Economics and Financial Management Module 13

Compound Interest Forumla

(Principle of the previous year+Interest of the previous year)* Rate* Time

Two Disability Programs

-Supplement Security Income (SSI) -Social Security Disability Insurance (SSDI)

Retirement Income Depends on

-The amount you have contributed to the system during your working years -Your average earnings during your lifetime under the Social Security system -Your age when you finally retire -Benefits are calculated based on an average of their 35 highest-earning years -65-67 includes full retirement benefits

Stocks/Equities

A share in the ownership of a company. As a stockholder, you are a part owner of a company and have a claim to a portion of that company's assets and earnings. The more stock you purchase, the greater your portion—or share—in the company's earnings.

A Bond

A sort of loan from you to a company or a government. When you purchase a bond, you are lending money to that entity for a defined period of time and at a fixed interest rate. Typically, you will get a dividend—or payout of the interest—on a regular basis, such as every year. At the end of the set term, your investment is returned to you.

Money Market Accounts

A type of savings account that banks and credit unions offer. The interest earned is based on the interest banks make on short-term investments. These accounts differ from regular savings accounts because they typically earn higher interest but also have higher minimum balance requirements (sometimes $1,000 to $2,500). -Earn more interest than CDs do, depending on the performance of the account. -Offer more liquidity than money tied up in a CD. -Frequently limit the number of transactions allowed on the account—often just three per month. -Set up in units of shares; one dollar of your money buys one share.

Riskier Investments

-Stocks -Bonds -Mutual Funds

Retirement Plans

-Annuities -Individual Retirement Accounts (IRA's)

Sources of Financial Management for Personal Loans

-Banks -Credit Unions -Internet sources with .edu, .gov, .org -Newspaper financial pages, financial magazines

What to Include in a Budget

-Create a written statement of your short-term and long-term goals. Include a money management plan for both the short term and the long term. -Include a retirement fund in your long-term plan. After you retire, you will need funds to live on in addition to what you might receive from Social Security and a pension. Include funds to use in the event of an emergency. -Once you reach this amount, you can start putting money into a savings account. If you deplete your emergency fund, start rebuilding it. -Include discretionary income. Inflation is an increase in general price levels, so if you are living on a fixed income budget, inflation would change how you look at your budget.

What do Thieves Do with a Stolen Identity

-Credit Card Fraud -Phone and Utilities Fraud -Bank/Finance Fraud -Government Documents Fraud -Other Fraud

Sources of Financial Management for Student Loans for Education

-Financial Aid office of a college/university -U.S. Department of Education -Internet sources with .edu, .org (non-profit), .gov

Consumer Rights

-Informed -Safe -Choose -Voice complaints

Sources of Financial Management for Long-term Savings and Investments

-Internet sources highlighting retirement with .gov, .org -Investor services and newsletters -Financial Magazines -Financial Advisors who make a financial plan -Annual Reports -Stock Brokers

Distorting Payements

-Leaving out info. -Loan repayments (reducing now, but more over time.) -Implying that past success guarantees future success

Death Benefits

-Lump sum of $225 to a spouse or child after a social security recipient dies -Survivor benefits in the form of monthly financial support. These are sometimes available to family members left behind after the death of a Social Security recipient. Eligible recipients can include widows or widowers, a divorced spouse (if they had been married for at least 10 years), children, stepchildren, adopted children, grandchildren, step grandchildren, and dependent parents. To receive monthly payments, survivors must meet certain age and eligibility guidelines. The average lifetime earnings of the deceased determine the amount family members receive.

Disability Benefits Eligibility

-Paid to a person who cannot work because he or she has a medical condition that is expected to last at least one year or that likely will result in death. -This disability insurance first came into being in 1956 when an amendment to the Social Security Act was passed to provide compensation to disabled workers between the ages of 50 and 64. -In 1960, another amendment eliminated the disabled worker age limit. Disabled "adult children"—dependents who have been disabled before reaching 22 years of age—are also eligible to receive disability benefits.

Medicare Componets

-Part A covers inpatient hospital care and some follow-up care. No extra payments are required. A person is eligible to apply for Part A at 64 years and 8 months, even if that person is not planning to retire. -Part B covers physician's services, some hospital costs (that are not covered by Part A), as well as medical supplies necessary to treat diseases or conditions. Part B is optional and a monthly premium is charged for this plan. (Doctor visits). -Part C allows a person who is covered by both Part A and Part B to choose a health care provider from which to receive these medical services. -Part D is prescription drug coverage. There is an optional extra charge for this, too.

Social Security Payments Timeline

-Payment of monthly Social Security benefits began in January 1940. Originally, these payments had only been for retired workers; -In 1939, these payments had been authorized for retired workers and their spouses. -Now, benefits are also provided to the families of deceased workers, including widows, children under age 18, and surviving elderly parents.

Economic Principles that Influence Personal Financial Spending

-People must make choices due to the arise of scarcity -Choices have opportunity costs -All choices have consequences -All choices have secondary effects (side effects) -Decisions are based on a marginal analysis which involves examining the costs and benefits of your choice.

Safe and Short-term Investments

-Savings Accounts -Certificate of Deposit -Money Market Account -U.S. Savings Bonds

To Avoid Having your Card Stolen

-Sign your card as soon as you receive it. -Store your card in a secure place. -Shred any documents with your account number. -Be sure you receive your billing statement on time. This helps ensure it has not been stolen in the mail. Notify the card issuer immediately if you lose your card. -Be sure to get your receipt after you buy something on credit—or you could be leaving your account number behind for someone else to see. -Never give out your credit card number unless you have initiated the contact—on the phone or by e-mail. -Be aware of your surroundings when you make a transaction with your card. Someone might be recording your account number or your ATM PIN.

What is needed in a (spa) contract?

-Signatures -Copies -Starting and ending dates of memberships -Contract can´t last longer than 36 months -Physical Location -Initiation Fee -How to resolve complaints -Buyer´s right to cancel

Few Main Identity Scams

-Stealing students info. from schools

Four Step Process to Address Consumer Complaints

-The first step is to return to the place of purchase. Go there with a polite but firm approach. This will usually solve the problem. -The second step is to contact the business's main office. Write a letter or e-mail. Most complaints to the company are resolved immediately. -If there is still no resolution, consumers can get help from a government or private consumer protection agency. -Once these other options have been tried, the consumer can take legal action, possibly in small claims court, which oversees disputes under a certain amount of money.

Social Security Provisions

-Title I provides funds to support state welfare programs. -Title II is what we know now as Social Security. In the original legislation, benefits were to be paid only to the primary worker when he or she retired at age 65. Benefits were to be based on the payroll tax contributions the worker made during his or her working life.

IRA Types

-Traditional -Roth -Simple -SEP

Changing Economic Decisions that Influence a Personal Finance Plan

-Unemployment rates, stock market, others -Inflation erodes purchasing power over time -Unemployment makes it more difficult to budget, save, and meet financial goals. -Deflation reduces the value of assets you own. -Slow economic growth leads to an increase in unemployment rates. -Fiscal policy (Fed) can affect future income.

Applying Key Principles to Financial Planning

-Use a budget plan to use your limited income to satisfy your wants. -Understand there is a trade-off between spending now and saving. -Make decisions on how to invest money due to several factors including expected return and the associated risk of the investment. -Consider economic conditions when setting financial goals.

Online Security

-Use a secure browser. A secure browser encrypts (scrambles) information you send out (to everyone but the person you send it to). Many newer computers come with built-in secure browsers; however, you may need to turn on the "security mode" manually. You also can download secure browsers for free. -Conduct online transactions on secure Web pages. The Web address (URL) of a secure Web page will display "https"—the "s" stands for "secure"—rather than the unprotected "http" configuration. Often, a secure Web page also displays an icon that looks like a padlock. -Know the policies of Internet sites you visit—especially security and privacy policies. You do not want these sites sharing your personal information. -Never download files or click on links from unknown sources. You could be opening up your computer to an invasive virus. -Record and review your online purchases, and read any e-mails from companies you buy from—they may be sending important security information. -Keep your password secret, even from your Internet and e-mail providers. -Do not use easy-to-guess passwords, such as your birth date or address. -Do not give out any payment or personal information to sources you do not trust 100%. -Do not be bullied by an e-mail warning that you must reply. These are exactly the ones to look out for. -Consider the purchasing of anti-hacking and other software to help protect your computer from Internet dangers.

Consumer Responsibilities

-checking receipts and statements -contesting an incorrect bill -maintaining consumer vigilance -using consumer protection laws -using government consumer protection agencies -using private consumer protection groups

Steps in Handling Fraud on Your Credit Card

1. Call the credit card´s fraud department 2. File a police report 3. Contact the credit bureaus 4. Review Your Credit Reports

Contract

A binding legal agreement that is enforceable by law. -protect both parties -legal consequences if not followed

Externality (Transaction Spillover)

A cost or benefit of a product that affects a person other than the buyer. - are unintended consequences of the production of a good or service.

The Rule of 72 (Finding Interest to Double)

Also used to determine the rate of investment return you need for your money to double in a specific amount of time. -Ex: suppose you want to double $4,000 in 10 years. Set up the equation as 72 ÷ 10 = 7.2. This means your investment would have to earn 7.2% each year for your money to double in that time. -Remember that the interest rate does not always stay the same over a long period of time.

Budget

An important tool for managing your money to achieve short-term and long-term goals. It can help prevent you from spending money you do not have and also help you save money.

Annuity

An investment plan that is an agreement between an individual and an insurance company. Basically, an individual puts money into the plan, and the insurance company guarantees a steady stream of income, usually on a monthly or quarterly basis, during the person's retirement. It is an insurance policy that guarantees steady income. The money in the account is not taxed until the individual begins to receive checks during retirement-that is, the money is tax deferred. The individual and insurance company can create different types of annuities and contracts.

The Federal Trade Commission (FTC)

Monitors suspected anticompetitive business activities.

Certificates of Deposit

CDs for short, are accounts that earn an interest rate proportional to the length of time your money is held. The longer the bank keeps your money, the higher the interest rate will be.

Consumer Complaint Program

Consumers with complaints about financial deals can contact the Fed, which will often send investigators to look into the complaints. The Fed tracks consumer questions and complaints to uncover unfair or illegal financial practices of state member banks and other financial institutions

Social Security

Designed as a safety net to provide income for older people when they stopped working. It is important to realize that Social Security payments are often less than what someone needs to survive. It is not a stand-alone retirement plan. Most retirees will need to supplement their this income through savings, pensions, investments, continued employment, or adjustments to their lifestyles. -"We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."—President Franklin D. Roosevelt

Skimming

Dishonest salespeople use a special device that records (and steals) your credit or debit card information as they process your card.

Retirement Planning

Each year, you will need about 70% of what you were earning prior to retirement.

Monetary Policy

Enacted to promote stable prices, moderate long-term interest rates, maximize employment—also can affect personal financial planning. -Planning should take into account possible changes in economic conditions (for example, the effects of inflation/deflation and interest rates on personal debt and savings).

Occupational Safety and Health Administration

Enforces laws that help protect workers from death, injury, and illness. -Protective equipment

Interest Rates

Fluctuate with Prime Rates

Medicare

Health insurance for those 65 years or older, or, for those who have a permanent disability.

Mobile Banking

Most banks allow customers to bank with a cell phone or other mobile device. Electronic banking can be done digitally and on the move.

¨Junk¨ Bonds

High-yield bonds carrying high risk, which are generally issued by a company seeking to raise capital in a very short amount of time.

Phishing

Identity thieves send you e-mails in the name of banks, companies, or government agencies, trying to trick you into giving them your personal information.

Stealing

Identity thieves steal whatever information they can get their hands on—wallets and purses, mail, pre-approved credit offers, new checks, etc. They might even steal personal information from their own coworkers from personnel files.

Risk and Return

If you want to earn a higher interest rate for your money to double faster, you have to take a greater risk. A greater risk, however, could mean you will lose your money. Some investments are safe, so they carry lower interest rates. Generally, the higher the interest rate, the greater your risk will be.

Consumer Protection Laws

In all 50 states place certain restrictions on how businesses treat their customers -protect buyers when sellers try to deceive or mislead them.

Fiscal Policy

Including government tax policies, can affect tax-deductible expenses and, as a result, influence financial planning. -These tax policies change over time.

The Rule of 72 (Finding Double of Interest)

Involves dividing 72 by the interest rate to see how long it will take for your investment to double. Ex: You invest $2,000 when you are 20 years old and you want to see how long it will take for your investment to double. The $2,000 is invested at 4% interest so you would do 72/4=18 years to double. -approximate and applies to money that earns compound interest.

Federal Insurance Contributions Act (FICA)

Make it so a portion of every worker's paycheck is withheld and placed into a large federal account. That money is used to pay benefits to current retirees. In most years, the amount of money collected by the federal government exceeds the amount paid out as benefits, and the remainder is placed into the Social Security Trust Fund for long-term safekeeping. -In Internal Revenue Code -In 2009, roughly $13.8 trillion had been paid into the Social Security system, while $11.3 trillion had been paid out as benefits.

Positive Externality

Third party has a benefit.

A Savings Account

Most basic type of account a bank offers; your money is insured and typically earns interest over time. Depending on the amount of money in the account, a savings account can earn between .20% and 2% interest, depending on the type of institution providing the account. There is usually a low minimum amount ($25) required to open the account. Generally, online banks are able to offer higher interest rates since they have fewer costs compared to brick-and-mortar institutions. -excellent for protecting and slowly growing your money, but they are low-return investments.

Insolvent

Not be able to meet its financial obligations.

Market Failure

Occur when the free market allows or even encourages conditions that are harmful to society as a whole. -Too costly for producers to generate goods that have positive effects for society. -Benefits increase when more people use or have access to a product or good.

Hacking

Occurs when a dishonest person with computer skills uses software to break into your e-mail and online accounts to obtain your information. Or, they hack into a company's site to get information on its customers—one of whom could be you.

Lease Agreements

Outline the responsibilities of landlords and tenants for rental properties.

Simple Interest Formula

Principal (P)* Rate (R) * Time (T)

Regulatory Laws

Protect consumers, the environment, and workers.

Securities and Exchange Commission (SEC)

Protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation. -Congress established the SEC in 1934 to restore investor confidence during the Great Depression.

Bureau of Consumer Protection

Protects consumers against unfair, deceptive, and fraudulent practices.

Food and Drug Administration

Protects public health by regulating products that can affect peoples health.

Environmental Protection Agency

Protects the environment and health of citizens.

Size Difference between Working and Retired

Right now, the number of workers who currently contribute to the system remains greater than the number of retirees who receive benefits. But, the size of the difference between collected revenues and paid benefits has been decreasing as more members of the baby boomer generation retire and as their life expectancy increases. Eventually, the FICA system will no longer be able to sustain itself with annual payroll taxes alone. Instead, Social Security will need to begin withdrawing money from the Trust Fund itself. This will continue until those funds are entirely depleted, which is projected to occur in 2036. -Then the system will be insolvent

Negative Externality

Third party has a cost.

Supplement Security Income (SSI)

SSI came into being in the 1970s. It is a program for people who have limited financial resources. Recipients must be at least 65 years old or have a disability (such as blindness). The benefits include a monthly check and health insurance. Very specific health and income guidelines restrict eligibility. This benefit is based on financial need; it does not matter whether the person has paid into the Social Security system.

Online Banking

Some banks allow customers to manage checking and savings accounts online. You can view your account statements and pay bills online and receive e-mail alerts to keep track of your money. Some banks also have financial tools and resources to help you manage your accounts online. These Web sites are always secure, so your personal information is safe.

Free ATM´ś

Some banks allow you to use any ATM without charging a fee; however, some banks do charge a fee.

Personalized Check Card

Sometimes, banks allow you to personalize your debit card, such as featuring your favorite sports team. Some banks even include a photo ID of the cardholder on the check card to reduce the odds of identity theft.

Points Rewards

Sometimes, banks give you points on qualifying purchases; once you have enough points, you can redeem them for such items as gift cards and airplane tickets.

Identity Theft Insurance

Sometimes, banks offer identity theft insurance; if your personal information is ever stolen, the insurance will compensate you for any qualified expenses.

Dividend

Stocks pay this portion of the profits—for each share, usually every three months.

Community Reinvestments

The Fed also looks into compliance with consumer protection laws. One law is the Community Reinvestment Act. According to this law, a bank must invest in its community. It must offer credit to people in low-income areas for affordable housing. -The Fed also makes sure that underserved groups have access to credit through its Community Affairs programs. Each Federal Reserve Bank has programs to educate consumers about their rights.

Truth in Lending

The Fed enforces the this Act to be sure banks and other institutions offer detailed information about terms and costs of credit for products such as mortgages.

Compound Interest

This allows your interest to be reinvested. -Most common type of return on your savings investment. -Stated as a yearly rate, but are usually continual, monthly, or quarterly. -Grows larger the longer money is invested.

Traditional IRA

The contributions are tax deductible up to a certain amount. In 2010, the annual contribution amount for a single tax filer was $5,000. If you turn 50, you can contribute another $1,000 as a catch-up amount. This amount doubles if you file as a married couple. These amounts change periodically. One of the main benefits of the Traditional IRA is that you can deduct the amount of the contribution from your taxable income, so you pay less in taxes the year you make the contribution. However, you will still have to pay taxes at whatever time you withdraw that money; the benefit is that theoretically, you will pay these taxes at a point in life (retirement) when your taxable income is likely to be much lower. This means you would pay less in taxes on that money in the future than you would now. The biggest negative aspect of the Traditional IRA is that you must pay a high penalty fee for early withdrawal. Another potential negative is that you cannot contribute any more money to it once you reach 70.5.

Opportunity Cost

The cost of giving up something to have something else.

Principal

The initial money placed in an investment.

Liquid Investments

The money can be removed at short notice and low cost. You can access your money at any time, with no penalty or fee. -Savings and Checking Accounts

Simple Interest

The most basic type of return on your investment based on principal. -Earned per period: quarterly (every three months), semi-annually (6 months), annually (12)

Inflation Rate

The percentage by which prices increase on a monthly or annual basis. This change in prices is measured by the Consumer Price Index (CPI).

Deflation

The prices of goods and services decrease and the purchasing power of money increases.

Individual Retirement Account (IRA)

There are different types of IRAs. These may be set up with a financial institution (such as a bank), life insurance company, mutual fund, or stockbroker. IRAs have tax benefits, but there are penalties for early withdrawal. The tax benefit of an IRA retirement account is limited. This means you can deposit up to a specified amount of money that will be tax deferred. If you deposit $2,000 in an IRA account, that amount is deducted from your annual taxable income. You will pay taxes on the money when you withdraw it from the account later. This is true for all IRAs, except the Roth IRA.

Scarcity

There are not enough resources to satisfy all of the competing uses.

Public Goods

They are goods that are used and paid for by the public.

Dumpster Diving

Thieves go through your garbage to find documents with your personal information.

Social Security Disability Insurance (SSDI)

This disability program is for workers (and certain family members) who paid into the Social Security system for a certain amount of time, making them eligible for benefits. These benefits include a monthly check and the use of Medicaid.

A Mutual Fund

This kind of company selects various stocks and bonds it believes will perform well overall. An investor can then buy shares in the mutual fund rather than the individual stocks that make up the fund. Mutual funds are attractive because they offer a less risky way of investing in the stock market. If one stock does poorly, chances are another one in the same mutual fund will perform well, so the overall outcome for the investor could still be positive. A well-balanced portfolio balances the risks and rewards for its investors.

The Federal Reserve (Fed)

This was created in 1913 when President Woodrow Wilson signed the Federal Reserve Act. -Its purpose is to provide the country with a safe, flexible, and stable monetary and financial system.

Time Value of Money

Value of money in the future—taking into consideration the accruing of interest. For example, $500 today invested for one year and earning 5% interest would be worth $525.

A Checking Account

Very similar to a savings account except that it is easier to withdraw money in the form of a check or an ATM transaction. The money in a checking account usually earns a lower interest rate than the money in a savings account because the balance tends to be less steady. The higher interest acts as an incentive for people to save. The more money people have in their savings accounts, the more money banks have to fund loans, which can help keep the economy growing in a healthy way.

Purchasing Power

What you can buy with a given amount of money. -This decreases when prices increase

Identity Theft

When someone steals your personal information for his or her own use. -The person might take your name, address, credit card number, Social Security number, or other pieces of your personal information to commit the crime.

The Federal Reserve (The Fed)

is the United States' central bank. It has a Board of Governors and 12 Federal Reserve Banks, including one in Richmond, Virginia. -The Fed monitors consumer protection laws and regulations for financial transactions. These include electronic fund transfers (including ATMs) and credit, charge, and debit cards. Also included are deposit account transactions, mortgages and home loans, and lines of credit.

Federal Trade Commission (FTC)

main federal agency that works to protect consumers from identify theft. Its Web site gives advice on how parents can protect their children from identity theft, including information about the following topics: -The Family Educational Rights Privacy Act, which protects student records1 -Who has access to the students' information -When and how the personal information will be used -Schools' directory information policies