Transcript accumulating personal wealth.

Tools_for_Financial_Success.asf
Credit_and_Credit_Cards.asf
END Thurs
•Credit refers to the ability to
borrow money.
•Some forms of credit commonly
used by consumers are
car loans, home mortgage
loans and credit cards.
•Firms also use credit regularly, either by borrowing from
a bank or issuing corporate bonds.
•Government also uses credit when it needs to borrow
money to finance a budget deficit.
•Those who can borrow moderate or large sums of
money at a reasonable rate of interest are sometimes
said to have good credit, while those who cannot borrow
such amounts at such rates are said to have bad credit.
•Credit is extremely useful to the economy.
•Most people would have great difficulty in buying a
house if they couldn't borrow the money.
•Many people also use credit to further their education.
•Many firms would be unable to build new factories if
they had to save all the money
first.
•In addition, short-term credit is
often used by people
(through credit cards) and
firms as a simple and
convenient method of
paying for purchases.
Example_3__Varying_Algorithms____Investing_.asf
•However, excessive borrowing can be a problem for
households, firms and government.
•Making interest payments because you borrowed money
for the house that you live in, a car that you drive or a
factory that produces goods can make good economic
sense.
•But credit should not be used to pay for goods or
consumption in the present that were completely
consumed in the past.
•Be careful if the loan lasts
longer than the item you
bought with it.
•Econ Disk for Credit
•Income - Payments earned by households for selling or
renting their productive resources.
•May include salaries, wages, interest and dividends.
Example_2__Applying_Algorithms____Saving_.asf
Example_3__Varying_Algorithms____Investing_.asf
•Broadly speaking,
an individual
has only two
choices about
what to do with
(after-tax)
income:
spending on
current
consumption or
saving for the
The_Stock_Market.asf
•From an individual point of view, saving typically
becomes a form of investing, since the saving is put into
a bank account, stock, bond or mutual fund that pays a
rate of return.
•In general, investing refers to postponing current
consumption or rewards to pursue an activity with
expectations of greater benefits in the future.
•Financial investment refers to the decisions by
individuals and firms to invest money in financial assets
such as bank accounts, certificates of deposit, stocks,
bonds and mutual funds.
•Financial investment is crucial to
accumulating personal
wealth.
•END Fri
•Real investment or physical
capital investment is the
component of aggregate
demand that refers to the
decisions by firms to
purchase equipment and
physical plant, and also
the purchases of new
homes by consumers.
•The amount of real investment is critical to economic
growth.
•Financial investment and real investment are connected,
but they are not the same.
•Thus, when you hear a casual reference to "investment,"
be clear in your own mind on whether it is financial
investment or real investment. ECON DISK – invest &
save
The_Free_Market_Economy__Supply_and_Demand.asf
•Consumers purchase
goods and services to
satisfy their economic wants.
•Goods are tangible items that can be held
or touched like clothes and cars.
•Services are actions that give economic benefit, such as
a repaired kitchen sink or a package delivered.
•A demand schedule describes the behavior of consumers
and illustrates the amount of a good or service that will
be purchased at various prices during a specific time
period.
•Generally, the lower the price of something, the more of
it will be purchased--and vice versa. EconD - Consumers
Credit_and_Compound_Interest.asf
•Imagine that last year you invested $100 and receive a
rate of return after one year of 10 percent, so that you
have a gain of $10.
•You now invest your total, the $110, and receive a rate
of return of 10 percent, but at the end of this year your
gain is not $10, but rather $11.
•The rate of return hasn't changed, so why was the gain
$10 last year and $11 this year?
•The answer is that when you reinvest past earnings,
then in the future you will earn interest not only on the
original investment, but also on the past accumulated
returns; this is called compound interest.
•Thus, making a one-time investment of $1,000 and
letting an 8 percent annual return on this investment
compound for 40 years would give a future value of
$1,000(1 + .08)^40 = $21,724.
•One lesson of compound interest is to try to save
relatively early in life for
retirement, because
saving in your 20s
and 30s allows much
more time to
accumulate and thus
to let the power of
compound interest
work than saving
done in your 50s or
60s. Econ Disk – C.I.
•Financial markets are those markets
that exist for buying and selling
financial assets.
•The most important financial assets for
individual investors are bonds,
stocks and mutual funds.
•A bond is issued by a corporation or government as a
way of borrowing money.
•An individual who purchases a bond gives money to the
corporation or government that issued the bond, and in
return, receives repayment of the money with interest
over time.
•Many bonds promise a fixed rate of interest.
•Investors in long-term bonds must be concerned that if
inflation is unexpectedly high or nominal interest rates
rise, they may be locked into a bond that pays an
undesirably low rate of return.
•A stock is a share of ownership in a business.
•If a firm has 100,000 shares of stock, and you own
1,000 shares, then you own 1 percent of the company.
•Owners of stock receive a return in two ways.
•The firm may pay dividends to its shareholders out of
the profits that it earns. Also, investors may profit by
selling their shares of stock for more than they paid for
them; this is called a capital gain.
•However, if a company goes
bankrupt, the stock is worth
nothing.
• Thus, stocks are a riskier
investment than many
bonds.
•Many individual investors want to diversify, that is, own
a wide range of stocks and/or bonds from different firms
and different levels of government, so that they don't
have to worry too much about what happens with any
individual firm.
• A mutual fund is an investment company that raises
money from investors; purchases a range of stocks,
bonds and other financial investments; and pays a return
to shareholders according to the overall return of the
entire fund.
•A mutual fund that seeks to mimic the average
performance of the stock market as a whole is called an
index fund.
•However, a mutual fund may focus on stocks or bonds
from a particular industry or particular country or those
that the mutual fund manager believes will perform well
in the future. (Go to Econ Disk for demonstration) (end Wed)
•Human capital refers to the combination of a person's
education, knowledge, experience, health, habits, training
and talent.
•A person who has acquired more human capital will be
able to produce more.
•At the individual level, additions to human capital are
closely connected to earning higher wages and income.
•At the level of the national economy, gains in the
average level of human capital for the population are a
primary source of productivity growth and economic
growth.
•People improve their human capital by investing in
themselves in thousands of ways, but most of the ways
involve study, practice and self-discipline. (Econ Disk)
•The purchase of insurance involves
paying an amount called a
premium at regular intervals,
with the understanding that if
negative events occur, the
insurance company will pay
certain costs.
•For example, health insurance provides payments to
health-care providers if you are sick.
•Life insurance provides a payment to your descendants
if you die.
•Car insurance provides payments for damages caused in
an auto accident.
•Homeowner's insurance pays for home repairs in the
case of fire or storm damage.
•Insurance works on the principle that in a large group of
people historical experience allows one to predict with
some accuracy how many of them will suffer a negative
event each year--but no one can say in advance exactly
who in the group will suffer the negative events.
•Individuals who are averse to taking risks prefer to pay
an insurance premium, and be protected against the high
costs of negative events, instead of
waiting to find out if they are
unlucky enough to suffer the
negative events.
•The great irony of insurance is that it
is a purchase one hopes never to
benefit from--since that would
mean that the negative event
has occurred.
•(Econ disk presentation)
•Budgeting refers to drawing up a
plan for how available funds
will be spent.
•A typical approach is to write down
the total income that you
expect to have available to
spend, and then to write down
how you plan to spend it.
•Budgeting helps you know where your money is actually
going, which in turn helps you to make more informed
decisions about how you would prefer to spend your
money.
•Budgeting helps make clear that cutbacks in one area of
spending might be worth making, because they can pay
for increases in other more desired areas. (Econ Disk)