Personal Finance Unit #9 Economics
Feb 26, 2016
Personal FinanceUnit #9 Economics
Income: Knowing what you earnTypes of income:• Earned• Stock/mutual funds• Interest from savings• Gifts• Selling or renting property
Earned Income• The pay that people receive for their work.• Come in several forms1) Salary2) Wage3) Commission4) Bonus
Salary—the employee receives a fixed payment at regular intervalsAdvantages—guaranteed pay whether business thrives or is slow.Disadvantages—no extra pay for extra hours worked
Wage—employee is paid by the hourAdvantages—paid for all time workedDisadvantages—may face loss of income if business is slow and hours are cut back
Commission—employee receives a percentage of the sales price of a good or service as payment for making the sale.Advantages—hard work is rewarded with increased pay.Disadvantages—income is not guaranteed; if business is slow, income could fall sharply
Bonus—employee is given additional money for excellent work performanceAdvantages—good work is rewarded with additional incomeDisadvantages--none
Piecemeal—employee is paid for each unit of a product he or she makesAdvantages—faster workers can make more moneyDisadvantages—income can vary widely depending on work speed and availability of work
Fringe benefits and other income• Fringe benefits—indirect payments for their work
(medical, dental, sick leave, paid vacation)• Interest on savings (savings account)• Stock dividends• Money from the sale or rental of property• Monetary gifts• Inheritance
Disposable Income• Salary + other income – taxes = disposable
income
Making Financial ChoicesGoals and Values Consumer spending Particular goal (education, house, vacation) Giving to charity Saving Debt
Making a Budget• Fixed expenses—expenses that have to be paid regularly,
usually every month (ex. Rent, car payment)• Variable expenses—expenses that change from month to
month (ex. Food, clothes, entertainment, etc)
Making Savings DecisionsTo decide which method would be best for you, consider:• Liquidity—the ability to turn savings back
into cash• Income—overall income you will earn from
the money you save• Safety—risk factor of savings• Net worth—measure of wealth. Current
value of assets minus liabilities (debts you owe)
Saving Plan Choices
• Passbook savings—Pays a fixed rate; money can be withdrawn at any time• Interest-bearing checking—called NOW (Negotiable Order of Withdrawal) accounts;
the owner can write checks on the account, which also earns interest• Time-deposit—Funds deposited for a set period of time; usually a penalty for early
withdrawal; interest rate dependent upon time limit on deposit• Savings bond—Sold by the government; common for bonds to be sold for half their
full value, reaching their full value after a period of time• Stock–Shares in corporations; owners of stock sometimes earn income from
dividends; they make profit when they sell their stock for a higher price than they paid for it
• Mutual fund—Pooled funds of investors, managed by professional; funds usually invested in stocks and bonds
• Real Estate—purchase of land and/or buildings; income earned from rent; profit made when real estate is sold for a higher price than was paid for it
• Insurance—investment can be made in an insurance policy such as life insurance; after a set number of years, some policies can be surrendered for cash value, plus interest
Safety• Trade-off between Safety
and Income• Safe—bank accounts,
savings accounts, government bonds BUT= low interest• Risky—stock, real-estate
BUT = possibility of big profit