ALL OF THEIR MONEY, BUT THEY

STILL HAVE THE CHANCE TO EARN HIGH PROFITS

CAUSES OF INFLATION• REMEMBER: INFLATION HAPPENS! WE’VE JUST GOT TO DEAL WITH IT!

• BUT, ECONOMISTS HAVE CONCLUDED THAT THE TWO MAIN CAUSES OF

INFLATION ARE:

(1) A RAPID INCREASE IN AGGREGATE DEMAND

• IF AGGREGATE DEMAND RISES FASTER THAN PRODUCERS CAN

SUPPLY GOODS AND SERVICES, THE RESULT IS SHORTAGES, WHICH

LEAD TO HIGHER PRICES

• THIS IS CALLED DEMAND-PULL INFLATION

(2) A RAPID FALL IN AGGREGATE SUPPLY

• IF AGGREGATE SUPPLY FALLS SUDDENLY BECAUSE OF A NATURAL

DISASTER, WHILE DEMAND STAYS THE SAME, THERE WILL ALSO BE

SHORTAGES AND HIGHER PRICES

• THIS IS CALLED COST-PUSH INFLATION

EFFECTS OF INFLATION• WHEN INFLATION IS HIGH, THE PURCHASING POWER OF THE

DOLLAR DECLINES

• THIS MEANS, YOUR DOLLAR IS WORTH LESS

• THIS AFFECTS CONSUMERS WHEN THEIR INCOME DOES NOT

INCREASE AS FAST AS THE INFLATION RATE DOES!

• IF YOU ARE ON A FIXED MONTHLY INCOME, OR ARE UNDER A SALARY

CONTRACT, THEN YOU LOSE PURCHASING POWER

• SOME PEOPLE HAVE COST-OF-LIVING ADJUSTMENTS IN THEIR WAGES

TO COUNTERACT THE EFFECTS OF INFLATION

• THOSE WHO SUFFER THE MOST FROM INFLATION ARE LOW-INCOME

FAMILIES: THEY MUST SPEND MORE AND MORE OF THEIR LIMITED CASH

ON NECESSITIES

DIFFERENT KINDS OF TAXES• REMEMBER: ONE FISCAL POLICY THAT THE GOVERNMENT MAY

ENACT IS TO INCREASE TAXES IN ORDER TO SLOW DOWN

CONSUMER DEMAND

• TAXES ARE CATEGORIZED BASED ON THE RELATIVE EFFECTS THEY

HAVE FOR PEOPLE WITH HIGH INCOMES AND PEOPLE WITH LOW

INCOMES

• THERE ARE THREE MAIN TYPES OF TAXES:

• PROPORTIONAL TAXES

• PROGRESSIVE TAXES

• REGRESSIVE TAXES

PROPORTIONAL TAXES• TAXES IN WHICH PEOPLE WITH HIGHER INCOMES PAY THE SAME

PROPORTION, OR PERCENTAGE, OF THEIR INCOMES AS PEOPLE

WITH LOW INCOMES

• THIS IS ALSO KNOWN AS A FLAT TAX – BECAUSE EVERYONE PAYS THE

SAME FLAT RATE

• VERY FEW TAXES IN THE US ARE PROPORTIONAL

• ONE EXAMPLE IS THE SOCIAL SECURITY TAX – IT IS PROPORTIONAL FOR

PEOPLE EARNING UP TO $102,000

• THIS MEANS THAT ALL PEOPLE UNDER $102,000 PAY THE SAME

PERCENTAGE TAX FOR SOCIAL SECURITY

• PROPORTIONAL TAXES HAVE THE SAME IMPACT ON THE RICH AND

THE POOR – THEY DO NOT REDISTRIBUTE INCOME FROM ONE

SOCIAL CLASS TO ANOTHER

AN EXAMPLE OF FLAT TAX

INCOME LEVEL FLAT TAX TAXES PAID

$1,000,000/YEAR 4% $40,000

$100,000/YEAR 4% $4,000

$50,000/YEAR 4% $2,000

$25,000/YEAR 4% $1,000

Do You Think This Is Fair?

PROGRESSIVE TAXES

• TAXES IN WHICH PEOPLE WITH HIGHER INCOMES PAY A LARGER

PROPORTION, OR PERCENTAGE, OF THEIR INCOME THAN PEOPLE

WITH LOWER INCOMES• THESE ARE ALSO KNOWN AS GRADUATED TAXES – OR TAXES THAT

GRADUALLY INCREASE AS INCOME GOES UP

• THE BEST EXAMPLE OF A PROGRESSIVE TAX IN THE US IS THE PERSONAL

INCOME TAX

• IN THEORY, PROGRESSIVE TAXES PLACE A HEAVIER BURDEN ON THE

RICH BECAUSE THEY PAY A HIGHER PERCENTAGE OF THEIR MONEY IN

TAXES

• A TRUE PROGRESSIVE TAX AIMS TO REDUCE INEQUALITIES IN

INCOME ACROSS SOCIAL CLASSES

PROGRESSIVE TAX EXAMPLE

REGRESSIVE TAXES

• TAXES IN WHICH PEOPLE WITH LOWER INCOMES PAY A LARGER

PROPORTION, OR PERCENTAGE, OF THEIR INCOME THAN PEOPLE

WITH HIGHER INCOMES

• THESE TAXES PLACE A GREATER BURDEN ON THE POOR

• THE BEST EXAMPLE IN THE US IS THE SALES TAX – EVEN THOUGH

EVERYONE PAYS THE SAME RATE OF SALES TAX, THIS TAX ACCOUNTS

FOR A HIGHER PERCENTAGE OF A POOR PERSON’S INCOME THAN A

RICH PERSON’S INCOME

• FOR THIS REASON, REGRESSIVE TAXES TEND TO INCREASE INCOME

INEQUALITIES

A COMPARISON OF TAXES

TAX BURDENS BY INCOME LEVEL

ADDITIONAL TAXES• IN THE US, MOST SALES TAXES ARE IMPOSED BY STATE OR LOCAL

GOVERNMENTS

• THE ONLY EXCEPTION IS AN EXCISE TAX, OR AN ADDITIONAL SALES

TAX PLACED ON SPECIFIC ITEMS THAT IS COLLECTED BY THE

FEDERAL GOVERNMENT

• THIS IS SOMETIMES CALLED A “SIN TAX” BECAUSE IT APPLIES TO ITEMS

SUCH AS ALCOHOL AND TOBACCO

• ANOTHER IMPORTANT TAX IS THE PROPERTY TAX

• IT IS IMPOSED ON LAND AND BUILDINGS AND IS USUALLY COLLECTED

BY LOCAL GOVERNMENTS

• THIS TAX USUALLY GOES TO SUPPORT LOCAL SCHOOLS

BUY NOW, PAY LATER

CREDIT IS THE ABILITY TO OBTAIN GOODS AND SERVICES NOW,

BASED ON AN AGREEMENT TO PAY FOR THEM LATER

CREDIT TAKES MANY FORMS – A BANK LOAN FOR MAJOR

EXPENSES, SUCH AS CARS, HOUSES, AND EDUCATION; OR

CREDIT CARD PURCHASES FOR SMALLER ITEMS SUCH AS

FOOD, CLOTHING, AND GAS

CREDIT IS CONVENIENT – ALLOWING US TO ENJOY GOODS

BEFORE WE ACTUALLY PAY FOR THEM

BUT, IF YOU AREN’T CAREFUL, CREDIT CAN ALSO LEAD TO

SPIRALING DEBT THAT CAN DESTROY YOUR FINANCIAL

HEALTH!

BECOMING CREDITWORTHY

IT IS IMPORTANT TO BUILD A GOOD HISTORY OF USING CREDIT – IT

CAN AFFECT THE INTEREST RATES YOU GET ON LOANS, OR YOUR

ABILITY TO OPEN CREDIT CARDS

BEING ABLE TO USE CREDIT WISELY AND BEING A RELIABLE DEBTOR

(SOMEONE WHO TAKES OUT CREDIT) IS KNOWN AS BEING

CREDITWORTHY

BANKS AND CREDIT CARD COMPANIES DECIDE YOUR

CREDITWORTHINESS BASED ON TWO UNDERLYING QUESTIONS:

1. ARE YOU ABLE TO PAY THE MONEY BACK?

2. ARE YOU LIKELY TO PAY THE MONEY BACK?

1. CAN YOU PAY?

IN ORDER TO DETERMINE IF YOU HAVE THE ABILITY TO PAY BACK A LOAN, THE BANK WILL INVESTIGATE:

WHERE YOU WORK

HOW MUCH YOU EARN

HOW MUCH MONEY YOU CURRENTLY HAVE SAVED

WHAT YOUR CURRENT EXPENSES ARE

HOW MANY PEOPLE DEPEND ON YOU FOR THEIR BASIC NEEDS

HOW MUCH YOU ALREADY OWE IN DEBTS

WHAT PROPERTY YOU OWN THAT CAN BE USED AS COLLATERAL, OR SOMETHING THE BANK COULD TAKE AWAY FROM YOU IF YOU DO NOT REPAY THE LOAN

2. WILL YOU PAY?

TO DETERMINE IF YOU WILL PAY BACK THE LOAN IS A LITTLE MORE TRICKY

SO, TO DECIDE IF YOU ARE LIKELY TO PAY, THE BANK WILL LOOK AT YOUR EMPLOYMENT HISTORY AND YOUR CREDIT HISTORY, OR HOW WELL YOU HAVE MANAGED YOUR BILLS AND CREDIT IN THE PAST

YOUR CREDIT HISTORY IS RECORDED WITH CREDIT BUREAUS, WHICH ARE COMPANIES THAT COLLECT FINANCIAL INFORMATION ON EVERY BILL-PAYING ADULT IN THE NATION

YOUR CREDIT HISTORY SHOWS HOW RELIABLE YOU ARE!

YOUR RELIABILITY IS SHOWN THROUGH A CREDIT SCORE –THE HIGHER THE SCORE, THE MORE LIKELY YOU ARE TO GET A LOAN

THE COST OF BORROWING MONEY

INTEREST IS THE COST OF USING MONEY – WE’VE TALKED ABOUT

EXAMPLES OF INTEREST IN PAST UNITS

INTEREST IS USUALLY EXPRESSED AS AN INTEREST RATE, OR A

PERCENTAGE OF THE TOTAL AMOUNT OWED

THERE ARE SEVERAL THINGS YOU SHOULD LEARN ABOUT DIFFERENT

TYPES OF INTEREST:

IS THE INTEREST RATE QUOTED AN ANNUAL RATE (AMOUNT PER YEAR) OR

PER MONTH?

IS THE INTEREST RATE FIXED OR VARIABLE?

A FIXED INTEREST RATE NEVER CHANGES, BUT A VARIABLE INTEREST RATE CAN

GO UP AT ANY TIME

IS THE INTEREST CALCULATED AS SIMPLE INTEREST OR COMPOUND

INTEREST?

SIMPLE AND COMPOUND INTEREST

SIMPLE INTEREST MEANS THAT

YOU ARE CHARGED INTEREST

ONLY ON THE ORIGINAL

AMOUNT OF THE LOAN

COMPOUND INTEREST MEANS

THAT YOU PAY INTEREST ON ANY

REMAINING PRINCIPLE AND THE

PREVIOUSLY CHARGED INTEREST

ON IT

CAN BE COMPOUNDED

MONTHLY OR YEARLY

Compound Interest• Hard on borrowers• Good for investors

ANOTHER WAY TO LOOK AT IT