Consumers Final Review

traditional economic system

based on traditional customs and beliefs

Command/Controlled Economic System

central government

Free Market Economy

Individuals acting in their own self-interest

What is necessary in a mixed market economy?

The BALANCE of free market principles and government intervention

Definition of “Economics”

The study of how resources are allocated to satisfy unlimited needs and wants

What is inflation?

Substantial & continuing rise in the general price level Too much money & credit around in relation to the supply of goods and services available

Scarcity

Having a limited supply of something → time and money

Surplus

• occurs when the supplier produces more than enough goods/services to satisfy the demand, therefore the product’s price is above the equilibrium price. Supplier is encouraged to lower the price.

shortage

• occurs when the supplier does not produce enough goods/services to satisfy demand, therefore the product’s price is below the equilibrium price. Supplier is encouraged to raise the price.

Demand

•  The amount of goods and services that consumers are willing to pay for at various prices.

The Law of Demand

• Consumers generally buy less of an item at a higher price than at a lower price (think with your consumer hat)

Things that cause changes in demand:

• Prices of substitute and complementary goods/services

• Income

• Change in consumer preference

• Consumer expectations

supply

•  the amount of goods and services businesses are willing to offer for sale at various prices.

law of supply

• Producers will supply more of an item at a higher price than at a lower price (think with your business owner hat)

things that cause change in supply

• Cost of producing the good/service

• Availability of resources

• Weather

• Government policies

opportunity cost

Giving something up, the next best thing, the value you are giving up

• Your 2^nd choice is the opportunity cost of your 1^st choice

• It’s the value of what we give up to do something else

• We all pay opportunity costs because we can not do all the things we want to do => we have to make choices

What are the three monetary tools that the Fed uses?

1. Discount rate = rate FED charges member banks to borrow from it

2. Reserve requirements = percentage of deposits that member banks must keep on hand at the FED

3. Open market operations = buying & selling of treasury securities

What does the Fed do to affect the money supply?

• Takes actions to influence money & credit conditions/availability 

• Use a monetary tool or combination of to either put money into or take money out of the economy

• Tight (contractionary) monetary policy = reduces supply of money
  

• Easy (expansionary) monetary policy = increase supply of money

What is monetary policy?

how a country's central bank (like the Federal Reserve in the US) manages the money supply and interest rates to influence the economy

What is the Consumer Price Index?

a monthly report that measures changes in the prices of common goods and services that consumers purchase

→ measures inflation

What is float?

refers to a period of time where money is temporarily "counted" in multiple places due to delays in the processing of payments, particularly checks. This creates a gap between when a company records a transaction and when the actual funds are moved.  

• allowing immediate use of funds

• he time between when you write a check, and when the bank subtracts the amount from your account

Certified Check

• Personal check drawn on your checking account 

• Your financial institution imprints the word “certified” signifying that the account has sufficient funds to pay

  • Source of guaranteed funds

Cashiers Check

• This check is to be made out to a specific party and drawn on the account of the financial institution itself 

• It is backed by the institution’s finances.

• The only check to be considered a legal tender similar to currency. 

• Usually costs between $10-15

Travelers Check

• Issued by large financial institutions and accepted almost everywhere  

• They come in specific amounts $10, $20, $50, $100

• They should be signed immediately and signed again when being used

Money Order

• A checking instrument bought for a particular amount.  This is the only type of “check” that doesn’t require a checking account

• Many money orders have maximum limits (usually $1000) which would limit the use of it 

• The fee ranges from $1.00 to $8.00 depending on the amount needed

• Can obtain from a currency exchange

What is liquidity?

How quickly you can convert an asset into cash

What is an outstanding check?

Checks you have written that have not yet been cashed by the payee

Commercial Bank

• Work with individuals & businesses

  • They are typically larger institutions

• FOR PROFIT

• Accounts insured by the FDIC up to $250,000

Savings and Loan Association

• Specialize in home loans/mortgages

• Accounts also insured up to $250,000

• For profit

• Tend to be local institutions

Credit Union

• Members share a common affiliation

• Members are part owners

• Accounts insured up to $250,000 by the NCUA

• NON-PROFIT

  • Lower interest rates

Currency Exchange

• FOR PROFIT

  • Provide services for a fee

• Cash checks, money orders, title transfers, city & plate stickers

• Often in areas with no banks

What are the different ways to endorse a check?

• Signed approval for check to be cashed, deposited, or transferred

• Sign EXACTLY as it is made out on the front

• In assigned area ONLY – the bank uses the rest

  • BLANK – Signature only

  • RESTRICTIVE – For Deposit Only, Signature, Account #

    • Only thing that you will be permitted to do is to deposit the money into account (no cash back)

  • TRANSFER – Pay to the Order of John Smith & Signature

Cash

• Physical money that is directly exchanged for goods or services. 

  • Pros: Immediately accessible, no fees, good for smaller purchases. 

  • Cons: Can be lost or stolen easily, not always accepted everywhere. 

Check

• A written piece of paper that instructs a bank to transfer funds from your account to the recipient's. 

  • Pros: Can be used for larger payments or when you don't have cash.

  • Cons: Can take time to clear, may not be accepted everywhere. 

Debit Card

• electronically linked to your bank account, allowing you to withdraw cash or pay for purchases directly from your funds. 

  • Pros: Convenient, readily accepted, avoids overspending (since you're spending your own money). 

  • Cons: May not be accepted everywhere for large purchases. 

Credit Card

• Allows you to borrow money from a lender to make purchases, with the expectation of repaying it later. 

  • Pros: Can be used for large purchases, build credit history, sometimes offer rewards. 

  • Cons: Can accrue high interest charges if not paid on time, potential for overspending. 

What is the FDIC and how much does it insure?

to maintain stability and public confidence in the financial system by insuring deposits, supervising financial institutions, and managing the resolution of failed banks. 

→ up to $250,000

What is a stop payment order?

instruction to a bank to revoke a check that has already been written

What is a stale check?

a check that is older than 6 months that a bank is not obligated to cash

How do banks make most of their money?

Interest earned on loans

What is a lease?

a document that commits the tenant to pay rent for a period of time, it describes the terms under which the property is rented

What is a security deposit?

initial start-up expense that is paid to the landlord for any possible damage done to the apartment.

What are the tax benefits to being a homeowner versus a renter?

Deduct both mortgage interest & property taxes

Why do you need renter’s insurance and is it expensive?

Usually about $10-15 per month Insures valuables, personal property, and against lawsuits Liability coverage If a person is injured in your home not due to a problem with the structure…you can be sued! Renter’s insurance protects you from litigation that results from someone visiting you at home

What does it mean to sublet an apartment?

allows the tenant to find another person to live in the apartment assuming the obligations of the lease

What are the three major credit bureaus and what do they do?

Companies that prepare credit reports on individuals that lenders and other service agents (such as insurance companies) can use to assess an individual’s ability to handle credit Three Major Credit Bureaus Equifax Transunion Experian

Chapter 7 (Liquidation) Bankruptcy

• Most debt gets cleared

• Turn over all assets to a trustee who sells them to repay creditors

Chapter 13 (Rehabilitation) Bankruptcy

• Keep assets, but are assigned a 3-5 year repayment plan

• Harder to qualify for

• May provide some psychological relief, but it has serious downsides

• Seriously impairs ability to obtain credit in the future

  • Why would somebody trust that you will pay them back?

    • Must wait 8 years to file bankruptcy again

• New interest rates will be very high

  • You haven’t shown you can use credit wisely

What happens if your credit card is lost or stolen, and the timing and ramifications

• If you realize your card is lost or stolen, contact your credit card company immediately

  • Good chance your liability will be $0 if they catch it in time

Know about co-signing a loan and the ramifications

Must be 18 to get a card without a parent co-signing Under 18, you can be an authorized user on your parent’s account Charges go to their account; Unlikely to affect your credit score Credit card company will ask for: Driver’s License # SSN Address Employment Income Debt

What is a balloon payment?

a lump sum payment due at the end of a loan term, often much larger than the regular monthly payments. It's typically part of a loan, which features smaller initial payments and a final, larger payment to cover the remaining loan balance

why credit card companies call customers “revolvers” and “deadbeats”

Those in the credit card industry use slang to describe these two groups — "revolvers" are those who carry a balance every month and reliably pay interest on their charges, and "deadbeats" are those, like me, who avoid interest by paying their balances in full and on-time.

APR

annual percentage rate (affects how much you pay each month in interest)

Finance Charge

• Includes interest and any other fees the lender may charge

• Represents the “opportunity cost” of using credit

  • If you had used cash and paid up front, you would have this extra money to spend on other things

Interest

is the cost of borrowing money or the payment a lender receives for lending money. It's essentially a fee or reward for the use of funds. When you borrow money (like for a loan or credit card), you pay back not only the principal (the original amount borrowed), but also interest. Conversely, when you save or invest money, you earn interest from the institution holding your funds. 

What should you do if you cannot make your loan payments?

Contact your lender right away · Try to refinance your loan · Consolidate your debt · Enroll in a debt management plan · Negotiate a settlement

Cash Advance

(taking cash out to use immediately → no grace period)

Collateral

Money or items of value used to backup a loan

What is a creditor?

Creditors are individuals or entities that have lent money to another individual or entity

What is wage garnishment? 

Wage garnishment is a legal process where a portion of an individual's earnings is withheld by their employer and sent to a creditor to satisfy a debt. This process is typically initiated through a court order or by a government agency, such as the IRS.

What is a dividend?

receive a portion of the company’s income but not all have that

Describe the relationship between risk and return

Greater risk, greater potential reward

What are capital gains?

Capital gains represent the profit earned from selling a capital asset, such as stocks, bonds, real estate, or other investments, for a higher price than its original purchase price (or "basis").

Market order

instruction to your broker to by/sell stock at the currently available price

Limit Order

instruction to your broker to buy/sell stock at a specified price → good for 24 hours

bonds

offer fixed payments and no ownership stake

Stocks

provide ownership but come with higher risk and no guaranteed returns

point

$1

Bull market

times are good; prices are rising

bear market

 Market is suffering; prices declining

What are the advantages and disadvantages of using a discount broker?

carry out orders for less cost to the investor but they typically just execute orders for their clients. They don't offer personal consultations or advice. can offer lower fees due to the lack of these services

How do stockbrokers make money?

Makes $$ from buying/selling securities for their clients

What are the 3 ways you can make money in stocks?

• Dividends - not all companies pay them; get paid quarterly but listed in the paper as annual

• Buy low, Sell high - The most common way to make money off of stocks. Idea is to purchase the stock at a low price and sell it a high price to make money.

• Short sell - Opposite of buy low/sell high; You make money of the stock price goes down from the price that you “borrowed” the shares from your broker at. You borrow shares and replace the cost (cover) them at  a lower price. Hence making a profit on difference between the borrowed price and the current stock price. Potential loss can be limitless because the stock can continue to go up and up and up. But it cannot drop lower than $0

What is diversification?

Investing in different types of investment vehicles and industries

What type of groups issue bonds and why?

issued by a corporation, government, federal agency or other organization to raise capital, are a common type of debt security in which the borrower agrees to pay interest in exchange for the capital raised. The vast majority of bonds have a maturity date that's set when the bond is issued.

What are the advantages and disadvantages of a mutual fund?

• Pools the money of many investors to buy a selection of stocks/bonds

  • A mini-portfolio in itself

  • Actively managed by a “fund manager”

  • Most common investment choice in most retirement accounts

• Allows greater access to more types of stocks and bonds

• Advantages

  • Diversification, Liquidity, Professional Management

• Disadvantages

  • Buried costs/fees, no control of what’s included, wisdom of mgmt.

What are the differences between a common and preferred stock?

preferred stock shareholders have priority over a company's income, meaning they are paid dividends before common shareholders

What is a W-2?

• Statement from your employer telling how much you made and how much was withheld

Sent “2” you at the end of the year

What is a W4?

• fill out when you start a job, tells the employer how much to withhold in tax

Fill out be “4” you start the job

What is a 1099INT?

•  Form that you get from a bank, mutual fund, etc., which tells you how much you made  

  • Interest, dividends, etc…. 

  • In most cases, this must be included in your taxable income.

Must be made available to you by January 31 of the following year

Why would you have a difference between tax owed (liability) and tax withheld?

Withholding on your paycheck is simply an estimate. The actual tax you owe could be more or less depending on a variety of factors.

What should you do if you had tax withheld from each paycheck, but you don’t really owe the money to the government based on your income?

File a tax return to get a refund of the taxes withheld. Even if you don’t owe taxes, the IRS won’t refund you unless you file.

What is an allowance (on a W4 form), and what are the tax advantages of having some?

A term used in completing a W-4 Form. The more allowances a taxpayer claims, the less will be withheld from his/her earnings. When fewer allowances are claimed, the more withheld.

progressive taxes

• The more you make, the more you pay 

• e.g. Federal Income Tax

proportional taxes

• Same rate for all, flat tax 

• e.g. IL state tax

• 4.95% for all who reside in the state of Illinois

  • 2024

What is an exemption?

excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax.

What is a standard deduction and how does it affect your income taxes?

is a specific dollar amount that reduces the amount of taxable income. The standard deduction consists of the sum of the basic standard deduction and any additional standard deduction amounts for age and/or blindness. In general, the IRS adjusts the standard deduction each year for inflation

Social Security

• Funds retirement, disability, & survivorship benefits

  • Tax Rate = 6.2% (for both the employer and employee)

Medicare

• Provides health care coverage for people 65+

Tax Rate= 1.45% (for both the employer and employee)

How does the size of a down payment affect the finance charges (or interest paid)?

A larger down payment typically leads to lower finance charges (or interest paid) on a loan. This is because a larger down payment reduces the amount you need to borrow, resulting in a smaller loan principal. Lower principal means less interest is calculated over the loan's term, leading to overall savings on interest costs.

What is a deductible?

amount you agree to pay per claim

What is a claim?

a formal request from the policyholder to their insurance company asking for payment after a covered incident, such as a hospital stay, a natural disaster, theft, and more.

premium

is the amount you pay regularly, usually monthly, to maintain your insurance policy and keep it active. It's essentially the price of your insurance coverage, and failing to pay premiums can result in your policy being canceled. 

Car insurances

• Collision – covers damages to your car 

• Comprehensive – protects your car from damages resulting from theft, vandalism, fire, flood, weather, etc... 
  Uninsured Motorist – covers you and your family for injuries and property damage for uninsured or hit and run drivers

• Medical Payments – covers you and your family for medical costs of injuries sustained in an accident with your car

What minimum car insurance coverages are required in Illinois?

25/50/20 → liability coverage

collision insurance

covers damages to your car

comprehensive insurance

protects your car from damages resulting from theft, vandalism, fire, flood, weather, etc...

What car insurance coverages can you consider dropping later in a car’s life?

Comprehensive and collision coverages

What is involved in leasing a car?

• Early Termination – if you need to end the lease early, you will have to pay this fee (very expensive)

• Excess Mileage Charge – you are allowed a certain number of miles each year for the life of the lease – each mile that exceeds that number will result in X amount of dollars per mile

• Excess Wear and Tear – lessor will inspect car when you return it, and if it is determined that the car’s condition is worse than just normal wear and tear, you will lose your security deposit and maybe owe even more

• Residual Value – what the car is worth at the end of the lease (book value)

  • the shorter the lease, the higher the residual value, which means that your monthly payments will be less!

What are the disadvantages of leasing a car?

• Do not own car at end of lease

• Mileage is limited to set amount

• Contract is confusing

• Steep fees for terminating lease early