Econ- Unit 7

During periods of high inflation:

Money loses value

Joe sold stock for $1,000 that he bought a year ago for $1,000. He says, “At least I didn’t lose any money on my financial investment.” However, his economist friend points out that, in effect, he did lose money because he could have received a 2% return on the $1,000 if he had deposited the money in a savings account instead of buying the stock.

In this case, the economist’s analysis incorporates the idea of ___.

Opportunity cost

___, which includes government tax policies, can affect tax-deductible expenses and, as a result, influence financial planning.

Fiscal policy

What are some ways to achieve your savings goals?

Direct automatic deductions from paychecks to savings, have a game night at home instead of going to the movies, spend less on clothes

(T/F) Buying a home is a long-term financial goal.

True

Having financial goals that help you to organize and control your financial resources is called ___.

Money management

(T/F) Credit card bills are unanticipated expenses.

False

___ are costs that are anticipated but may change from month to month. Examples may include entertainment, hobbies, or certain educational expenses.

Variable costs

Unanticipated expenses could result from ___-- such as a sick pet, a broken tooth, a flat tire, or a ruined pair of shoes-- which cannot be ignored.

Emergencies

What are some examples of anticipated income?

An allowance, your salary, wages

What is NOT an example of anticipated income?

Gifts

(T/F) Being able to predict how much income you will earn over a period of time can make it easy to create short and long term spending goals and help you stick to a budget.

True

A ___ is a regular payment, often at monthly or biweekly intervals, made by an employer to an employee, especially in the case of professional or white-collar employees.

Salary

Your house is valued at $89,000 with a mortgage balance of $80,000. Your minivan is worth $20,000. You owe $16,000 on this auto loan. Related only to the house and minivan purchase, what is true of the value of your assets, liability, and net worth?

Your net worth equals $13,000, your total assets equal $109,000, your total liabilities equal $96,000

(T/F) Your net worth statement includes a chart that has the totals of your fixed costs on one side and your variable costs on the other.

False

Generally speaking, a car is a ___ asset.

Depreciating

Knowing your net worth is important because…

It is a snapshot in time that lets you understand your current financial situation and it gives you a reference point for measuring progress toward your financial goals

(T/F) Assets can include antiques, fine art, and other collectibles. Their value can increase or decrease, depending on factors in the market.

True

Depreciating assets are possessions that decrease in value over time. An example would include ___.

Computer equipment

Carlos is a senior and is looking forward to taking his girlfriend, Rachel, to the prom this spring, but he needs to save his money to rent a tux. Carlos works part-time and brings home $150 each week. He bought a used car last month and his payment is $200 per month. His parents cover his insurance, but he must cover his gas ($15 a week) to and from work and school. Carlos also has a cellphone, which costs $85 per month. He hopes to attend college this fall and plans to live at home, but he needs to save up to pay for his tuition and books. In order to afford the fall semester, he needs to contribute $200 each month to his college savings account.  Looking at his budget, how much does Carlos have left over each month to put towards his tux rental?

$55

(T/F) If you find yourself spending too much money each month, adjust your budget lines and take some money out of the nonessential categories-- like rent and food.

False

A ___ budget plans expenses for the entire year.

Annual

What is a likely reason for a budget to fail?

Failing to establish an emergency fund to account for unforeseen expenses

(T/F) To create a budget, a list of expenses and income is needed. Savings goals are not needed to create a budget because they are not a bill paid monthly.

False

A plan made in advance regarding the expenditure of money based on available income is called a ___.

Budget

(T/F) A budget is a plan for expenses and income.

True

When creating a budget, it helps to ___ your expenses.

Categorize

Saving money means giving up the opportunity cost to…

Spend in the present

If Marie spends $15 a month on movie tickets and and $5 a week on soda and candy in the vending machines at school, her annual budget for these two items will be ___.

$440

(T/F) Federal student grants must be repaid.

False

___ student loans typically require a credit check and/or a co-signer.

Private

As compared to private student loans, federal student loans…

Have lower interest rates and more flexible terms

FAFSA will provide students with an estimate of…

Family contribution to educational expenses

(T/F) Published tuition costs are paid by all students.

False

FAFSA is used by colleges and educational institutions to determine ___.

Federal aid eligibility

(T/F) Savings accounts earn interest.

True

(T/F) Cerificates of deposit earn less interest than savings accounts and have rules that savings accounts don’t.

False

(T/F) The stock market and and bond markets are part of the capital market.

True

(T/F) A mortgage is a loan to purchase a car.

False

(T/F) Investing in capital markets have higher potential returns and are riskier than putting funds in savings accounts and CDs.

True

People who could envision their future selves made choices to save ___ as much as people who couldn’t envision their future selves.

Twice

The cost to borrow and the price paid to savers is ___.

Interest

Interest earned on principal and on interest earned is ___.

Compound interest

One reason interest rates vary is ___.

Level of risk

Larger increases in savings occur when the interest rate is ___ and the length of time the funds are saved is ___.

Higher, longer

Examples of short-term savings goals:

Birthday gift for your best friend, new set of tires for your car, prom tickets, spring break road trip

Examples of long-term savings goals:

Early retirement, pay off mortgage, purchase a home, college tuition for a child

A loan for purchasing a home.

Mortgage

The process of organizing and controlling financial resources in order to achieve short-term and long-term goals.

Money management

A goal that can be achieved in five years or more.

Long-term financial goal

Money set aside for unexpected expenses.

Emergency fund

A goal that can be achieved in one year or less.

Short-term financial goal

Negatively impacts savings by eroding the purchasing power of savings over time.

Inflation

Prices on average increase, but at a lower rate of increase.

Disinflation

Falling prices can lead to lower wages, which leads to less spending and lower costs.

Deflation

(T/F) To slow the rate of inflation, the Fed can decrease interest rates.

False

(T/F) At higher interest rates, consumers want to borrow more.

False

(T/F) Inflation affects people differently. If you have taken out a fixed-rate loan, inflation is good for you.

True

(T/F) People on fixed incomes benefit from inflation because their incomes can now buy more goods and services.

False

(T/F) Workers may have problems paying their bills if their wages don’t rise as fast as prices.

True

(T/F) Individual prices usually stay the same over time . Inflation only affects the overall price level.

False

A sum of money paid regularly to a person, often by a parent to a child; sometimes paid in compensation for services rendered.

Allowance

Regular receipts of funds that come as part of a contractual obligation. These can include wages, salary payments, or certain conditional payments such as scholarships.

Anticipated income

An amount of money received in excess of a previously agreed-upon amount, often in recognition of exceptional service or completion of an important project.

Bonuses

Funds received to help offset the costs of education. They are often conditional on maintaining grades and/or other factors.

Educational grants or scholarships

Unanticipated receipt of funds or other things of value.

Gifts

Gifts received from another party upon their death, also known as a bequest.

Inheritances

___ are paid for services rendered and are not based on hours worked.

Salaries

Payments received that are not foreseen or may happen at irregular intervals. These can include bonuses and gifts.

Unanticipated income

Payments for labor services that are directly tied to time worked, or to the number of units of output produced.

Wages

Examples of anticipated income:

Allowance, educational grants or scholarships, wages, salary

Examples of unanticipated income:

Bonuses, gifts, inheritances

A ___ is extra money paid to an employee, often when sales targets are exceeded.

Bonus

Sales representatives sometimes make a ___ on a sale, usually based on a percentage of the sales price.

Commission

Money earned on a bank account is called ___. It is expressed as a percentage of the account holder’s balance.

Interest

Wages earned for working extra hours are called ___.

Overtime

Family members or employers may give out ___ that are not considered taxable income (below a certain amount).

Gifts

A ___ is money paid on a regular basis for work.

Salary

Regular payments that must be made to cover certain regular expenditures. These could include rent, utility bills, and groceries.

Anticipated expenses

Costs which remain the same each month.

Fixed costs

Expenses that are not foreseen and may happen at irregular intervals. Examples can include medical expenses, auto or appliance repairs, or losses from natural disasters.

Unanticipated expenses

Costs that are anticipated but may vary from month to month. Examples may include entertainment, hobbies, or certain educational expenses.

Variable costs

(T/F) Car repairs are an example of an anticipated expense.

False

(T/F) Unanticipated events can result from emergencies, like a sick pet.

True

(T/F) You usually go to the movies twice a month. This is an example of a fixed cost.

False

(T/F) Variable expenses, like restaurant meals, can change each month.

True

(T/F) Having an annual budget or spending plan, including an emergency fund, can help you cope with unanticipated expenses.

True

(T/F) Credit card bills are unanticipated expenses.

False

___ of US households would find it difficult to manage a $400 emergency expense.

40%

___ of adults cannot cover monthly bills.

20%

Among those that have difficulty paying for an emergency expense, one of the most common ways to pay is to ___.

Use a credit card

(T/F) Estate planning is the process of arranging the transfer of assets to family members or other persons in anticipation of death.

True

(T/F) Monetary gifts are not taxed.

False

Gift taxes keep people from avoiding ___ taxes.

Estate

(T/F) Single, childless individuals definitely need to have an estate plan.

False

(T/F) Two ways that estate planning occurs are through wills and trusts.

True

(T/F) Currently, individual gifts up to $13,000 are not considered taxable income.

True

Examples of assets:

Car, furnishings, house, college savings account, emergency savings account, retirement savings account, jewelry, art, SUV

(T/F) Credit card debt is an example of a liability.

True

Cash or property that can be sold quickly.

Liquid assets