Transcript Economic Influences on Decision Making

Economic Influences on
Decision Making
Before you make decisions about money, you must understand how
economic factors may impact personal and financial decisions and the
risks related to personal and financial decisions
We know Life is about CHOICES…
and that it is good to weigh the pros and cons of
pursuing a particular course of action.
Using careful analysis, people can determine if
advantages outweighs the disadvantages and a
decision can be made.
When we consider our choices we need to look at
our resources.
Resources are:
1. Time
2. Money
3. Effort
Opportunity Costs
What a person gives up
when a decision is made.
The cost, also called a tradeoff, may involve one or more
of your resources (time
money and effort)
Personal Opportunity Costs
• Involve time, health or energy.
Time spent studying means lost
time to hang out or work. But
this trade off will improve your
learning, grades and therefore
your opportunities
Financial Opportunity Costs
• Involve monetary values of
decisions. ie – purchasing an
item with your savings means you
no longer gain interest on those
funds.
Consider the Resource Cost & the
Personal and Financial Opportunity Costs
• Going to the movies
• Quitting your job and go to college
• Spending time on Saturday with Grandma
• Deciding not to study for a test
• Purchasing a TV with a loan from your parents
• Spending $1000 out of your bank account
Opportunity Cost Calculated (1. 35 min)
The time value of money
(TVM) is the idea that money
available at the present time
is worth more than the same
amount in the future due to
its potential earning
capacity.
This core principle of finance
states money can earn
interest, therefore any
amount of money is worth
more the sooner it is
received.
Time Value of Money 1.35 min
Measuring financial opportunity costs using
Interest Calculations
Spending $1000 from a savings account paying 4%
a year means an opportunity cost of…
$40 of lost interest!
Calculation
• $1000 x .04 (4%) x 1yr= $40
Over 10 yrs, that $40 a year saved at 4% would have a value of over
$480 due to compound interest
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Year 11
Year 12
Year 13
Year 14
Year 15
Principal
$ 1,000.00
$ 1,040.04
$ 1,081.68
$ 1,124.99
$ 1,170.03
$ 1,216.87
$ 1,265.58
$ 1,316.25
$ 1,368.94
$ 1,423.74
$ 1,480.72
$ 1,539.99
$ 1,601.63
$ 1,665.74
$ 1,732.41
Interest
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
4%
Simple Interest
$
40.00
$
41.60
$
43.27
$
45.00
$
46.80
$
48.67
$
50.62
$
52.65
$
54.76
$
56.95
$
59.23
$
61.60
$
64.07
$
66.63
$
69.30
Compound
Interest
$ 1,040.04
$ 1,081.68
$ 1,124.99
$ 1,170.03
$ 1,216.87
$ 1,265.58
$ 1,316.25
$ 1,368.94
$ 1,423.74
$ 1,480.72
$ 1,539.99
$ 1,601.63
$ 1,665.74
$ 1,732.41
$ 1,801.74
Changing economic factors influence the
decisions we make.
Sometimes we don’t consider economic influences when making decisions.
Trends in the economy may influence our decisions to
• Save
• Invest
• Spend
• Borrow
ie: Higher interest Rates make saving more attractive.
Before making decisions about MONEY you must understand how
economic factors impact personal & financial decisions.
Consumer prices
• Changes in the buying power of the
dollar, inflation
Interest Rates
• The cost of borrowing money
Consumer spending
• Demand for goods and services
Money Supply
• Funds available for spending in the
economy
Gross Domestic Product (GDP)
• Total value of good and services
produced within the country
Stock Market Index
• Indicates general trends in the value of
stocks (Dow Jones Avg., NASDAQ, TSE 300)
Housing Starts
• The number of new homes being built
Unemployment
The number of people without employment
who are willing to work
Consumer Actions are affected by
Economic Conditions.
1. Higher prices result in more expensive goods and services, and lower buying
power of the dollar.
2. Increases in consumer spending for certain goods and services result in
additional jobs in those industries.
3. A growing GDP usually indicates expanded economic growth in a country.
4. Increased home building usually leads to more job opportunities and expanded
consumer spending.
5. Lower interest rates encourage consumer spending; higher rates
are likely to encourage saving and discourage borrowing.
6. A larger money supply will usually result in lower interest rates. A
smaller money supply will likely result in higher interest rates and
reduced consumer spending.
7. Higher stock prices usually indicate confidence in the economy and
strong business conditions for jobs and consumer spending.
8. High unemployment reduces consumer spending and results in
fewer job opportunities.
Economic Factor
Consumer prices
Consumer spending
Gross Domestic Product (GDP)
Housing Starts
Interest Rates
Money Supply
Stock Market Index
Unemployment
Recent Trend
Possible Influences on personal
and financial decisions
Risks Associated with
Financial Decision Making
Making choices about money can be risky. There are common
risks that you should think about related to personal and
financial decision making.
Changing jobs or reduced spending by consumers can result in a lower income or
loss of one’s employment. Career changes or job loss can result in a lower
income and reduced buying power
• Income Risk
Rising prices cause lower buying power. Buying an item later may mean a high
price.
• Inflation Risk
Changing interest rates affect your costs (when borrowing)
and your benefits (when saving or investing)
• Interest-rate risk
Certain types of savings, guaranteed investment certificates (GICs), and
investments (real estate) may be difficult to cash quickly
• Liquidity Risk
Factors that create a less than desirable situation. Risk may be in the form
of inconvenience, embarrassment, safety or health concerns.
• Personal Risks