ECONOMICS UNIT 5 – PERSONAL FINANCE. INVESTMENT How many of you would like to invest money in the future? Why? Who thinks they will purchase a car in.

ECONOMICS UNIT 5 – PERSONAL FINANCE

INVESTMENT

• How many of you would like to invest money in the future?• Why?

• Who thinks they will purchase a car in the future?

INVESTMENTS

• Investment: the action or process of investing money for profit or material result.

• Create a T-chart for good investments and bad investments• Take 5 minutes to make a list of good investments

and bad investments• You will be sharing, and it will be turned in for a grade

RISK AND REWARD

• What is “risk” and “reward”?

• Risk: the possibility that something unpleasant or unwelcome will happen; the possibility of financial loss.

• Reward: a thing given in recognition of one's service, effort, or achievement

FINANCIAL ASSETS AND INVESTMENTS

• Use your textbook to fill in the different types of investments.• They are found in chapter 11 (pg 271)• The definition for Certificate of Deposit is in chapter 10 (pg 259)• IRAs and 401k are not in the book

Asset Definition Advantages Disadvantages

IndividualRetirementAccount (IRA)

Long term account set up byan individual to save money fortheir retirement

Long term, taxsheltered (moneyremoved fromincome beforeyearly taxes),don’t have to beemployed tocreate

Heavy penaltiesfor earlyredemption, nontransferable

401K (pensions) Account for a retiree from theirspecific company

Income security,tax sheltered

Salariesgarnished, lowreturn, nontransferable,ifcompany fails thepension is gone

PERSONAL INVESTMENT GOALS

• Look at the chart you filled in the other day• Using this information, you are going to create

some investment goals for 10 years and 20 years• Criteria:• Age• Income• Short term goals• Long term goals• Tolerance for risk• Debt (think future debt)

TAXABLE INCOME

• Give them taxes packet; discuss each part and let students answer questions

CREDIT

• Show Credit and Credit Cards

BENEFITS AND RISKS OF CREDIT

Benefits Risks

The option of buying something today and paying the money back over time, rather than having to wait

Borrowing more than you can afford to pay back

The flexibility to act on major purchases and life opportunities that may require more money than you have on hand right now, like buying a computer or borrowing for college

Damaging your credit report if you fail to make payments on time

Easier to rent an apartment and to get service from local utility companies

The possibility of paying costly late fees

Easier to rent a car and get a hotel reservation

Paying interest can double the cost of an item

Easier to purchase a car when you have established credit

If you damage your credit, it is difficult to repair and takes time.

Easier to get a cell phone

GOOD CREDIT VS. BAD CREDIT

• Good credit indicators:• Making at least the minimum payment each month• Paying your bills before the due date each month• Making your payment each month, not skipping or

missing a month• Keeping your balance below your credit limit

• Results:• It will be easier to borrow money or get credit.• You will not be assessed costly late fees or over your limit

fees.• You will have more money to spend on other things.

GOOD CREDIT VS. BAD CREDIT

• Bad credit indicators:• Paying less than the minimum payment each month• Payments received after the due date• Skipping or missing payments for some month• Charging over your credit limit• Your debt is too large a percentage of your income

• Results:• It will be difficult to borrow money when you need it.• You will have to pay costly fees.• You will have to pay more in interest adding to the cost of

the item

• Show How to Improve Your Credit

• Give Your Credit Score to complete

MONEY FOR COLLEGE

STEPS FOR FINANCIAL AID

• Fill out the FASFA• Fill out any other forms your school requires• Look up online for any extra scholarships or

grants you may qualify for• Accept your reward amounts

FEDERAL GRANTS

• Federal Pell Grant• Does not have to be repaid• Based on financial need• Usually only for undergrad (bachelor’s degree)

• Federal Supplemental Educational Opportunity Grant• For students with exceptional financial need• “Campus-based” aid; not all schools participate• Only so much money given to school – when it runs out,

no more to give

FEDERAL GRANTS

• TEACH Grant • Money if you plan to become a teacher in a high-need field in a

low-income area• You are required to teach for a certain length of time after you

get your degree or it becomes a loan• You must take certain classes and get a specific job to meet

requirements for loan

• Iraq and Afghanistan Service Grants• If your parent or guardian died as a result of military service in

Iraq or Afghanistan, you may be eligible• You can not be eligible for a Federal Pell Grant because of EFC

but meet other requirements, your parent needed to die in Afghanistan or Iraq after the events of 9/11, and you were under 24 years old or enrolled in college at least part time when the parent died

STUDENT LOANS

• MUST BE PAID BACK• Given at a lower interest rate than regular bank

loans• Can be very costly if you’re not careful

STUDENT LOANS

• Direct Loan:• Federal loan• Advantages:• Borrowers have flexible repayment options

• Disadvantages: • Not all schools participate and not everyone is eligible

• Direct PLUS Loan:• Federal loan• Advantages:• Borrowers have flexible repayment options• Parents may borrow for their dependent undergrad student• Designed for graduate students

• Disadvantages:• Borrower is fully responsible for paying the interest regardless of the

loan status

STUDENT LOANS

• Subsidized loan:• Federal loan• Advantages: • Government pays the interest that accrues while the borrower is in

school

• Disadvantages: • Based on financial need

• Unsubsidized loan:• Federal and private loans• Advantages: • No requirement to demonstrate financial need

• Disadvantages: • Borrower is full responsible for paying the interest regardless of loan

status• Interest accrues from the date of disbursement

FINANCIAL INSTITUTIONS

FINANCIAL INSTITUTIONS

• Role of financial institutions:• Intermediaries between savers and borrows• Safe way to borrow and store money• With deposits, provide commercial loans, personal loans,

mortgages, and issue credit cards

• Enable households and businesses to earn a return on their savings, while providing necessary funds for businesses to use for capital investment• Provide loans, so families and businesses can

purchase what they need

SAVINGS IN THE ECONOMY

• Based on capital formation• Capital formation – expansion of capital or capital

goods, through savings or through investment. More money in savings leads to more resources for business investment, rather than individual consumption

TYPES OF LOANS FOR CONSUMERS

• Open-end credit – a line of credit that can be used repeatedly, within an established borrowing limit. (e.g., credit card, home-equity line of credit) Finance charges apply to the unpaid balance.

• Closed-end credit – a loan for a set amount that requires regular payments at certain intervals. (e.g., vehicle loan, student loan, mortgage) Finance charges are agreed upon at the start of the loan.

• Secured loans – a loan that is obtained by offering an asset as collateral to ensure repayment of the loan. Default on the loan results in loss of the asset. (e.g., vehicle loan, mortgage)

• Unsecured loans – a loan that is obtained without the use of collateral. Default results in collections and possible lawsuit. (e.g., payday loans, student loans, credit cards)

COSTS/BENEFITS

• Declaring personal bankruptcy• Costs• Huge drop in credit score• Effects on record for 7-10 years• Automatic rejection for future credit• Still have to repay part of debt• Secured debt (mortgage, car) not discharged in bankruptcy• Could lose personal property• Could affect future employment, housing• Fees for attorneys, trustee, court

• Benefits• Can help with problems arising from sudden or unexpected catastrophe• Can lower payments• Can stop collection effort

COSTS/BENEFITS

• Buying Insurance • Costs• Money out of pocket• Might not need it or use it• Difficulty of comparing plans

• Benefits• Legal requirements (e.g., auto insurance)• Coverage of unexpected expenses• Some plans build equity to borrow against• Possible tax credit to cover insurance premium

COSTS/BENEFITS

• Charitable giving• Costs• Money out of pocket• Time

• Benefits• Tax deductions• Helping society• Feel good

COSTS/BENEFITS

• Renting a Home • Costs• Abiding by requirements of the lease • Opportunity cost of not building equity from property

ownership • Subject to possible rent increases

• Benefits• Maintenance and upkeep costs are responsibility of the

landlord• Easier mobility in terms of relocation• Payment of property taxes is indirect

COSTS/BENEFITS

• Buying a Home• Costs• Large capital outlay to obtain a loan• Obligations to pay property taxes and insurance• Long term economic commitment to repay a mortgage• Costs of repairs and maintenance• Potential homeowner association fees

• Benefits• Potential to accumulate equity and capital gains at the time

of sale• Tax deductions for mortgage interest and property taxes• Ability to customize the property to owner likes and needs

RENTING TO BUYING

• What to consider:• Compare the benefits of renting and owning; consider

situations when owning or renting could be appropriate (e.g., long term v. short term housing needs; market conditions)

• Monetary requirements for owning a home; plan to achieve requirements, including savings plan

• Personal net worth – assets minus liabilities; net worth changes over time