By kidseconposters.com
Companies issue stock to raise money to finance business operations. Stock represents ownership in a company. Thus, if you are a stockholder, you own part of a company. A stock certificate shows how many shares you own.
By kidseconposters.com
Companies issue stock to raise money to finance business operations. Stock represents ownership in a company. Thus, if you are a stockholder, you own part of a company. A stock certificate shows how many shares you own.
By kidseconposters.com
For individuals, saving is the part of one’s income that is not spent. People often place their savings in banks and credit unions, which in turn lend the money to businesses and other individuals. Sometimes people use their savings to purchase financial securities, such as stocks or bonds. It is important to save regularly, especially for things like education, retirement, and financial emergencies.
By kidseconposters.com
Investing in capital goods occurs when businesses purchase capital goods in order to increase the productivity of workers. This investment always involves some risk.
By kidseconposters.com
Financial institutions encourage people to save by offering interest on savings. They loan these savings to businesses and consumers. Banks compete with one another to attract savers and borrowers. The goal of the bank, like any business, is to make a profit.
By kidseconposters.com
People often put their savings into financial investments like stocks, bonds, or certificates of deposit. Some of these are more risky — but have the potential of a much better rate of return — than less risky investments. Research the financial investments below. Rate each according to risk and return — with 10 high and 1 low.
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Teaching a personal finance class? We have some great class ideas on how to integrate the portfolio simulation and educational content with your classes!
By Professor Anke Stugk, MBA
astugk@hodges.edu
A study of personal financial management including retirement planning; budgeting; individual taxation; consumer credit; investments such as stock, mutual funds, and annuities; insurance, and major expenses. Prerequisite: MAC1132 or permission of the faculty/program advisor, program chair, and dean.
Personal Finance Semester Project Assignment Objectives
Assignment Instructions
You have a $100,000 simulation account using the Stock-Trak simulation portfolio. Based on what you know today, please make investments that will fit your financial goals. Your submission must include a title Page, brief summary of your personal financial goals, brief reasoning for your investment decision, table of your investments, and references if applicable. Your write up must be a minimum of 150 words.
Continue working on the following section during the semester
Clearly identify Federal Taxation principles that impact your personal financial planning. Provide detailed calculated examples pertaining to your simulation portfolio and financial goals. In addition to your calculations you must provide a write up of minimum 250 words for this section.
Identify asset and credit management principles you can use to achieve your financial goals you have stated in week 1. Provide detailed calculated examples pertaining to your simulation portfolio. Your calculations must include the concepts of time value of money. In addition to your calculations you must provide a write up of minimum 250 words for this section.
Clearly identify insurance needs you must meet to achieve your personal financial goals. Provide detailed information on life, health, and property insurance. In addition to your calculations you must provide a write up of minimum 250 words for this section.
Based on what you have learned over the past weeks make adjustments to your portfolio. Identify the changes you have made to your portfolio and provide detailed information why you have made these changes. Download the detailed transaction report and include as appendix to your final portfolio. Select one investment you have made and complete a basic fundamental analysis for this security. This analysis must be in essay format and include the company name, ticker symbol, where it is traded, the company headquarter, who is the CEO since when, what is the industry, brief overview of the company, what has been the trend of the security over the past three years, what is the security beta and what does that mean for your investment? (Do not include bullet points!) In addition to your calculations and tables you must provide a write up of minimum 500 words for this section.
Provide detailed information on what measures you must take to be prepared for retirement. Based on your personal finance strategy include information on your necessary estate planning assuming you have achieved all your financial goals. In addition to your calculations you must provide a write up of minimum 250 words for this section.
Conclude on the main findings during this project. Provide detailed information on what you would change when reviewing your week one allocation and week 6 portfolio allocations. Provide a strategy to create a personal financial plan. You are required to have a minimum of 250 words.
Your final submission will include a title page, introduction using assignment from week 1, information for each section as stated above, and a reference page. All components must be submitted as one word document in your final week. You will be required to submit your assignment under the assignment link and through Turnitin. Only submissions in both places will be considered for grading. Students are required to adhere to the Academic Honesty Policy and follow APA style guidelines.
To be “in debt” means to owe money to someone else, usually making fixed payments to pay back the amount over time, plus interest.
Debt means different things to different people – having some debt is perfectly healthy for your personal finances, but too much can leave you buried. There is also a major difference between personal debt and business debt.
Your “personal debt” is how much money you owe to other people, businesses, banks, credit card companies, and other creditors. Your total debt also includes any outstanding mortgages and student loans.
Having personal debt is not inherently a bad thing, but having too much debt so that you are unable to pay it back in a timely fashion is a huge problem. Reaching the point where you are unable to pay back your personal debt is known as being insolvent.
There are many sources of personal debt, some are considered healthier than others.
Credit card debt is having an outstanding balance on your credit card. Each month that you have an outstanding balance, you are required to make at least a minimum payments. Interest will continue to accrue on the outstanding balance you haven’t yet paid back, so you will be paying back even more later.
The good news is that using a credit card responsibly is a basic way you can build your credit. Building credit shows your trustworthiness in using borrowed money. This helps develop your credit score, providing opportunities for getting additional loans for mortgages and other big purchases later in life. The bad news is that credit card debt which grows too quickly or remains outstanding for too long is one of the key sources of financial trouble for young people.
For students and individuals just starting their first jobs, having a credit card may feel like a blessing. Credit cards can sometimes be used as “bridge funds” between paychecks or student loan payouts. They allow you to make purchases or make payments on living and school expenses. Having that card available may seem like an easy fix to your current financial dilemma. However, if you don’t quite understand how credit cards work, you can rack up a large amount of credit card debt, leaving you with large monthly payments that need to be taken care of. This could create a situation where you are unable to pay back the full amount in a timely manner. Remember that every month that you have a balance on your card, interest builds up, making it more expensive to pay off the card in the long run.
Credit card debt does have its place in most people’s financial lives, though. When used appropriately, credit cards can be a great way to build up a credit history, and most credit card companies offer reward programs that can make credit cards more attractive to use than cash for everyday purchases.
Many university students need to take out student loans to finance their education. Student loans are a lump-sum form of debt that usually pays out every semester or year, but the loan does not need to be repaid until after you graduate from the university and hopefully find a job.
Student loans are popular because they make it easier for more people to obtain higher education, and by living off borrowed money, students can focus entirely on their studies. Even students who work while in school may still take out a student loan to help pay for tuition costs. The major downside to having student loans is that these former students begin their professional lives with a large cloud of student loan debt looming.
Even though you may not need to start paying back your loans until after graduation, interest usually starts accumulating as soon as the loan is dispersed. This means that the longer you wait to start paying it back, the bigger the debt becomes.
Student loan debt is also treated differently from other types of debt. Even if you file bankruptcy, you probably won’t be able to discharge your student loans. (Discharging debt through bankruptcy means your debt is cancelled. You no longer owe.) This exception in the law exists to prevent fresh graduates from declaring bankruptcy right out of school and discharging their full debt immediately. It means that regardless of how insolvent you become, you will still have to pay back your student loans. In recent years, if you still owe on your student loans and haven’t been making payments, the government will try to retrieve what you owe by keeping a portion of your income tax returns.
Mortgages and car loans are loans taken out to pay for a house or car. These loans usually have the house or car you’re buying posted as “collateral”, meaning that if you fail to pay back the loan, the house or car could be repossessed to pay back the debt.
Mortgages and car loans are usually looked at as positive debit. As long as you made good purchasing decisions and received loans with decent interest rates, taking out these loans is seen as a necessary part of your credit life. Their major downside is that these loans are typically much larger than what you would see with normal credit card debt, which means you will be paying them back over a much longer period of time.
The longer you are paying back a debt, the more careful you have to be that you always have enough money available to make at least the minimum payment, otherwise the loan will going into default. For example, if you take out a 20-year mortgage on your house, you need to be sure that you have a plan to keep making the mortgage payments for the next 20 years, even if you lose your job somewhere along the line or a financial disaster strikes.
Generally speaking, if you find yourself in the position where you think you might not be able to make your mortgage or car payment, you will be in a better position if you sell the house or the car yourself rather than waiting until your creditors seek repossession.
Your net worth is based on your balance of assets (things you own like your house, cash, jewelry, and anything else of value) against your liabilities (your total debt). As your debt increases, your net worth goes down.
The flip side is that if you use debt to make valuable purchases, like taking out a mortgage to buy a house, the value of this asset (your home) may increase at a higher rate than the interest you pay on it. When looking at increasing your net worth, consider the lifetime growth of your assets against the debt needed to fund the purchase of those assets.
If you “default” on your debt, it means you are unable to repay it, and your creditors will start attempting to recover their loss. This can lead to debt collection for them or bankruptcy protection for you.
There are different legal methods that creditors can take to collect their debt from you. During this process, there are consumer protections to safeguard you against illegal practices.
If you posted anything as collateral for your loan (like your car), the creditor can take possession of that item if you stop making your loan payments, and they can usually do this without notifying you. The creditor can then sell off what is repossessed and use the sale to satisfy the amount that was owed. If they can’t get back the amount that you owe them when it is sold, you may still be liable to pay back the difference.
If there was no collateral involved with the loan, the creditor can sue you which forces you to pay back the loan amount. The court system provides different methods to recover the money. One common method is “wage garnishment.” In this method, a certain amount of money is taken out of your paycheck directly and sent to the creditor before you even see it. There is usually a cap on how much can be taken, generally no more than 25% of your paycheck, but the cap can be lower depending on the state you live in.
A “property lien” is another type of court order which a creditor can use to recover money from an unpaid debt. A property lien is a public statement saying that you owe the creditor money, and that until that debt is repaid, the creditor now owns a piece of your property. Having a property lien does not immediately do anything to you, but it opens up the door to foreclosure. The creditor could force the sale of your property to satisfy the debt you owe.
Most creditors prefer to avoid foreclosure since it is a lot of work to arrange the sale, so foreclosure is typically left as a “last resort.” Instead, if you have a property lien against an asset, you will typically have to pay off your debt by using the proceeds you make when you sell the property. Once the lien has been paid, you will then have a “clear title” that you can use to transfer ownership to the new owners. If your creditor does decide to foreclose on your property, they only have a right to the amount of money that they’re owed. If the property is sold for more than you owe, you get to keep the rest of the money.
Even if you default on your debt, you still have certain rights and options available.
The Fair Debt Collection Practices Act is a consumer protections measure that helps protect individuals from unfair harassment by their creditors. It makes it illegal for creditors to
The Act also requires anyone who contacts you about your debt to tell you who they are calling on behalf of and the total amount you owe. If a debt collector breaks any of these rules, they can be penalized by the Consumer Financial Protection Bureau.
If you really find yourself insolvent, you may need to consider bankruptcy. A simple bankruptcy, known as “Chapter 7,“ involves selling off all your assets above a minimum threshold (usually $5000 – $6000). A trustee takes possession of all your property and assets and sells them. The proceeds are then distributed between your creditors. Over 90% of all bankruptcies are this type.
After declaring bankruptcy, all debts (apart from student loan debt, child support, and a few other special cases) are “discharged.” The creditors are no longer able to collect on them. However, the person who filed for bankruptcy generally will be unable to obtain any new credit for 3 to 5 years. This impacts financial transactions such as getting a simple credit card or even renting an apartment. A bankruptcy will appear on your credit report for 7 years. Remember that using credit deals with trustworthiness, so declaring bankruptcy shows others that you didn’t hold up your end of the deal. You will need to work extremely hard to repair your financial reputation.
Business debt works a bit differently from personal debt. Businesses (especially big businesses) are in debt nearly all the time. Making payments on this debt is generally considered part of their normal operating expenses.
When you take on personal debt, you know you will be paying off that debt for a period of time. Eventually you want to retire and live off your savings, so it is in your best interest to minimize how much debt you have by that time. During your working years, you will also probably have a cap on how much more money you earn each year. Most people don’t expect to receive 20% raises every year for their entire life.
These constraints do not apply for businesses. They expect to exist and continue to do business forever, so they do not have a point on their horizon where they need to be “debt free.”
The biggest difference, though, is that businesses use debt as leverage. They borrow money in order to make more money through opening new factories, hiring new employees, doing more research, etc. Each time a business takes out a loan, it is saying that it expects to be able to use that money to make more money. And the money earned is greater than the cost of that loaned money. For example, if a business can borrow $10,000 with a 10% interest rate to bring a new product to market this year, and it can earn $30,000 in extra revenue from sales of that product, then taking out that loan is a positive decision.
As businesses pay off their debts, they will often continue to re-finance, or borrow against the new value they have created since their last loan. This means that their actual dollar amount of debt grows over time. With individuals, we are mostly concerned with how big our debt is, but a business only needs to worry about how much they are paying back relative to how much they are earning. If their earnings keep increasing, then there isn’t a problem if their debt is increasing too, as long as their debt is not growing faster than their revenues.
This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!
Learn More[qsm quiz=77]
In order to be self-sufficient in our economy, everyone needs some type of income – money to pay the bills and other living expenses, but that income comes in many shapes and forms.
When you have a job, the total compensation from your employer consists of more than just the paycheck you get. Different employers offer many different compensation packages. Finding the right balance between them all is often a careful point of negotiation when accepting a job offer, but the first step is knowing what they are!
Direct compensation is what you get from your employer for doing your job—how you are being paid. This is directly laid out in your employment contract, collective bargaining agreement, or other terms of your job.
When people think of their “income,” salary or wages is usually the first number that comes to mind. It is the actual cash that your employer pays you per year. When considering different job offers, this is the easiest number to consider for income and compensation because it is easy to compare “apples to apples” between jobs. $45,000 or $47,500? Which is greater?
Your salary or wages is also called your gross pay. Gross means that it has not been adjusted to reflect taxes, withholdings, retirement contributions, or other non-cash perks. It is the amount you start with when you calculate the number of hours you’ve worked and how much you get paid for those hours.
Hourly wages are the most basic form of compensation. You are paid a specific amount for every hour that you work. Most people’s first jobs will be hourly, but many high-end professionals and independent contractors also charge by the hour. Part-time employees, whose scheduled work hours differ week to week, are almost always paid by the hour.
If you do work as a contractor, it means that you are self-employed, but you contract out your time and energies to work for someone else (either a person or company). Companies like Uber and Deliveroo, who offer a lot of flexibility to their workers, employ most of their workers as “contractors”. Contractors are typically paid a specific amount per hour of work, plus expenses (since a contractor typically has to buy their own work materials and get paid back for them later). Contractors are not typically eligible for any compensation other than this hourly rate.
If you work as an hourly employee, that means that you have a specific agreement with your employer. Employees typically have much less flexible schedules than contractors. They are scheduled to work for a specific amount of time every week and are compensated based on the total number of hours they actually work. Hourly employees may be entitled to other perks and forms of compensation, depending on their employment agreement. This could include free food for someone who works at a restaurant, getting to see movies for free for someone who works at a movie theater, or a holiday bonus. Hourly employees who end up working more than their scheduled hours are often paid “overtime” as compensation.
A worker who is paid a salary is not paid per hour but instead is paid a set amount every pay period based on a set number of hours worked per week, month, or year. Salaried workers are almost exclusively full-time employees.
Even though salaried workers are not paid per hour, their contracts usually state that they are expected to work at least 30-35 hours per week. If they need to work more than this as part of their normal job duties, they are not paid overtime.
Salaried workers are more likely to receive other types of compensation in addition to their base salary including things like paid holidays, mileage reimbursement, and paid sick time.
In addition to salary and wages, most employers offer group insurance as well. Group insurance is offered to all employees of a company who get a “group deal” for insurance at a fixed cost each year. Because many employees take advantage of this insurance program, the insurance company is able to offer lower premium rates than you would typically get if you had to purchase insurance as an individual.
The cost of the group insurance is shared between the employee and the employer. The employee’s share is deducted from their gross pay, while the employer’s share is paid directly by the employer.
If you work for a large company, you will almost certainly have group health insurance included as part of your employment package. As an employee, you can usually add your family members and children to your insurance coverage. Since buying health insurance on your own can cost twice as much, (or more) health insurance is a major form of compensation to consider when comparing job offers.
Many employers will also include life insurance as part of the employment package. Life insurance has two functions:
Many employers will also offer to help with retirement savings through programs such as 401k, 403b, or a pension plan.
The most common method employers use to help you save for retirement is by paying directly into your retirement account, like a 401(k), usually matching your own contribution. This means that for every dollar you save yourself, your employer will also contribute an extra dollar, doubling your savings rate. This form of employer contribution is very popular both with employers and employees, since it gives employees direct control of their retirement accounts. Employers also benefit through reduced employee turnover, tax deductions, or tax credits.
By maximizing your retirement savings early, (meaning you save the maximum eligible amount per year) you can effectively double the amount you’ve saved because your employer contributes the same amount. Since your retirement savings is being invested, you will also be earning returns on your investment through the growth of stock, payments of dividends, earning interest on bonds, etc., you’re getting an even bigger bonus.
For more information on employer-sponsored retirement savings programs, like the 401(k), check out our article on retirement.
Employers might also offer a direct pension program. After retiring from a company with a pension program, you receive a check each month for the rest of your life. The amount you receive is typically based on how long you worked with the company and how much you earned over your lifetime.
Even if you leave one company and start working somewhere else, you will still be able to collect a pension from the first one based on how long you worked there. Pensions are less common in recent years, as many employers favor direct-contribution plans instead.
Indirect compensation are other forms of “payment” you receive that do not necessarily have a known dollar amount. These are often considered “perks” of your job.
Equity compensation means the company provides a way for its employees to own company stock and benefit from some of the company’s profits. This can be through direct stock compensation, (receiving shares of stock in the company) stock options, (giving employees the right to buy company stock at a later date at a fixed price) or even through profit sharing, (splitting the company profits with employees).
Forms of equity compensation are most popular with employees in management roles. They act as a form of motivation to encourage employees to help the company grow, since the better the company does, the more valuable the equity compensation becomes. Because start-up companies haven’t yet experienced substantial success, employees are often offered direct stock compensation. Once the company grows, the value of your shares of stock increases, sometimes dramatically.
Vacation time, how much of it you receive and how often you are eligible for it, is a key piece of indirect compensation. Vacation days, sick days, and personal days all vary greatly from company to company, but having those paid days off can be a major source of compensation.
A new form of compensation to reward employees and attract new talent in recent years has been the introduction of flexible working hours and conditions. Typically, in the past, businesses had set hours of operation, so you were expected to work from 8:00 a.m. to 5:00 p.m. with a one-hour lunch break. An example of flex time would be a company allowing employees to work from 8:00 a.m. to 6:00 p.m. four days a week instead of working 9:00 a.m. to 5:00 p.m. five days a week. This provides employees with regular 3-day weekends. In another flex time option, companies may allow employees to work from home occasionally or flex their hours by starting and ending their work day later.
How much flexibility your job allows can be a major form of compensation offered by your employer.
Some companies offer perk packages specifically targeting employees with families. Typical perks include maternity/paternity leave, bonuses to accommodate child daycare, extra time off for child sick days, and sometimes a company-provided day care on site in the building. Family perks are an important form of compensation companies offer to attract candidates who may be starting a family in the future or who currently have young children and need to consider how to balance their family-work commitments.
Throughout your life, the majority of your income will come through your employment, but there are additional sources of income you should consider.
Investment income are earnings you get from dividends, interest, selling stock, and other investment-related activities. Investment income becomes very important after you retire. If you have been saving money in a retirement account, and have benefited from employer contributions, your investment income can be a very large amount by the time you retire.
You could also receive investment income through selling a house, investing in start-up businesses that provide you with profit-sharing or equity in the business, or using bonds or certificates of deposit that provided interest income when they mature.
Social security provides retirement benefits and disability income for employees who have paid into the social security system and have reached a certain retirement age. Everyone who pays into social security is eligible for its benefits. Social security can often be the most reliable form of income, but it usually not the largest.
Combining social security income with other retirement income will help you live a comfortable life in your retirement years.
[qsm quiz=75]
In the past, information about your bank transactions, credit card transactions, investment statements, and other financial paperwork came through paper documents. People were told to keep these documents safe or shred them when they were not longer needed. Today, the majority of our financial records can be accessed online. Apart from a few paper records, everything you need to know can be accessed from nearly anywhere in the world, instantly.
While online access definitely makes our record keeping simpler and eliminates a paper trail, we now need to ensure that we are the only ones who can access our online financial records. Fraud and identity theft are growing problems, impacting millions of people each year. Here are some basic steps you should follow to avoid becoming a victim.
When it comes to your unique identification (your birthdate, your social security number, your bank account numbers, your passwords, etc.), be aware that scammers would like to get that information in order to take advantage of you and others. You might tell yourself that you’ll never give out that information, but when someone calls from the IRS asking you to confirm your social security number, you may do it without thinking. After all, isn’t the IRS a trustworthy organization? The answer is Yes, but fraudsters pretend to work for the IRS and other trusted organizations just to get personal information from people like you. Giving your personal information to someone unwittingly is the biggest ways people give up their information to identity thieves and other fraudsters. There are a few best-practices you can use to make sure your information stays safe.
Never give out your password. This may seem obvious, but it remains the most common way that you allow someone access to your account. An agent of a financial institution will never ask for your password. Employees whose job responsibilities include helping customers can access your accounts using their own administration tools. Some companies will ask you to set up security questions to reset your own password if you forget what you chose. Other companies will ask you to choose a PIN number so that if you need help with your accounts, the PIN acts as another layer of security.
Create different passwords for your accounts. Never use the password to your banking information on a website where you shop. Some websites let their staff see your password or they store your password in such a way that it can be decoded easily. In the past five years, the news has reported stories of retailers or websites that were “hacked.” This means that someone got unauthorized access to the website information, often including customer account information. The hackers can then use the customers’ personal information in illegal ways. Since people often use the same email address or username for different online accounts, hackers who have stolen your personal data will try the same username and password combination they stole from one site to get access to other sites.
The best approach includes creating unique passwords for each of your accounts and updating your passwords every few months.
“Hello, this is Jameson calling from Visa. Would you mind verifying your credit card number for me?” Identity thieves often call and claim to be from the IRS, the electric company, or a local business who claims you just won a prize. Why? Because these are organizations you trust and they are hoping you’ll let your guard down and give them your credit card number.
This type of fraud also happens online through emails where you are asked to click a link and verify your information for your bank account, your Paypal account, your Apple account, etc. These emails often ask for personal information in an effort to steal your login credentials or card information. The links may even look very realistic.
Just remember, if you weren’t the individual who initiated the phone call or the email, don’t give out your credit card number. In all cases, call your financial institution to verify that they needed to reach you, or in the case of an email, report it as spam.
Most financial institutions and other retailers, such as T-Mobile, now have multiply layers of security in place to protect you and your accounts. If you try to reach your online bank account and you are using a device that the bank’s server doesn’t recognize, such as a new computer or a computer at the hotel you are visiting, the bank will want to verify that you, the account holder, is truly the one trying to access the account. The bank will send you a temporary PIN number via text, a phone call, or an email, and you will need to enter that information online in order to complete your login process.
Most credit cards now include a chip and a CVV code. The chip means that when you use your card at a retailer, your account information is scrambled, making it harder for the information to be stolen. The CVV code (card verification value) protects your card number from being used in online transactions unless that code is also provided.
One security measure you need to be aware of is the way you share personal information on social networking sites. If you post too much information about yourself, an identity thief can “uncover” key pieces of information about your life and use it to answer the “challenge questions” on your accounts.
In the normal course of doing business, a company may ask for personal information about you. After all, your personal information is what makes you unique, so that is an easy way for a company to create a unique customer database. But there are only a few situations where you need to provide this data about yourself. Your employer will need your personal information for wage and tax purposes. A business may ask for your social security number in order to check your credit before giving you a loan, renting you an apartment, or making a job offer. However, most institutions do not need your social security number at all. If they ask for it, ask if they can provide you with a unique customer number instead.
The decision to share your key personal information is yours to make. Ask questions before deciding to share it. Ask why they need that information, how it will be used, how they will protect it, and what happens if you decide not to share. After all, it’s your identity at stake.
Computers, smartphones, and cameras allow you to keep a great deal of information at your fingertips, but when you dispose of, donate, or recycle a device you may inadvertently disclose sensitive information, which could be exploited by cyber criminals. The Department of Homeland Security Office of Cybersecurity and Infrastructure offers the following recommendations:
Whatever method you choose, just remember that your goal is to keep your personal information safe so that your accounts are not compromised, leading to potential theft or fraud.
This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!
Learn More[qsm quiz=73]
An investing strategy is a plan for how to save money and help it grow. Sometimes an investing strategy can be as simple as “plan for trading stocks,” but it really means a lot more.
All investments balance liquidity (how easily it can be converted into cash for other use), risk (the chance of the investment to lose value), and potential returns (how quickly and how much your investment can grow).
The balance among these three areas depends on your own individual taste, but how you view them will determine what kinds of investments you choose. Let’s take a look at several investment options with a look at the liquidity, risk, and potential growth you will typically experience.
The “security type” is what you are holding or investing in. Security types vary widely, but a balanced portfolio should include a mix of the options available.
Liquidity: Very High
Risk: Low
Potential Growth: Zero or Negative
Cash, believe it or not, is an investment in and of itself. Cash and bank deposits you can withdraw quickly are the most liquid assets, since liquidity refers to how quickly you can convert any investment into cash.
Being able to always use cash for whatever you want is valuable. That is why “emergency funds” exist as cash and bank deposits, not as bars of gold. On the other hand, cash kept in a safe, at home, or in a safety deposit box does not grow in value, and cash kept in a savings account may lose value over time due to inflation.
Liquidity: Low
Risk: Low
Potential Growth: Low
A Certificate of Deposit is like a savings account with a locked-in interest rate. The difference is that money invested in a CD cannot be withdrawn for a certain period of time. When you open a CD, you choose a length of time (e.g. 3 months to 20 years). CDs are very safe investments but they have a very low potential for growth since the interest rates are low (e.g. 0.4% to 1.6%).
Liquidity: High
Risk: Medium
Potential Growth: High
When you ask people about investing, stocks are usually what comes to mind. If you want to invest in stocks, you have several choices. You can buy stock in a single company. You can invest in a mutual fund which is a fund representing several different stocks. You can also invest in an ETF, an exchange-traded fund which represents a collection of stocks traded within a certain index, such as the companies in the S&P 500. As far as an investment strategy is concerned, these options represent the same thing – buying a piece of one or many companies in exchange for a share of their profits.
Liquidity: Medium
Risk: Low
Potential Growth: Medium
Bonds come in three “flavors” – Corporate Bonds, Treasury Bonds, and other Government Bonds. Unlike stocks, a bond is a loan that you make to a company or the government for a period of time. When the bond matures (when the period of time is over), the organization will pay back the loan amount plus interest. Corporate bonds from large companies and treasury bonds are usually very safe investments with a low rate of return. Junk bonds are issued by companies with lower credit ratings who are in need of money. Because these companies are a higher risk, they offer to pay out higher interest rates to investors. Junk bonds have a high default rate, so they are considered speculative.
Liquidity: Low
Risk: Medium
Potential Growth: Medium
Real Estate includes land and buildings. Until fairly recently, the bulk of “retirement savings” was in the form of real estate — the house you lived in. People would buy a house and hope that the value grew enough over the next 30-40 years to sell it and use the profits for retirement.
In the 1980s, flipping houses became a popular way to invest in property and gain a profit. Flipping houses involves buying damaged or discounted houses, doing necessary repairs, and then selling them for profit.
Since the housing market crash in 2007, people are more wary of real estate investing, but owning a home is still a very popular long-term investment strategy.
Liquidity: High
Risk: Medium
Potential Growth: Medium
Many investors try to buy gold and other precious metals as an investment. The value of these precious metals rarely declines, so this is seen as a way to protect against inflation. But there is no guarantee as to their value. In 2011, the “gold bubble” burst, making the prices of the metals more volatile than before. (A bubble occurs when speculators bid up prices of an item beyond its intrinsic value. Gold is not really an important metal in our society. It is used mostly for gold jewelry, a luxury item. The price of gold rose to $1895 an ounce, but then began a steady decline to $1075 an ounce.)
Holding precious metals as a safeguard against market uncertainty in other security types is still very popular. However, financial planners recommend that no more than 10% of your portfolio should be invested in gold.
Liquidity: Medium
Risk: High
Potential Growth: High
A derivative is a financial security whose value is reliant upon or derived from an underlying asset or group of assets such as stock options and futures. Being a “derivative” means that it “derives” its value from something else. A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed upon price. The stock option has value because the stock that it lets you buy has value; however, the option itself has no value unless you use it. A futures contract is a legal agreement to buy or sell something at a predetermined price at a specified time in the future. Future contracts are used with commodities like oil, natural gas, corn, and wheat.
Derivatives are most useful for hedging, such as buying a stock option for a stock you think will go up in value that you don’t necessarily want to buy right now.
Many years ago, a common piece of investment advice was that if you are building an investment strategy for retirement, a large chunk of your “nest egg” would be held in your house, which would mature with the market rates.
When looking at the remainder of your investment assets, financial planners would recommend, as a “rule of thumb,” to balance your assets between stocks and bonds according to your age. This strategy involved starting with the number 100 and then subtracting your age. The resulting number would represent the percentage of your asset portfolio that should be invested in stocks. The remaining percentage should be invested in bonds. This meant that an 18-year-old would have 82% of their portfolio invested in stocks and 18% in bonds.
This advice is a bit outdated, but it does include some wisdom that all investors should be aware of.
Diversify at a few different levels. Split your assets into a few different security types. In the classic example, the saver would have about 50% of their savings stored in real estate with the remaining 50% divided between stocks and bonds. This meant that if there was a fall in housing prices, the individual was protected by having money invested in stocks and bonds. If the stock market started to fall, the saver would still be okay because he’d have the house and bonds.
Bonds are a safer investment since their value is determined by the prevailing interest rates, so they are more insulated from market fluctuations. They also benefit if there is a surge in housing prices, stock prices, and interest rates.
The old suggestion of invest in “more bonds as you get older” is based on the idea that as you get closer to retirement, your portfolio should become more conservative. The closer you are to retirement, the less risk you want to take with your money. If you have several stocks that lose value when you’re 25, you still have 40 years to make up that lost income before you retire. However, if your stocks lose value when you are 62, it becomes a lot more difficult to make up that lost income.
If you’re ready to start investing, there are a couple of strategies to keep in mind. Most long-term investing strategies are based on one, or a combination, of these.
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffet
The “buy-and-hold” strategy is based on the idea that you do extensive research on what you’re buying, choosing your investments for solid long-term reasoning, then buy and hold onto them, regardless of what the market prices do. The only time a buy-and-hold investor should sell is either
Warren Buffet is generally considered the most famous buy-and-hold investor.
“The market can stay irrational longer than you can stay solvent.” – John Maynard Keynes
Even if all your research is great, and even if what you invested in does regain all its value in the long run, you still have a deadline of when you need that money to live on in retirement. You also have a very real chance of just being wrong in your choice, and with a buy-and-hold strategy you might take a huge loss before admitting defeat.
“Know what you own, and know why you own it.” – Peter Lynch
“Value investing” is looking for stocks that are under-valued compared to the rest of the market. This means looking for companies that seem to be growing strongly but have not yet attracted much market attention, or looking for new players with solid foundations and the potential for growth. You will buy and sell stocks more often with value investing. As soon as your picks start looking “priced in” or “over-valued,” you’ll start thinking about selling and moving on.
Peter Lynch was made famous by his use of value investing while acting as the primary manager of the Magellan Fund Fidelity Investments.
“The four most expensive words in the English language are, ‘This time it’s different.’” – Sir John Templeton
Value investing requires you to pay close attention to companies and re-evaluate how much you think they’re worth on a regular basis. If you’re wrong too many times in a row, you could have trouble bouncing back.
“Understanding the value of a security and whether it’s trading above or below that value is the difference between investing and speculating.” – Coreen T. Sol
“Active Trading” is when you are buying and selling stock regularly, trying to take advantage of market swings to earn a profit. Active trading requires a more advanced knowledge of chart patterns, fundamental and technical analysis, and an appetite for risk. In exchange, you can make huge returns with active trading by riding market trends. Day trading is a form of active trading when you buy and sell in the same day. Day trading is more about luck than about strategy.
“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
Active trading can get big returns quickly, but it can get big losses even faster. Most professional investors and financial advisers suggest using only a very small portion of your portfolio for active trading, since the damage can be hard to undo.
This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!
Learn More[qsm quiz=74]
Building the next “big thing”. Being your own boss. Getting the full rewards for your work. There are a lot of reasons to start a business, but taking the plunge is a step entrepreneurs have to face if they plan on striking out on their own.
Every business starts with someone who wanted to do something and then took the steps to make it happen. People usually start a business for one of the following reasons.
There is no magic formula for helping a business become successful. You may have a great product that fills a need in the market, but if you aren’t organized and have a poor work ethic, you might not be able to get the product out the door. Conversely, you might be extremely organized and highly motivated, but if your product isn’t selling, your business could fail. According to the Bureau of Labor Statistics, about 20% of small businesses fail in their first year, and about 50% fail in their fifth. Why? Because business is uncertain and risky. However, if you take the time to create a solid business plan, your chances of success increase.
Your business plan is a written document that details several decisions you have made and the research you did about the industry you’re planning to enter.
Every business exists to address a problem. Your product or service was designed to fill a void in the market, to give consumers a solution to a problem they have. Some businesses offer entirely new products, giving consumers something they want or need which they did not have before. Others improve on existing products by introducing new features or lowering prices. Some businesses innovate in entirely new ways. When you think about how your business will make money, think of what it has to offer and why people would be willing to purchase it.
When performing a market analysis, an entrepreneur looks at potential competitors in the market, companies who are already doing what his/her business is planning to do. If, for example, you want to open an Italian restaurant, part of your market analysis would be researching the other Italian restaurants in the area that customers already have access to. The information you uncover will help you build a SWOT analysis. A SWOT describes the strengths, weaknesses, opportunities, and threats of your company. You should be able to outline several advantages that your restaurant will have over the local competition. If you can’t find those advantages, then you will have a hard time attracting customers.
Your business plan should outline several goals you have for your company and its planned growth. Each goal needs to be specific and measurable, with a definite timeframe. Goals should build on each other, and they need to be attainable. For example, these three goals would allow you to track your business’s progress:
Reviewing your goals regularly will help you get a clear picture of how well your business is really doing. You can update these milestones as time goes on to be more realistic, but keeping your goals in mind is both an important motivating factor and a good way to show potential investors that you are able to hit your own targets.
This section of the business provides details on how you plan to run the company. It should include how your business ownership is structured, who is part of the management team, your management philosophy, how many employees you intend to hire, what their roles will be, and what skills your key employees bring with them.
Starting a business is risky. You might need to buy equipment, rent office space, or even just spend a lot of time and energy on a business with no guarantee it will succeed. Entrepreneurs often use their life savings to invest in this new business. Some borrow from friends and family with the hope that they can pay them back. Having the business fail is always a possibility. This uncertainty is one of the biggest reasons people choose not to start a business, even if they have strong entrepreneurial skills and a solid business plan. That’s why entrepreneurs often begin a business as a side job. They keep their full-time job with its stability until their side business becomes successful enough to make a permanent job change.
The following video shows different funding options entrepreneurs have when beginning a new business.
You can read more about the wider-range impacts of starting a business in our economics article about entrepreneurship.
[qsm quiz=71]
Credit is when you use borrowed money with a promise to repay it at a later date. Credit comes in many forms from credit cards to mortgages. There is a wide range of ways to use credit, which means that it is often a challenge for beginners to learn all the ins and outs of using credit wisely.
Before diving in to how the pieces work together, you need to understand the basic terms that are used when speaking about credit.
Principal is the amount of money that you borrow. You are expected to re-pay the principal plus any interest charged.
The interest rate is how much you are charged for the right to use borrowed money. The number is expressed as an annual interest rate.
Your credit limit is the total amount you are allowed to borrow. This is set by the lender based on your ability to repay.
The grace period represents the time between when you borrow money and when interest begins to be charged on the principal.
The minimum payment is the smallest amount you can pay each month before your credit card company considers you defaulting on your debt. This minimum payment is based on a percentage of your total principal balance.
Credit works based on trust. You, as the borrower, ask a lender for a “line of credit” or the opportunity to borrow money for your own needs. In return, you promise to pay it back. If the lender agrees, the credit will be extended to you, based on certain terms and conditions. These terms are generally based on what you intend to buy, how likely you are to make all payments on time, how trustworthy you have proven yourself in the past with borrowed money, your income, the overall conditions of the market, and a few other factors.
At the end of the day, the more trustworthy you have proven yourself to creditors, the better terms you can get when borrowing money. Why? Because you are seen as a lower risk. However, if you have never borrowed money before or if you have borrowed money but were not very trustworthy about repaying your debt, you will get terms that aren’t as good.
The terms of your credit refers to how much money you can borrow and how expensive it will be for you. Receiving “good terms” generally means higher credit limits (meaning you’re allowed to borrow more money at one time), lower interest rates (making it less expensive to borrow), and other perks like cash back and flight miles. For beginners, focusing on lower interest rates should be your biggest concern when shopping around for credit cards or car loans.
Since your credit terms are determined by trust, the best way to improve your terms are by using credit and reliably paying it back. This shows creditors that you are able to manage regular payments and will very likely be able to pay back your borrowed money on time.
From a creditor’s point of view, every time they lend money it is an investment. The return on their investment would be the interest rate you are charged to borrow money, and their risk is the likelihood you do not pay them back on time or you don’t pay at all. If your personal financial history has shown that you can reliably make your payments, they believe you’re a safer investment and you get offered better terms. And the more often you show that you’re responsible with borrowed money, the better those terms will be for subsequent offers.
Creditors use credit reports to share information with each other about who does and who does not pay their bills, so you won’t be able to get out of a bad credit history by switching to a different lender.
Let’s imagine that a credit card company agreed to give you a credit card with a $300 credit limit. You decide to use that credit card to purchase a new TV for $300. Your principal balance is now $300, and since you maxed out your credit card with that one purchase (you used every dollar they would let you borrow on that card), you cannot use your credit card for more purchases until you pay down what you now owe.
The credit card company now gives you a grace period before the first bill comes due. The grace period is the time between when you make the purchase and when you get charged interest. The grace period is usually 3-4 weeks, but this can vary a lot depending on your credit card company.
After the grace period ends, the credit card company will start charging you interest on your purchase. The amount of interest you pay is based on the interest rate you were offered in your terms and the amount of principal you owe. Once the interest charge is calculated, it is added to your principal balance to determine how much you owe now. The interest is the extra money you pay for the privilege of borrowing money
You will need to make at least your minimum payment every month in order to remain in good standing with the credit card company. The minimum payment is either a flat amount (e.g. $25) or a percentage of the principal balance you owe plus interest charges and late fees. If you consistently pay less than the minimum payment, you will never fully pay off your debt. And if you only pay the minimum payment, you will be stuck paying off relatively small credit card debts for many years. In the end, this means you could be paying more for the interest you were charged than for the original item you purchased. The best tip is that you can always pay more than the minimum payment. As you make payments to reduce your principal balance, you can start using your credit card again. In our TV example, if you paid off $100 of what you borrowed on your credit card, you can now use the card to make additional purchases. Just remember that your limit is $300. Once your principal balance is zero, you’ve paid off your credit card and no more interest will be charged. Then you can consider making another purchase.
If you need to buy a house or property, you will most likely need to take out a mortgage. The biggest difference between a mortgage and a credit card is that with a mortgage, you are borrowing the money for a very specific purpose, usually to buy a house. The house you are buying then becomes collateral in the loan, meaning that if you fail to pay back the loan, the creditor can take your house.
Because the mortgage is backed by collateral, the creditor is taking on less risk in lending you the money. And because you are in a less risky situation, the lender will usually offer you a much higher credit limit and better interest rates than you would receive for a credit card, even with the same credit score and credit history. Other than a higher credit limit and a lower interest rate, mortgages work in the same way that credit cards do. You will still have minimum monthly payments to make and you will get charged interest every month on the balance you owe. Unlike credit cards, there are two types of interest rates used with mortgages, fixed and adjustable.
A fixed-rate mortgage is just how it sounds—the interest rate is fixed for the entire duration of the mortgage. This means your rates and payments will be predictable for the life of the loan. As a trade-off, the interest rate on fixed-rate mortgages may be slightly higher, on average, than for adjustable-rate mortgages.
With an adjustable-rate mortgage, your interest rate can adjust and change over the term of your mortgage based on the overall market interest rates. Lenders prefer these types of loans because it means they can increase or decrease how much they’re charging the borrower based on prevailing market rates.
As a borrower, when you get an adjustable-rate mortgage, you lose some predictability in your monthly payments. Normally you are offered an interest rate for the first 5 years of the loan which is lower than the rate you could get for a fixed-rate mortgage. But after those initial 5 years, the lender can change the interest rate every year.
There are a lot of other factors besides your credit history that will impact your credit and payments. The biggest of these can be the extra fees that credit card companies charge for using certain services. These can be tricky and add up fast.
Fees vary widely, both in type and amount depending on the credit card company, so reviewing potential fees should definitely be on your list of things to check when comparison shopping for credit cards.
Other factors that impact your credit terms include your income and the general market. If you earn more money, you will likely have higher credit limits and lower interest rates, since creditors see that you have a greater ability to pay. If interest rates in the overall market are low or high, this will also play a significant role in the rate you are offered.
When it comes to the amount of interest you are charged on your outstanding balance, another factor could be how your interest is calculated. Some creditors calculate interest monthly while others calculate daily. This calculation should impact how you pay your bill. If interest is calculated monthly, you benefit by making a big payment once per month right before the interest is calculated. If interest is calculated daily, you benefit most by making many smaller payments throughout the month.
[qsm quiz=70]
Credit reports are a report that contains your credit history – both the good and the bad. If you watch late-night TV, you have probably seen a few commercials offering free credit reports, so you might know that these are important. Most people, however, don’t know just how big a role a credit report can play in their financial lives.
A credit report is a historical record of how you’ve managed your finances. It shows how and when you pay your bills that are credit related, how long you’ve been using credit, how much debt you currently have, and what credit has been paid off and closed.
There are three main organizations that provide credit reports in the United States: Experian, TransUnion, and Equifax. Each of these organizations is specially licensed to collect information on all individuals in the U.S. that is related to their credit and payment history, criminal records, bankruptcies, and lawsuits. Your personal credit report is an overview of these activities for the last 7-10 years.
When you request credit from a company, you give that company permission to pull your credit report. The company then asks one of the three credit reporting agencies for a copy of your credit report to help them assess your application for credit. Your report is probably pulled any time you want to open a credit card, take out a loan, get insurance, or rent a home. Sometimes potential employers might request a copy of your credit report, although in this case they need your written consent.
Your credit report is a complete credit history, capturing information about the bills you have paid, the bills you paid late, the bills you didn’t pay, and their amounts. Your credit score is a number that represents how well you have repaid your debts. The more responsible you have been, the higher the number.
Since a credit report contains different information from different sources, all of that information is consolidated into what is known as a “FICO score.” The FICO score basically distills all your credit history down to a number. The larger this number is, the more trust the credit agencies have in you to pay your bills on time. If you have a clean credit report you will have a high credit score. A poor credit score indicates that you probably have a lot of late payments or complaints in your credit report.
Your income does not impact your credit score, but repeated requests to review your score do have a negative impact, since the credit rating agencies assume that if you are trying to get credit from many different places, your financial position might be unstable.
Both your credit report and your credit score are important, and they can have a huge impact on your financial life. Anyone who needs to assess your financial trustworthiness will probably look at your credit report, so it is absolutely in your best interest to keep it looking good.
The first time your credit report might be viewed is when you apply for a credit card. The length of your credit history (how long you’ve been using credit), your credit score, how well you have kept up with previous payment obligations, and your income, will determine the range of credit options available to you.
Generally speaking, people with a poor credit history have lower spending limits, are charged higher interest rates, and are less likely to receive concessions (such as late payment forgiveness) or perks. On the other hand, if your credit report looks good, you will have a wide choice of different credit card companies offering increasingly attractive terms to attract your business.
When you want to buy a house, make sure you shop around for a lender. Since the dollar amount borrowed will be much greater, more lenders will be willing to take a chance on you. This means more banks and lenders will be willing to lend to you in the first place, your interest rates will be better than those offered for a credit card (which can save you tens of thousands of dollars over the life of the loan), and you may have more flexible down payment options.
When you rent an apartment, your potential landlord will probably pull your credit report. Landlords often use credit reports to compare different candidates and to determine the size of the security deposit they will require. Remember, the landlord is primarily concerned with making sure the rent will be paid on time. If a potential renter has a poor credit report, the landlord may rather wait for the next applicant than take a risk on a less trustworthy individual.
Since insurance companies are not extending credit to you, the information on your credit report may not play as large a role in determining whether or not to work with you. However, insurers may use your credit report information when they determine your premiums and deductibles. They want to make sure all of their clients are paying on time. In the insurance industry, the insurance provider needs to take in at least as much money from premiums as they are paying out in claims. If you don’t pay your premiums on time, that is bad for their business.
If you don’t pay on time for a few months in a row, the insurance company may cancel your policy. And if you don’t pay for a few months and then play catch up right before filing a claim, the insurance company will probably charge you higher premiums to make up for your irregular payment history.
In recent years, more employers are reviewing the credit history of potential job applicants. This trend first started in the finance and banking industry, but has been spreading to other employment sectors as well. Potential employers see your credit history as your overall professional trustworthiness, particularly if you have a long history of late payments.
Your credit report follows your basic payment history to creditors. This includes:
Items in your credit report do not stay there forever, so if you make credit mistakes when you are young, you might not need to suffer from them forever. Generally speaking, missed bill payments, collections, and most other items expire after 7 years. Bankruptcies and other civil judgments (like unpaid taxes) usually have a longer expiration, up to 10 years.
The three credit reporting agencies get all of their information from your creditors. Everything in your report was given to them by someone you did business with or someone who sued you. Not every creditor supplies this information. For example, if you rent an apartment, your payment history might not appear in your credit report unless your landlord makes a point to report it. And the reported rental information may be unbalanced negatively for you since landlords might not always report timely or late payments but almost certainly will report judgments and collections.
Creditors report information which is linked to you through your social security number and your address. Your social security number is the main way information is linked, but sometimes your address is also used to help prevent fraud and identity theft.
All of the details presented so far have been helpful for creditors and employers, but you also have some control over your credit report information. The Fair Credit Reporting Act is a law that provides all consumers with certain rights to their credit report, and it includes restrictions on what businesses can include in the report and how they can use that information.
Once you have your credit report, you can dispute any claims on it if you feel they are not legitimate. You do this by calling the credit reporting agency who provided the report and filing a “dispute”. You also need to contact the lender who made the report and ask them to issue a correction if it is inaccurate. If the claim occurred because of an error, it will be removed from your report.
Even if a claim is not an error, you can contact the business who filed the claim and try to get it removed. If the business decides to withdraw the claim, that information is removed from your report. This often occurs when people move out of their home without paying the final utility bills. If you contact the utility companies and pay the outstanding bills (plus a fee), the companies may withdraw the claims entirely from your report. If you do have these negative credit claims, it is always in your best interest to find them and take care of them as soon as possible. Otherwise your future ability to obtain credit will be impacted. For more information on disputing claims, visit http://consumer.ftc.gov.
If a potential employer wants to see your credit report, they need to get your written permission, only use your report information for the purposes of hiring you (and tell you what those exact purposes are), provide you with a copy of the report if they decide not to hire you (or fire you), and give you an opportunity to dispute any outstanding claims before they make their final decision.
If you get denied credit (or a job) because of the contents of your credit report, you also have the right to get a free copy for your own reference.
Businesses who order credit reports also have limits on how they can use the information. Generally speaking, a business who orders a credit report must
People and businesses who provide the data that is included in credit reports also have responsibilities. The most important responsibility is to make sure the information they report is accurate and up-to-date.
If you file a dispute, the data provider has 30 days to verify that the claim is accurate, or else the claim is removed from your report until they do so. The data provider must also take some safeguards to prevent data theft. This is why they require both a social security number and an address, so these items can be cross-referenced to check for identity theft.
The companies who provide data to the credit reporting agencies need to inform consumers before they file a claim and give the consumers a chance to resolve the claim before it appears on their credit reports.
Watch this great video from Bank of America showing how to find mistakes on your credit report, and get them corrected.
Your credit report is important, so don’t forget about it. You get one free look at your credit report each year, so you should take advantage of it. Some studies have shown that up to 30% of credit reports contain inaccurate information, so it is always in your best interest to have these issues resolved as soon as possible. (Note: Your free annual credit report does NOT include your credit score.)
This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!
Learn More[qsm quiz=79]
Every time you buy something, you are considered a consumer. The noun consumerism refers to the idea that spending money and consuming goods is good for our economy. Because you are willing to spend money on goods and services, businesses are able to produce items, people are able to have jobs, money is able to flow, and our economy expands.
As the world’s economy grows, each person is involved in more, and bigger, transactions, and so the rights and responsibilities of being a well-educated consumer are more important now than ever before.
If you buy something and use it, you are a consumer. If you make and sell something, you are a producer. Of course, most people are both – working as producers and buying as consumers. Just like businesses have certain responsibilities and practices they need to keep in mind, consumers have responsibilities in order to make sure they are not being taken advantage of. In the United States, every consumer has certain rights to ensure they get a fair deal. The most fundamental consumer right is the right to complain. This may not sound important, but it can have a much bigger impact than you would expect.
An implied warranty means that when a company sells a product, they are selling a product that is defect-free. If you take it home only to find it does not work, you have the right to go back to the store and ask for a replacement. Unless the product comes with a warranty, the store may not be obligated to give you a free replacement, but generally speaking, businesses prefer to keep their customers happy, so it is likely they will exchange your item for you.
Most front-line employees have a set of guidelines to follow as they work with customers who have product quality or service issues. If you feel your issue is not being taken seriously as you talk with a lower level employee, you can always ask to speak to a higher level employee, such as the salesperson who worked with you or a manager. If you can demonstrate that the business willingly sold you something broken or defective, the sale may be considered fraud. Fraudulent business practices have their own set of consequences and regulations, so definitely report issues to the Better Business Bureau or the Federal Trade Commission.
You also have the right to leave negative feedback and reviews on review websites. Share your honest thoughts about your experience or purchase, but be professional and not offensive with your review. Again, this might seem like a small consolation, but companies (especially those doing business online) rely heavily on positive customer reviews, so speaking up can end up having a larger impact.
Explicit rights are the rights which are guaranteed through a contract or by law.
Beside the implied warranty that comes with a product purchase, many products also come with an explicit warranty. This warranty is usually written and includes information about how any product or service defects will be handled by the manufacturer or the retailer in the event that the product does not function as originally described or intended. Most often if you experience a product issue, you will be asked to show proof of purchase (the original receipt). Then the business will repair or replace the defective item. In today’s electronic age, your sales receipt may include the warranty information, or the information sheet accompanying the product will provide instructions about the terms of the warranty. If you have a warranty, along with a proof-of-purchase (including a receipt), you may be able to explicitly request the seller fulfill the terms of the warranty by offering repair or replacement. If they refuse, you have further legal right to sue in a small-claims court.
Several types of purchases have even more consumer protections by law. These include:
If you believe you have a consumer complaint, the most important documents you need will be your receipts. Generally speaking, regulatory agencies require you to try to resolve any issue directly with the business before they get involved, so you should send the business your complaint in writing before trying to get additional help.
If you do need help with your consumer complaint, the best places to start are the Consumer Complains Resource Center at USA.gov and the Better Business Bureau.
Consumers do not have a large number of implied protections. This is, in part, because business law is centered on the “reasonable person“ standard. This standard focuses on the idea of “what would a reasonable person do in this same situation?” Consumers are expected to put some thought into each purchase to make sure it is what they really want to do. If a consumer spends $9,000 on an iPhone game (which a consumer reported in 2015) before realizing how much money he was losing, he will not have many legal protections (unless he can demonstrate that the game was fraudulent in some way). Consumer protections are not designed to prevent consumers from making bad decisions. It is the duty of every consumer to make rational, reasonable choices when choosing their consumption. The easiest way to do this is to build a spending plan and stick with it.
One final thought: To make sure you have all the tools you need to file a complaint if you need to, always keep detailed financial records.
This lesson is part of the PersonalFinanceLab curriculum library. Schools with a PersonalFinanceLab.com site license can get this lesson, plus our full library of 300 others, along with our budgeting game, stock game, and automatically-graded assessments for their classroom - complete with LMS integration and rostering support!
Learn More[qsm quiz=72]
When should someone start planning for retirement? Fidelity Investments recommends most young people try to save two times their annual salary by the time they turn 35. Unfortunately, retirement is so far off in the minds of most young people that they find their retirement account is completely empty at the age of 30.
What can you do to make sure you are prepared when you are ready to retire? Here are some programs to take advantage of that will help you save for that day.
Social Security is a wide-ranging social welfare system in the United States, paid for by payroll taxes, often referred to as FICA (Federal Insurance contributions Act). Employers deduct money from their employees’ paychecks through payroll deductions, match that dollar amount, and send that money to the government. The largest Social Security payout is through old-age pensions, but Social Security is also paid to disabled workers and to spouses and children of deceased, disabled, or retired workers.
All workers in the United States who have paid into Social Security are eligible to receive a monthly pension payment from the Social Security Administration after they retire. Workers need to work at least 40 years to receive full benefits, and their specific benefit amount is determined by how much they have paid in over the course of their working life. You don’t have to do anything special to be eligible to receive an old-age pension from Social Security other than pay your normal payroll taxes. Your employer will make those payroll deductions for you. However, if you are self-employed, you are responsible yourself for paying these taxes. Every year when you file your income taxes, you are responsible for reporting and paying your self-employment tax (SECA tax). The main difference between FICA taxes and Self-employment taxes is that when you are self-employed you are both the employer and the employee, so the amount of tax you pay is double.
The Social Security system was first created during the Great Depression, when over 50% of all retired people lived below the federal poverty line. While you will get a bigger pension if you paid more in to the system over your career, Social Security is still designed primarily as a “safety net,” designed to help the poorest retirees. This government-provided monthly income is a small supplement to help prevent retired people from having no means to afford a basic living standard. Even today, Social Security payments are credited with lifting 20% of all retired people out of poverty.
You should not be relying on social security payments to make up the bulk of your retirement income. Remember, Social Security is a safety net – there if you need it to help maintain a modest standard of living. But if everything goes well and you are actively planning for your retirement years, Social Security should only be a small percentage of your retirement income.
In recent years, the most popular way to prepare for retirement has been to actively plan for retirement by saving and investing to build up wealth so that when you retire, you have that savings to live on. There are several tools available to help you with that savings and investing plan.
Cash Savings are the savings you keep in a savings or checking account. In the past, this was the primary means that people used to save for retirement – keeping liquid assets that could be used to live off in their old age. Cash savings is no longer often recommended as a reliable way to prepare for retirement, since other alternatives with strong advantages have arisen.
You DO need to have money in a savings account. A rule of thumb is to keep enough money there to pay for 6 months’ worth of your regular living expenses. One major drawback to keeping money in a savings account is that the interest you earn on that money is very low, and if the economy is experiencing inflation, the value of the money in your savings account is decreasing. Another problem with cash savings is taxes. If you earn more than $10 in interest on a savings account, you need to report that on your income taxes as income earned.
In 1975, the government passed legislation allowing citizens to make contributions to Individual Retirement Accounts, commonly known as IRAs. Citizens are encouraged to invest in their futures by opening an IRA and making regular contributions. With a traditional IRA, the government lets you take a certain amount of your income and deposit it directly into a retirement account. This contribution amount is not taxed, so you are really reducing the amount of taxable income that you have to pay income taxes on. There are limitations on the amount of money you can contribute to your IRA each year, but this tool can help you build wealth slowly and steadily.
A dedicated IRA account is better than a savings account because it can be invested in stocks, bonds, mutual funds, certificates of deposit, real estate, or other investment instruments. This gives an IRA another major advantage over cash savings – you can help your retirement savings grow through investment. The added value to your IRA, like dividends, interest, and profits from stock trading, is also not taxed while it is in the account. When you retire and begin withdrawing from your IRA, you do need to pay taxes on your withdrawals.
One disadvantage of an IRA is that the money is “locked in”. Remember that an IRA is for your retirement years, so you cannot withdraw money early from your IRA without having to pay a penalty. One exception is for buying a house. If you are a first time homeowner, you are allowed to withdraw $10,000 for a down payment (or for construction costs) without having to pay the penalty, but you will be responsible for paying income taxes on that $10,000. Another disadvantage is risk. If you have a large amount of your IRA invested in stocks, it is possible to lose a large amount of your savings if your investments fall in value.
Once you have your savings in a dedicated IRA account, it can also be invested in stocks, bonds, mutual funds, certificates of deposit, real estate, or other investment instruments. This gives an IRA another major advantage over cash savings – you can help your retirement savings grow through investment. The added value to your IRA (like dividends, interest, and profits from stock trading) is also not taxed while it is in the account. When you retire and begin withdrawing from your IRA, you do need to pay tax on what you take out.
A disadvantage of an IRA is that the money is “locked in”. You cannot take money out of your IRA without taking a huge tax penalty, so it cannot be used to buy a house, for example. If you have a large amount of your IRA invested in stocks, it is also possible to lose a large amount of your savings if your investments fall in value.
Roth IRA accounts operate very similarly to Traditional IRAs, but the major difference is when you pay taxes on the money.
With a Traditional IRA, deposits you make into the account are tax-free. You pay taxes on that income when you withdraw the money from your account during retirement. With a Roth IRA, the opposite is true. You pay the full income tax when you make the contribution, but you do not pay any tax when you withdraw the money. This means that if you think tax rates will go up by the time you retire, you will probably choose to open a Roth IRA and pay taxes now while interest rates are lower. But if you think tax rates will go down, you will probably choose to open a Traditional IRA and pay taxes later.
One major advantage of a Roth IRA account is that you can make qualified withdrawals at any time, tax and penalty free. This applies ONLY to the money you contributed, not to the gains you have earned.
Many professional jobs offer some sort of retirement assistance to their employees. This is almost exclusively the case with salaried positions that have an employment contract, or union jobs that have collective bargaining agreements.
Once you retire, you can receive money from your pension plan account. At one time, employer pensions made up the majority of retirement income for the elderly. Employees were more likely to work for the same employer for many years, so it made sense to invest in this type of a personal retirement plan. Employer pension checks are issued every month. The amount is generally much lower than a normal paycheck. The amount you receive is determined by how long you worked for an employer and how much you were earning.
Employer pensions have an advantage similar to the Social Security program. If you choose to participate, automatic payments can be transferred from your paychecks into your pension account. Then just keep working until you retire. At that time, you will receive checks from both your pension account and from Social Security. This money should provide enough for you to live on, even though it’s less than you had while employed.
There is one big risk with employer pension funds—the employer could go bankrupt, and that could impact your monthly payments. Private-sector employers with pension funds have insurance through the Pension Benefit Guaranty Corporation. The employer pays a monthly premium for each employee contributing to the pension plan, so if this employer goes bankrupt, the government would protect the employees’ basic pension benefits, requiring the employer to continue paying pensions. Religious churches can opt out of the PBGC, so this leaves their pension programs possibly unprotected. Government pensions could also suffer setbacks. You’ve likely heard that the Social Security fund could run dry by the time you retire. The same thing could happen for state-sponsored retirement plans, impacting thousands of government employees. Even decreases in the fund could impact individuals, as many retirees in Detroit were shocked to discover in 2015 when the city was forced to cut its pension payments.
401(k) accounts were created almost by accident. In 1978, Congress passed the Revenue Act. It included a provision that allowed people to defer paying taxes on income until a later date. A tax consultant named Ted Banna realized that this obscure tax code, called 401(k), could be used to create simple retirement accounts. 401(k) accounts are created through an employer. The employee contributes through a payroll deduction and the employer makes, their own contribution, often matching how much you contribute. This means that your employer is paying in to your retirement account while you are still working. The money is still yours, so even if the company declares bankruptcy later, you don’t have to worry about your account being affected like you would through an employer-sponsored pension plan.
The main advantage of a 401(k) account is that you don’t pay the income tax on your contributions right away. You can wait and pay taxes when you withdraw the money in retirement. This makes it similar to a traditional IRA. With a 401(k), you don’t pay additional taxes on the capital gains and interest (which you do with the traditional IRA). If you prefer to pay taxes now rather than later, there are also Roth 401(k) accounts which let you pay the tax immediately.
Before the 1970’s, most people’s retirement plan included relying on their company pension and Social Security, plus any other savings they might have accumulated. It was common for retirees to sell their house and move into something smaller, using the profit as their main retirement savings.
Since 1980, however, fewer and fewer employers are offering a pension package, leaving it up to individuals to build their own retirement accounts and portfolios. This is not necessarily a bad thing. While choosing a retirement account is more complicated than just working and getting a check when you retire, the tax benefits and potential for investment and growth means that if you plan well, you can retire with even more comfort than you experienced while working.
The exact retirement plan you choose will vary greatly based on what programs your employer offers, but the main idea to keep in mind is to always be saving!
[qsm quiz=69]
“Labor” is how much a person works. It is the use of time and exertion of effort to produce something of value. Generally speaking, the more valuable a person’s labor is, the higher their wage.
Each person starts off as an Unskilled Worker, meaning they do not have any specific training or professional skill sets that set them apart from any other worker. If a person goes to school or gains enough experience to become a Specialist or Expert, they become a Skilled Worker (read our article on Specialization for more details).
Skilled workers almost always earn higher wages than unskilled workers, but both groups have specific pressures that push their wages up or down.
If a person has two master’s degrees in Engineering, a doctorate in Biology, and completed trade school to be an Electrician, they would still be considered an Unskilled Worker if they currently have a job as a pizza delivery driver.
There are two factors that contribute to higher wages for skilled workers – labor market competition, and labor productivity.
Skilled workers have skills that most people do not. This means that any time a new job posting arises that requires a particular skill, the Skilled Workers who have it have less competition for that post. As a person becomes more specialized with a more and more narrow focus, they typically have a much higher chance of getting a job that fits their particular qualifications.
For example, these are two job postings for an “Economist”. One is for a “Junior Economist”, meaning a Skilled Worker in Economics, but with little additional training other than school. The other is for a “Financial Economist”, or an economist that has additional training in financial markets.
The Junior Economist has far more people who have those skills, where the Financial Economist has a lot less. Since there are so many people applying for the Junior Economist job, the company that is hiring can offer a lower wage, since the potential employee can be more easily replaced. The Financial Economist, on the other hand, requires more skills and the company would have a harder time replacing a candidate that gets a better salary offer elsewhere, so this job likely offers a higher wage.
The wage of Skilled Workers also goes up as the value of what their labor produces increases. If the skills you bring to a job creates more value and more profits for your employer, you will typically be able to earn more money than someone who adds less value.
Sales people in particular have a direct link to their productivity in the form of Commissions. More effective salespeople are able to sell more and higher valued products, so companies offer a percentage of their total sales as a bonus to the salesperson as motivation. Other companies offer Profit Sharing, where a percentage of profits is distributed to all the workers, or Stock/Investment Options, where employees can earn company stock, which goes up in value when the company is performing well.
Skilled workers do not always stay ahead of the game forever, there are some important changes that can cause the wages of particular skilled workers to fall quickly.
A horse caretaker used to be an extremely important skilled job in the economy, but almost overnight after the Ford Model T car was invented, city streets were emptied of horses entirely. This can be what happens when a formerly valued skill becomes redundant by a technology or an overall economic change – the market demand of those skills starts to fall, and the wages of the people with those skills falls with it.
Doctors are almost always in demand, but only if they keep their skills up to date.
In the 1950’s and 1960’s, very few people held college degrees in business. This meant that the people who had those degrees had a huge advantage when they were looking for a job. Since then, millions of people “Caught On”, and people are graduating with university degrees in more numbers than ever before. This means that these skills are becoming “Cheaper” for employers, since far more people have them.
This is a pressure that pushes wages for each skill down, since it becomes less “Rare” to find someone who has a general university education.
Unskilled workers, by definition, do not have expertise that will set them apart from any other worker, so they will generally be applying for the same jobs as all of the other unskilled workers in their area. While an Unskilled Worker is able to apply for a very wide variety of jobs, because there are so many others applying for the same jobs, it tends to push the wages down, since each individual worker can be easily replaced. There are some particular economic mechanisms that can cause the general level of unskilled wages to increase or decrease.
Labor unions exist for both skilled and unskilled workers as a collective agreement between all (or most) of the workers at a company to bargain with their employer for better working conditions. For skilled workers, the unions typically fight for better conditions (like vacation days, healthcare, and pensions). For unskilled workers, they fight for those same goals, but also to increase the wages for all of the employees in the union.
Labor unions started in the 19th century as a way for workers in the Industrial Revolution to fight back against employers who had unsafe work practices, extremely long work days (12+ hours a day, 6 days a week), and extremely low pay. They still work today to try to protect the rights of the workers and secure better wages and working conditions across many industries.
The government has also mandated that all workers must be paid a minimum wage. This is to set a minimum standard of living for all workers in an economy, and a floor that ensures that all workers are earning at least a base amount of money per hour of work. Minimum wage laws were first passed in the early 20th century, partially as a response to labor strikes to try to make sure that labor unions were not the only organization trying to promote the welfare of unskilled workers.
Generally speaking, when the average wage for unskilled workers starts to go up, more people are willing to work, but companies are less willing to hire more people.
This is the constant balance being made with labor unions and minimum wage laws. If the labor unions force the wages and benefits in a company too high, that company will be less willing to hire new workers because they earn less profit on the productivity of each person they hire. If minimum wage laws increase, unemployment also tends to increase in the short term, since fewer of the lowest-paying jobs are created.
Unskilled workers also see a lot of tasks that were once accomplished by hired workers now being done by machines. More advanced computers and robots are able to do some of the more repetitive tasks for cheaper than it would cost to hire someone for the same job (like dishwashers, or robots that automatically vacuum carpets). The more advanced technology gets, the more it generally hurts the wages and employment rate of the most unskilled workers.
There are also some big changes for the economy that can impact the wages of large groups of people at once.
If, all of the sudden, everyone woke up and decided they preferred Pepsi over Coca Cola, Coca Cola sales would drop by a huge amount overnight. This means that the actual revenue generated by employees of Coke would fall just as fast, and wages with it. On the other hand, Pepsi would suddenly be making huge profits, and so they would be paying their workers overtime to keep up with demand, and hiring a lot of new ones.
Swings in the tastes and preferences around the entire economy causes smaller versions of this shift to happen every day, which impact the wages of the people making the goods on both sides of the shift.
The most common example for the price of inputs is the price of Oil. Oil is used for electricity in some places, and powers the transport of goods from one location to another. When the price of Oil increases, it means that the cost of moving goods from one place to another also increases. This means that the wages of people making goods that need to travel long distances will be effected, since the profits their employers are making suddenly dropped.
[qsm quiz=41]
“Unemployment” is a major economic indicator measuring how much of the working population is currently looking for a job. The unemployment rate is the most “tangible” economic indicator – if GDP is going up or down, it is harder for people to notice in their day-to-day lives. When the unemployment rate goes up, it usually means you or someone you know lost their job recently, which puts a great strain on individuals.
One of the key goals of economic policy is to promote “Full Employment”, or bring unemployment down to its absolute minimum levels.
When we talk about “Unemployment”, we refer to people who are
Not everyone over 16 is considered part of the labor force. The biggest factor is that a person needs to be “wanting to work”, meaning actually working or looking for a job.
Full-time students are not counted the labor force (even if they have a part-time job), nor are retired people and people who have disabilities that prevent them from working. People who are currently unemployed, but are currently not looking for a job, are also not counted as part of the labor force – these people are known as Discouraged Workers.
Unemployment is calculated by a survey conducted by the United States Bureau of Labor Statistics. One of the questions they ask people who currently do not have a job is “how many hours in the last week did you spend looking for work?”. This question is used to sort people between “Unemployed” and “Discouraged Worker”.
Discouraged workers are called “discouraged” because they usually have stopped looking for work because they believe none can be found, that the labor market in their area simply is not creating enough jobs. This can cause the unemployment rate itself to behave strangely when there is an economic recovery – if many new jobs are created but the unemployment rate still goes up, it means that many discouraged workers are re-entering the labor force, which is a sign of economic recovery.
The unemployment rate also does not include people who have a part-time job because they are unable to find full-time work, or otherwise are working at a job far below their skill level (like an electrical engineer who is temporarily working part-time at Walmart while he continues his job search).
Underemployment is a condition that impacts young people (workers between 16 and 24) particularly often. Fresh university graduates might often have trouble finding work in their chosen field, especially after a recession, and so may be forced into a position where they are taking jobs where their education and training are irrelevant.
Underemployed workers do reduce the total output, but because these workers do technically have a job, they are not counted at all in the unemployment rate.
Discrimination along the lines of race, gender, and age can have serious impacts on the employment levels of each group. This discrimination can even be bigger than the unemployment differences between high school drop-outs and college graduates.
The unemployment rate difference between each group is important – it also means that when there is any swing in the average unemployment rate in the full labor force, discriminated groups usually feel a much larger impact than others.
For example, between 2006 and 2010, the unemployment rate for college graduates increased from 2.2% to 5.1% (about 1 in every 20), while the unemployment rate for African Americans increased from 11.1% to 19.8% (almost 1 in every 5). You can look up the unemployment rates over time for different demographics in the United States through the Bureau of Labor Statistics (BLS) by Clicking Here.
This does not mean that all unemployment rate differences are due to discrimination. The unemployment rate between college graduates and high school dropouts is quite large, but this can be attributed to a skill difference (college graduates are qualified for more jobs than high school drop-outs), not discrimination.
Not all unemployment is created equally – there are different economic factors at play that can create and destroy jobs.
Cyclical unemployment is unemployment that is caused by the rise and fall of the Business Cycle. As the economy as a whole grows, jobs are created and unemployment goes down. If the economy starts to weaken, jobs are destroyed as businesses shrink or close.
Cyclical unemployment is often what gets the most attention, since it acts as the barometer for the economy as a whole as jobs are lost and created.
Seasonal unemployment is the rise and fall in unemployment rates that takes place every year. Each Spring and Fall, farms tend to hire a lot more people to assist with planting and harvest, and those people get laid off at the end of that term. Between November and December, retail firms also tend to hire a lot more cashiers and service people to assist with the “Christmas Rush” of shoppers.
In scenic areas, unemployment rates also rise and fall with vacation seasons as hotel staff, park staff, lifeguards, ski instructors, and the like are hired to accommodate tourists, and laid off when the tourism season ends.
Generally speaking, the unemployment rate is “Seasonally-Adjusted” by averaging out these high and low seasons.
Image courtesy of renjith krishnan at FreeDigitalPhotos.net
Structural unemployment is harder to specifically count than the other types. This source of unemployment occurs when there is a mismatch between the skills that employers demand and job seekers have.
A real-world example of this comes from manufacturing jobs that were lost in the 1980s and 1990s throughout the United States, which coincided with a large number of new jobs being created in web development and programming. Even though there were many new job vacancies being created and firms willing to hire new workers, the people who were unemployed with manufacturing experience did not have the skills necessary to fill those vacancies, leading to a rise in the unemployment rate.
Periods of high structural unemployment can be identified by comparing how long it takes for a company, on average, to fill a new job vacancy with the total unemployment rate. If there are large numbers of people unemployed and looking for work, but it still takes a long time for new jobs to be filled, then there is likely a large amount of Structural Unemployment.
Frictional unemployment covers people who are unemployed for short periods of time between jobs. For example, if you move to a new city, there will be a few weeks where you are looking for a job even if you find one right away.
This also includes people who quit their job to try to find something better, and people who worked for companies that went out of business. Even when the economy is at “Full Employment”, frictional unemployment still exists.
[qsm quiz=47]
“Price Controls” are artificial limits that are put on prices. If the limit is put in place to prevent prices from getting too high, they are called Ceilings. If they are in place to prevent the price from getting too low, they are called “Floors”.
Price Ceilings are controls put in place to prevent the price of some good or service from getting too high. This type of control is most common with food, where there might be a maximum price that businesses can charge for things like flour or electricity.
These controls are put in place to protect consumers and to prevent price gouging, particularly so the poor are able to afford basic goods and services. When there is a price ceiling, suppliers cannot sell above a certain price, and this creates a Market Shortage.
With a Market Shortage, the quantity producers are willing to supply is less than the total quantity that consumers demand at the given price. This can result in rationing, or lottery systems to determine which consumers are able to buy.
In extreme cases, it can result in “Bread Lines”, where essential goods are not supplied in sufficient amounts, so consumers need to join waiting lists to get their necessary share.
Price Floors are the opposite – a control put in place to ensure that a certain amount of something is produced by making sure producers are guaranteed at least a certain price for what they supply. These types of control are common for milk.
These controls exist to prevent shortages, by making sure suppliers get at least a certain price, it encourages production. When there is a price floor, the producers are willing to supply more than consumers demand at a given price, creating a Market Surplus.
With a Market Surplus, the government needs to buy the excess production, or else the market price will collapse back down. In the case of milk, the government typically buys the excess production and stores it, uses it as part of disaster relief, or tries to sell it on international markets.
[qsm quiz=44]
Interest rates are growth rates – it is a percentage that is used to calculate how much a loan or investment grows over time.
Interest rates are most commonly associated with borrowing money, like a homeowner taking out a mortgage or a government selling a bond. The interest rate is how much extra needs to be paid back in exchange for the loan. Interest rates are also used in savings accounts, where you might earn interest on your savings.
For example, if you use your credit card to buy $100 with an 24% annual interest rate, if you wait one month to pay it back, you will need to pay back the $100, plus one month of interest (which is 24% divided by 12 months, or 2%). This means your final repayment would be $102.
Interest rates are usually fixed, but a dollar today is not worth the same as a dollar a year from now. The interest rate you have on your loan or bond will not change over time and is called the Nominal Interest Rate, but the effective (or Real) interest rate is smaller if there is a lot of inflation.
For this reason, in economics we almost always use the Real Interest Rate. To calculate the Real Interest Rate, simply subtract the inflation rate from the Nominal Interest Rate.
This difference is very important for savers. For example, if you have a savings account that pays 2% annual interest (meaning a 2% nominal interest rate), but the inflation rate was 3%, your Real Interest Rate is -1% – you’re actually losing value!
This does not happen very often in the real world. The ability to use your cash has value, and by saving in a bank without withdrawing it, you are giving up that time value of money. Another way to put it is that you need to be compensated for deferring the use of that money from the present to the future. The interest rate exists to compensate you for that value that you lose. If people see that they are earning a zero, or negative, real interest rate in their savings accounts, most would withdraw that money and use it for other investments (like government bonds).
Using your real interest rate lets you calculate the Future Value of any investment or loan you make. Conversely, by using the inverse of the real interest rate, you can take any future value and convert it into the Present Value.
This means that you can use interest rates to effectively see how money travels through time. Saving is effectively fast-forwarding your money to the future for later consumption, while borrowing is effectively taking money from your future self for consumption now.
When you make a decision to save, you can use the real interest rate to see how much your savings will be worth in the future. If the future value of your savings makes it worth the wait, you will save. If not, you will consume today.
The same goes for when you borrow – if you decide that the present value of how much you need to pay back is less than you think it is worth, you’ll take the loan. If not, you would pass.
The real interest rate goes up and down over time, and varies quite a lot based on the investment and market as a whole.
If a loan is risky, the lender will charge a higher interest rate to compensate for the fact that they might not get paid back at all. On the other hand, very reliable borrowers usually have much lower interest rates.
This plays a big role with investments. Government bonds generally have extremely low interest rates because there is almost zero risk that it will default. Stocks, in contrast have a much larger potential rate of return, but their chance of losing value is also a lot greater.
Supply and Demand plays a role with interest rates too. If there are a lot of people trying to borrow, the interest rate goes up because the total amount of cash available to lend is limited. If lots of people are suddenly saving a lot more, the interest rates will start to fall, since there is less competition to borrow.
The expected rate of inflation also plays a major role on interest rates. Look at it this way – if you want to lend $100 to a friend to be paid back in one year, you would be a lot more interested in your real rate of return, which is based on inflation. If you think there will be a lot of inflation in the next year, you would increase the interest rate you’re asking to make sure your real rate of return keeps up.
At the end of the day, when real interest rates are high across the economy, it means that a lot of people and businesses are borrowing money. This means that there is a general shift from saving to spending, and the allocation of resources over time has shifted from the future to the present (as a total economy, we are borrowing money from our future selves).
Higher interest rates mean that it is getting more expensive to borrow, which encourages people to save more, which starts to shift the balance of resources back to the future, and cause interest rates to fall in the long term.
In the short term, making it more expensive to borrow money means that people and businesses will be spending less on large purchases, like buying new equipment or a new house.
Having very high interest rates acts as a kind of “break” on the economy, slowing things down as people and businesses try to put off large purchases. This has a ripple effect through the economy. Rising interest rates are typically a result of economic growth, while falling interest rates are typically a symptom of an economic slowdown.
[qsm quiz=40]
Scarcity refers to the fact that resources are finite – people and organizations need to allocate their finite resources between their infinite wants.
Each year, the world produces more goods and services, along with better technologies and processes that can increase output farther. Even with this growth, there will always be scarcity, because there will always be the question of the best way to allocate the resources we have available.
Each person and organization needs to allocate their scarce resources among everything they want and need. Resources are also allocated between consumption and investment – how much you choose to use today against how much you save for the future (and use to improve how much you can produce tomorrow).
Each person works to earn an income, their income is their primary resource they need to allocate, but they also have a limited amount of time. This means that every year, you have 52 weeks of time and however much income you earn, which you can allocate to the best way you see fit.
You can use more of your income for consumption and less for saving, but this might mean that you will have less consumption later when you lose your job or retire. You can save and invest more of your income, but that means you will have less available to consume today.
Generally speaking, as a person’s income goes up, the higher percentage of it is used for saving and investment, since each additional dollar you spend on consumption is just a little bit less effective than the last.
This is why it doesn’t seem like people who make $2 million a year seem that much better off than people who make $1 million – once consumption levels get up to a certain level, spending much more will only make you a little bit better off.
You have a similar problem with what you will do with your time. Most people try to work for 8 hours a day, sleep about 7 hours, and use the remaining time for leisure (and preparing for work or spending time with family). Each person, in theory, has a choice to work more or fewer hours (getting an extra part-time job on the weekends, for example), or they can choose to use some of their leisure time to build new skills by going to school or learning a trade.
This balance between building skills, relaxing, raising a family, and working is the second fundamental problem of scarcity that an individual faces. Regardless of how much money they earn, there will always be limited time.
Businesses have their own scarcity problems. One of the classic conflicts is investment between Marketing and Research. Companies can invest much more in building the best possible products, but without sufficient marketing the general public might not even know they exist. On the other hand, they can invest heavily in marketing their existing products, but this comes at a cost of less product development and new technology being developed.
Governments are also faced with serious allocation problems. Tax revenue can be used on nearly infinite numbers of different projects and programs, from helping the poor to funding national defense.
There is also the same fundamental problem of individuals – how much should governments invest in advancing research and technology to help the economy grow, versus programs specifically to help the poor?
In theory, these questions are answered (at least in part) by voters by electing leaders with different platforms, but the “nuts and bolts” of each program, and the specific balance of resource allocation, is still a problem that governments face each day.
[qsm quiz=45]
“Specialization” is when a labor force begins to divide total production, leading to a rise of experts or specialists. This is called the Division of Labor, and it typically results in much higher productivity of labor.
Specialization has two main parts – Division of Labor, and a rise of Experts.
Imagine there is a company that builds cars. At first, there are just four employees – Alice, Bob, Carol, and Dan. They are building each vehicle by hand, and all work together in each part of production. In this case, each person is switching their tasks quite often, and so becomes proficient at nearly all aspects of the business. These tasks include:
Over time, it becomes apparent that each person is better at some tasks than others. For example,
In this case, Alice and Bob are going to be more efficient at building the motors and sewing the seats, so if they work on these tasks themselves, more will get done faster. At the same time, if Carol does all the sales work, they will be able to sell more cars faster, since she is better at it. Dan likes doing the metalwork and design, so he will be more effective at building of the body of the car.
After the four focus on their strengths, each car that is produced is of higher quality, is produced more quickly, and the business operations are running smoother.
The Division of Labor is the idea of breaking the total production of a good or service down to basic parts, which can then be tackled by the people who are best suited for each task. The Division of Labor was the driving force behind the Assembly Line, which is what propelled Ford Motor Company (F) to the head of the automotive industry in the early 1900’s, where it remains to this day.
In our example before, Alice and Bob are both working on the minute details of building engines and sewing upholstery, and are both equally good at both. In this case, it is still possible to increase their efficiency if they focus on becoming an Expert or Specialist at one of the tasks.
By focusing on just one task each, for example Alice on engine building and Bob on the upholstery, they both get much more concentrated practice on their craft – this focused practice, and the potential for them to focus on new and better techniques, will quickly make them even better at what they focused on than they were before. Even in places where all workers start off with the same basic skills and aptitudes, by dividing the labor it enables each worker to become a specialist on the particular job they are doing, which makes each person more efficient, and increases total output.
Specialization can take place at any level in any economy. It could be workers in a single factory specializing in one part of a production process all the way up to one country focusing on producing one type of good that they are best at.
A Comparative Advantage is how much better one person, company, or country is at one particular task than another. People generally try to stick to their strengths – this means they try to work with their comparative advantages, and trade to get things that they are less adept at making themselves.
For example, farmers have a comparative advantage in producing grain, while factories have a comparative advantage in building a tractor. If the farmer sells grain to buy a tractor, he will be able to get a much better one, with a lot less effort, than if he tried to build one himself. Similarly, factory workers have a much easier time building a tractor than they do going out into fields to try to grow their own food. By having both groups engage in trade, aligned with their own comparative advantages, the total output is much higher.
Comparative Advantages can be either innate (like Carol being a better salesperson than Dan) or developed (like Alice becoming an expert in engine building, gaining a comparative advantage over Bob).
[qsm quiz=46]
“Opportunity Cost” is what needs to be given up to get something. This is different from an item’s price.
Imagine you want to buy some stock for your virtual portfolio – you can afford one share of either Apple (AAPL) or Alphabet, Inc. (GOOG).
Your Opportunity Cost of buying one is that you cannot also buy the other, meaning you’ll miss out on any potential returns and dividends.
This problem appears in every choice you make – by doing one thing, you can’t do something else. Keeping the opportunity cost of each decision in mind is an important part of both personal finance and economics. Each person needs to keep in mind what they are giving up from each choice (whether it is using their cash to buy one thing or another, or to use it for saving and investing) in order to make sure they are making the most of the resources they have available.
Producers also face opportunity cost: what will they make?
By putting resources towards building one product, they miss out on potential profits they could have earned by making something else. The same dollar cannot be spent on marketing, research, production, and paying building rental, so all managers need to balance all of the opportunity costs of each decision with the potential benefits.
These opportunity costs also change a lot over time. As a business gets bigger, they have more resources to go around, which means that their opportunity costs (what they need to give up) from each individual action goes down while the potential possibilities goes up.
Each time you make a choice between two or more alternatives, you are indirectly saying that the benefit you get is bigger than the opportunity cost. This is not just how you spend your money, it also is how you spend your time.
You could use the same Saturday afternoon to go out with friends, play video games, do research on a new stock you want to buy, practice a new skill, watch TV, find a part-time job, study for school, and everything in between. Whichever option you choose, you have to give the others up, because you can’t be in two places at once.
How do you choose to use your time and resources?
[qsm quiz=43]
Everyone knows about costs and benefits of doing something – the pros and cons of making a choice. Marginal benefit and marginal cost are different – they look more closely at doing slightly more or less of different alternatives. Marginal costs and benefits are extremely important to producers when choosing their inputs and prices.
When we use the term “Marginal”, it usually means doing one more of something. For example, a marginal cost would be how much it would cost a company to produce 1 more of a good. Their marginal benefit would be the extra revenue they get from producing that one extra good.
Knowing this is important because it helps producers determine the total quantity they produce, and at what price they list them for in the marketplace.
Producers create goods and services through a combination of capital goods (like machines and computers) and labor (workers they hire).
In the short run, producers cannot add capital, so when a producer is deciding how much goods they will produce next month, they assume their total capital is fixed – all they can do is hire more workers.
Unfortunately, just doubling the number of workers you have will not double your output. As a business adds more workers, but keeps their capital constant, at first the workers will become more efficient (able to effectively divide their labor through specialization, and more effectively able to use the capital goods). At a certain point, though, each additional worker you add will make the average output per worker start to fall.
Think of it this way: Imagine you are running a farm growing carrots, and you have one truck that you use to bring the carrots to the market where they are sold. You can hire workers to help you dig up the carrots, wash them, and drive them to the market.
This works well – with your first four workers, each person makes the whole process more efficient, and now the truck is being used the full time.
When you start hiring even more workers, though, your truck will eventually hit its capacity to carry and move all the carrots, and so people will need to wait for you to get back and reload. The more people you add to the work force, the more time will be spent waiting, since you can’t speed up the truck. When workers are waiting, that means you’re paying them while you aren’t getting any extra work done, so everyone is less productive. This same relationship, where labor reaches the productive limits of capital, creates a U shaped curve when we look at the average cost of production.
At first, your average cost goes down rapidly – this is when you hire your first workers. This period, where the average cost is decreasing, is known as Economies of Scale.
In the middle, there is a long flat area where you are near your minimum average cost. This is the area where the truck is working most of the time, but you can still pack in a few extra carrots on the truck each time it goes.
As you get farther right, the average cost starts going up. This is where you have workers waiting to use the truck. This area is called “Disceconomies of Scale”.
Marginal Cost has the same kind of relationship – as you increase your production, your marginal cost will go up (how much it costs to bring one more carrot to market). In fact, the marginal cost actually starts going up before the average cost, and they share an interesting relationship.
The Marginal Cost curve will always intersect the absolute minimum point of the average cost curve. This relationship is useful – when an economist wants to calculate the minimum average cost, all they need is a formula for the average cost and marginal cost, and find the quantity where they are equal.
The “Marginal Benefits” are the extra benefit that a producer gets from producing one more unit of a good. For businesses, this is also called the Marginal Revenue.
The Marginal Revenue curve looks very similar to the Demand curve, just slightly steeper.
This is because for each extra unit a business sells, the less revenue they get for each because they need to keep lowering their cost to sell everything they produce.
For a business, they will reach their maximum levels of profit where they can get their marginal benefits to equal marginal costs:
This is because of how marginal revenue and marginal cost work. If the marginal revenue is greater than marginal cost, a company will make a little bit more profit by producing and selling one more unit. If the marginal cost is greater than marginal revenue, the company is making a loss at their current level of production (selling goods for less than the additional cost of making it), so they will reduce their production.
This works because demand is figured in to the marginal revenue. This also means that companies use their “Marginal Cost” curve as their Supply Line, so this relationship is the exact same as you see with normal Supply and Demand curves.
The relationship between marginal costs and marginal benefits is also extremely important when governments and voters determine how much, and what type, of public services are provided.
Generally speaking, governments are constantly adjusting how much spending they put towards different programs. This means that when they want to allocate an extra $1000 between 10 different programs, they need to measure the marginal benefit that $1000 will bring to each.
For example, it is currently possible for the governments in most cities in the United States to completely eliminate homelessness if they applied 100% of their city budget towards building new homes for the poor. The cost of this would be every other program, from water treatment, to police forces and fire departments, and schools.
The primary job of elected officials is trying to find which programs will get the greatest marginal benefit from an increase in spending, and which programs have the lowest marginal costs from a decrease. If the net benefit to the voters can be increased by transferring resources from one program to another, that is what they usually try to pursue.
Actually calculating these benefits and costs can be much more difficult – a difference in opinion over what programs produce the largest marginal benefits and which are sources of the biggest marginal costs is the biggest issue that divides voters between candidates.
[qsm quiz=42]
“Competition” is when many producers try to sell similar goods to the same set of consumers. The producers need to “compete” to try to attract more consumers, usually by lowering prices, offering better versions of the goods or services, or through marketing.
Competition is the core concept of the Market Economy.
Competition generally leads to lower prices, more choice, and better qualities of products for consumers than other types of economies. The reason for this is that with competition, there is very little “central planning” of the economy, while producers and consumers are able to act in their own self-interest.
For a producer, this means that they want to attract as many customers as possible, and earn the highest profit. In an ideal setting, there are thousands of potential producers for any good.
Lets say that a new market has opened – there is a street full of people who want to buy ice cubes. On this street is a building full of people who have freezers and tap water, so they are able to make ice cubes, and sell them.
Immediately, one person makes and sells 100 ice cubes for $10, with no cost other than time. Because of Supply and Demand, very few of the consumers are willing to buy at this price (see our article on Supply and Demand Examples in the Stock Market for details).
Seeing this profit, everyone else in the building starts making and selling ice. To get more profit, they also lower their price to attract more customers. Since there is no difference in the ice made by each of the producers, all of the consumers always take the lowest possible price, which forces the producers to keep matching the lowest price offered by anyone else.
At this low price, some of the producers decide that it is not worth their time and effort to keep producing, and so they drop out of the market. This means that the remaining producers can raise their prices a bit, since there is no longer as big of a market surplus.
The Price War caused the market price to fall by a huge amount (70% at one point), and caused some of the less efficient producers to drop out of the market. In the end, the consumers finished with a large reduction in the overall market price.
The remaining sellers still want to attract more buyers and earn higher profits, but at this point it is not possible while they are selling identical products. The result is product differentiation, or making their ice slightly different from the competition.
Product Differentiation is a form of innovation that requires investment, this can include things like new machines or processes that reduce cost, or new features or product advantages that make it more attractive to consumers.
For our Ice Sellers, lets say that some of the sellers used their profits to invest in new higher-capacity and energy-efficiency freezers that make it cheaper and easier for them to produce the same ice.
At the same time, some of the other sellers used their profits to research methods to make “Luxury Ice“, like ice spheres and crystal-clear large cubes, which they can then sell at a higher price.
Notice that at this point, there aren’t any more people buying the $5 ice anymore. This is because the “low-cost” producers are making the same ice for cheaper, while the “Luxury” ice makers are getting all the customers who are willing to pay more for a better product.
The companies that don’t innovate lose their profits, and eventually are forced to close. The competitive market resulted in a greater range of products, and a greater range of prices, for the consumers.
In the ice makers example above, all of the producers and consumers started in equal footing – all of the producers started with everything they needed to start making ice, and all the consumers knew who was selling what kind of ice and at what price. This is not usually the case in the real world, which can distort the normal competition.
A “barrier of entry” is something that prevents a new producer from entering the market and selling a competitive good. At the start of our Ice Makers example, there were no barriers to entry, since all of the potential producers had the same freezers and the same water.
At the end of the example, however, some barriers had appeared. One group of ice makers invested in better freezers that could make the same ice as everyone else, but cheaper. This means that any new seller would have to invest in the same class of freezer in order to compete. One major barrier to entry in almost every industry is the ability to raise capital, or get the necessary investment to start producing and selling. The ability to raise capital is called a “Natural Barrier“, since it is the direct result of competition and improvements to the market. These barriers are not seen as “bad”, since they are the natural result of market innovation and product differentiation.
Artificial Barriers, on the other hand, are other arbitrary costs that potential producers must face before they can get to the market. Artificial barriers are not necessarily a bad thing either. These include:
Artificial barriers usually exist where the welfare of your employees or customers are at risk if certain precautions are not taken (like health code certifications at restaurants, or workplace safety inspections at a factory). Unfortunately, artificial barriers are also the most likely to be manipulated when there is a high level of corruption, either by inspectors demanding bribes for permits, or by businesses pressuring governments to put up restrictions to prevent new competition from entering the marketplace.
Artificial Barriers cause the market price to increase for the goods being sold, since the producers need to pay these costs before they can even start to sell their products.
In our Ice Makers example, we also said that all of the consumers had the same information about the producers. In the real world, you usually have to do some research to find out what all of your buying alternatives are.
This means that if the consumers do not have a lot of extra time to dedicate towards researching different products and producers, they might not get the best prices.
Building a recognizable brand is an important part of marketing
Marketing is the manipulation of information you are probably the most familiar with. Marketing serves two functions for businesses:
Producers will often put a lot of their resources into marketing – having a well-marketed product that consumers know how to buy can be just as important as being the cheapest or best product on the market.
Not all markets have much competition. Cartels and Monopolies are the result of a breakdown in competition, either because of collusion, market dominance, or government intervention.
A Cartel is a group of independent producers who come to an agreement (either official or unofficial) to not directly compete against each other, even though they are both in the same market. This is usually done by:
One of the most well-known cartels is OPEC, or the Organization of the Petroleum Exporting Countries. OPEC members try to maintain strong oil prices to benefit their member countries, mostly by controlling the total output.
When producers within a country form a cartel, it is also called a Trust. Trusts exists mostly to just increase the profits of its members – in the late 19th century, Trusts in the steel and oil industries in the United States caused market prices to rise to much that the practice was made completely illegal.
Anti-trust laws help prevent collusion between producers to raise prices for consumers, but they can occasionally have unintended consequences. There have been several cases where some producers simply accuse larger competitors of anti-trust violation just to force them to waste resources defending themselves against the accusations.
A Monopoly is when a market is entirely served by a single producer, while competition is either barred completely or impractical to establish. Monopolies can arise naturally by a single producer simply forcing its competition out of business, buying any competing firms, but it more often arises from very high barriers to entry.
Monopolies almost always cause the market price for consumers to increase, because rather than comparing two alternatives with different prices, they are forced to choose “have or have not” entirely. This can also cause innovation and research to stagnate, since the monopoly no longer requires as much innovation to maintain profits.
In the United States, monopolies are usually illegal – there are many cases where large firms attempted to merge into one, only to be blocked by anti-trust laws fearing a monopoly.
In some rare cases, the government will give a business the right to have a monopoly on a certain market. This happens when it is deemed that a single large producer will be able to provide better prices and quality than many producers acting independently.
Sponsored monopolies that you might be the most familiar with are public utilities like electricity and water – these producers are allowed a monopoly in certain cities and regions, but under the condition that they have limits to how much they can charge and they must uphold certain quality standards.
Another example is mining, fishing, and logging operations – governments might give exclusive rights to mine, fish, or log in a particular area to just one or very few companies in order to limit the environmental damage and avoid too much destruction taking place.
[qsm quiz=32]
The Business Cycle is the broad, over-stretching cycle of expansion and recession in an economy.
The Business Cycle is concerned with many things – unemployment, industrial expansion, inflation rates, but the most important indicator is GDP (Gross Domestic Product) growth. Below you can see a graph of the GDP growth rate in the United States since 1946 – the grey bars highlight periods of a recession.
The Business Cycle can also be thought of as how Real GDP moves above and below its Potential Levels.
GDP, or “Gross Domestic Product”, is the total amount of finished goods and services produced in an economy during a given year (for more information, read our full article on Common Economic Indicators). If you just add up the value of all the finished goods and services in one year, you will have the Nominal GDP.
Unfortunately, you cannot directly compare the Nominal GDP of one year with the Nominal GDP of another year, because the same goods and services change price over time. If we want to compare the GDP of different years, we need to adjust the Nominal GDP by the Inflation Rate. Once you adjust your Nominal GDP by the Inflation Rate between years, you have the Real GDP, which you can use to directly compare different years.
The “Potential Level” of GDP is the total output an economy can sustainably produce in a year. This is the potential output if every laborer is using their skills the most efficiently, with businesses using their capital goods to the best of their design at the current levels of technology, and public institutions are operating at their peak efficiency. Every time workers learn new skills, technology increases that allows us to make new goods (or the same goods but more efficiently), or changes to the government or culture take place that promote economic growth, the Potential Level of GDP increases.
The Real GDP growth rate swings above and below the Potential GDP growth rate, which is called the Business Cycle.
It is easy to see how an economy can be running below the potential levels – if workers are not matched with jobs that make the best use of their skills, or if machines are not properly maintained, or even if the government has poor leaders that make less-than-optimal laws and policies, it will cause the Real GDP growth rate to fall below the potential level. If it falls too far below, the economy could enter a Recession. Inflation is usually low when an economy is running below its potential levels.
The economy can also run above Potential Levels. Remember – the Potential Level is based on what can be sustainably produced. This means that if current growth levels are the result of over-borrowing, or asset bubbles, output might actually be growing at a higher-than-sustainable rate. Economies very often run above their potential levels for short periods of time with no problems, but going too far above for too long can result in a crash. Inflation is usually higher when the economy is running above its potential, which serves to bring the Real GDP back down to its potential levels.
When the GDP growth rate is positive and unemployment is relatively low, it is called an Expansion. If the GDP growth rate is very low or negative, with higher unemployment, it is called a Recession.
This part-time lifeguard would prefer to be a full-time stock broker
Most of the time, the economy is an “Expansion” phase. This does not mean everyone is doing well – even during very strong expansions, the unemployment rate usually stays around 5% (meaning 1 out of every 20 people who wants a job can’t find one), with the underemployment rate (people who are working part-time but want a better job) is usually much higher.
What an Expansion does mean is that new jobs are being created, and the total value being produced by an economy is going up. Growth also promotes growth – the more resources that are available, the more resources can be allocated towards researching new technologies and building new skills.
Recessions typically occur every 7-15 years, often following an asset bubble bursting, followed by a large loss of value in an economy. Recessions typically have higher levels of unemployment, with low or negative GDP growth. Even if GDP growth is never negative, recessions hurt. Other than GDP, the biggest indicator of a recession is a sharp decrease in consumer spending, and inflation tends to fall.
Higher unemployment rates mean that people lose their jobs, and new workers have a hard time finding their first position. Losses in the financial sector hurt retirement accounts and individual savings and investments, which can severely disrupt life plans. Thankfully, recessions are temporary, and the business cycle can usually move back into an expansion phase fairly quickly.
[qsm quiz=39]
An Entrepreneur is someone who takes a risk to start a new business. Nearly every business that exists (apart those created as spin-offs of other businesses, or by government intervention) was started by one or several entrepreneurs, who took a risk to launch a new company.
Starting and running a small business is not for everyone, partly because there is a huge amount of risk involved, and partly because it takes a huge commitment of time and resources.
Entrepreneurs are people who are willing to risk a tremendous amount of time and energy, not to mention money and other resources, to try to launch an entirely new enterprise. The potential rewards can be huge – if their business is profitable, they can keep all the profit or themselves. But the risks are also massive, since over 90% of new businesses fail within the first 5 years.
Even if a person has a great business idea they would like to peruse, there are many other factors that can play a huge role in determining their success.
With the huge cost of trying, and the massive failure rate, why do so many new businesses start every year?
Governments love new businesses, because entrepreneurs are the most likely candidates to be working hard on new research and technologies that drive long-term economic growth. New businesses are a massive source of creativity in every industry – even if your business fails, if you had a great idea that you just couldn’t bring to market, there is a good chance someone will try to acquire your technology and apply it themselves (Google is famous for encouraging start-ups that can help grow its online ecosystem).
For the entrepreneur, if your start-up is successful, the potential rewards are limitless. Since your profit is based on how successful your business is, many entrepreneurs see starting their own business as the best way to ensure they are getting paid for the value they create in the long term, rather than asking for raises and promotions while working for someone else.
If you start your own business, it probably won’t be long before you need to hire workers. New start-up businesses growing and hiring is one of the most effective means of job-creation.
Entrepreneurs are often more willing to hire younger and less experienced workers too, which means that joining a start-up as an employee can be a great way to launch a successful career. Of course, this comes with the risk that the company you join will fail, leaving the employees out of the job too.
One pitfall of many start-ups is hiring too many new workers too fast, anticipating growth that might not come as quickly as the owner had hoped. On the other hand, some start-ups are very afraid to hire new workers, which means that their current employees get quickly over-worked.
Nearly every state, and most cities, have some sort of program to help encourage new businesses. This can be anything from low-rent and low-tax “business incubator” zones of towns, to income tax credits, to research grants, and everything in between.
Governments, not-for-profit organizations, and even for-profit companies also run “Business Incubators”, which exist to pool the resources of many start-ups together to save cost and build skills (for example, saving cost on office space, having an accounting staff shared between all the companies in the incubator, ect).
Many colleges and universities also offer special course part-time courses to help teach new and potential entrepreneurs basic business skills, like basic accounting and management.
Nearly all of these programs are operated independently by local and regional businesses and governments, so if you are interested in starting a business try to find information for your area on any programs that are available.
[qsm quiz=37]
Economic Incentives includes anything that pushes people, businesses, and governments to do one thing or another. This includes what products you buy, what career you choose, what products businesses produce, and what government programs are put in place.
Each individual faces many economic incentives every day.
If you are in school, you have strong incentives to graduate – graduates (on average) earn more money and have more attractive careers than non-graduates. If you are working, you have a strong economic incentive to go to work every morning, since otherwise you might get fired (although this might not always be the case).
Incentives for individuals generally fall into two categories: “Intrinsic Incentives” and “Extrinsic Incentives“.
Intrinsic Incentives are very powerful – they dictate the kind of school we pursue, what kind of jobs we apply for, how much we work at those jobs, and much, much more. It also plays a strong role in the products we buy, where we live, and who we associate with. Simply “liking” one product more than another can often be a much more powerful factor in whether or not you buy it than its price (and marketers know this!).
Extrinsic incentives are incentives that come from outside – the most common example is price. Extrinsic Incentives are just as powerful, if not more so, than intrinsic incentives – regardless of how much you want to go on vacation to the Moon, you probably can’t afford it.
Extrinsic Incentives are much easier to measure than intrinsic ones – most of economics tries to measure how changes in prices and other extrinsic factors influence the economy, and overall growth.
People generally react to fairness with fairness, and unfairness with retaliation. To economists, this is called “Tit for Tat”, and researchers both in economics and sociology have spent a lot of time and effort investigating this phenomenon.
Researchers in Game Theory have shown that using Tit for Tat, or reacting to kindness with kindness, and being quick to forgive unfairness, is the “winning strategy” for people playing a Prisoner’s Dilemma game.
In this game, a player is given a big reward for betraying the other player, but if both players betray at the same time, they both get no reward. If they both trust each other, they get a smaller reward. By playing this game over and over, so you know what the other player did in the last round, researchers tested a wide range of “strategies” to see what paid off most. Tit for Tat was the consistent winner.
Click Here to read more about the Prisoner’s Dilemma.
Earning profits is the primary motivation for businesses
Businesses have their own set of economic incentives – the biggest of which is turning a profit. Large corporations are owned by shareholders, and those shareholders have a primary concern that their investment remains profitable, and so there is a legal responsibility for businesses to earn as much as they can, while maintaining strong growth for the future.
This means that businesses strive to make the most profit out of what they sell as possible. This works against the individual’s incentives to buy what they need as cheaply as possible, which creates the relationship of Supply and Demand – the point where a supplier’s willingness to produce a product meets the individual’s willingness to buy it is where profit is maximized (see our article on Supply and Demand Examples in the Stock Market for details).
The incentives for profit impacts more than just prices – it also determines how much of a budget is allocated for research and development of new and improved products, and even environmental policies. If a business’s approach to the ecosystem and their community gives them a better impression to potential customers, it can lead to an increased demand for their products.
If politicians want to keep their jobs, they have an incentive to pass popular laws
The role of the government is to make life easier for the citizens, both in the short term and long term. The biggest incentives for public officials is to pass laws that benefit the most people.
This means that public officials try to pass laws that are popular, since if too many people are made unhappy, they will be voted out of office, with their laws replaced by the next set of officials. This puts an important check on government power, but it does have a drawback – it can sometimes promote policies with short-term benefits but long-term drawbacks, such as excessive borrowing that must be paid back by later generations.
[qsm quiz=35]
In Economics, an “Externality” is a benefit or cost that is not reflected in the price of a good or service.
Prices are determined by the relationship between the supply and demand of a good or service (for details, see our article on Supply and Demand Examples in the Stock Market). This, in turn, is determined by individual producers and consumers.
In come cases, the direct producers and consumers are not the only ones who are impacted by a good being produced or consumed. Pollution is a good example – if a company dumps toxic waste in a local river as part of its production process, the price of cleaning it up is not reflected in their production cost.
If the full costs of cleaning up the pollution were reflected in the price, less of this good would be produced. From a societal standpoint, there is a surplus.
On the other hand, if a person wants to install a solar panel to their house, the total pollution put out by the electric companies is reduced. This means the air quality is higher and the entire public in the area benefits, but this benefit is not reflected in the cost of the solar panel.
If the full benefits of the solar panels were reflected in the price, more solar panels would be produced and installed. From a societal standpoint, there is a shortage.
Governments and economies do recognize that externalities exist, and some actions are taken to account for them.
Taxes and subsidies are used to try to directly add these costs and benefits directly to the products.
Subsidies are also applied to products like solar panels – the government will usually pay back the percentage of the cost of solar panels if you buy and install them on your home to help reflect the extra benefits it brings.
If taxes and subsidies are not enough, governments can also put in place quotas, which are strict limits on how much of a good can be produced or consumed. One of the most common examples is hunting permits – people need to buy a permit to hunt, and even then they can only hunt a certain number of animals. Commercial fishers are also restricted in how many fish they are allowed to catch per season.
Both of these restrictions exist to allow animal populations to recover. That way, even if the market price for fish increases rapidly, fishing companies are still restricted in how many they can catch at a time.
While the government can put these restrictions in place, there is always a limit to how much can be done, and so some laws and regulations are prioritized over others.
When politicians need to choose which regulations to pass, there is a general trend to favor things that have a very large positive impact on a smaller group of influential people, at the expense of a smaller negative impact on a wider group of people.
This happens because when the negative impact is spread wide enough, most people might not even notice it at all, but the total impact on society can sometimes be worse than if there was no intervention at all.
None of these restrictions are perfect, and so each person should keep in mind the externalities, and what extra taxes, subsidies, and quotas are associated with them.
If something you want to consume has negative externalities, they are almost certainly not completely offset by any punitive taxes, so you should try to research alternatives and consider their full cost.
If there are positive externalities, it may be difficult to find information on any subsidies that might be available to you, since they can vary widely by state. If you have a more expensive alternative available for something you want to buy or use, always check to see if there are any programs available that might help offset the cost.
One starting point for your search is the Energy.Gov website, which lists many programs by state.
[qsm quiz=38]
Economic Growth means that the economy is growing – more goods and services are being produced and consumed than they were before. The most common measurement of economic growth is the Gross Domestic Product (or GDP), which measures the total number of finished goods and services produced in an economy in a year.
Governments usually do everything they can to encourage economic growth in order to create more jobs and wealth for their citizens.
Long-term economic growth comes from more workers entering the economy (either through immigration or by lowering the unemployment rate), and the output per worker increasing through higher skill levels or more advanced technology. This is called Labor Productivity.
Labor productivity is just the total output divided by the total number of workers. If this ratio goes up, that means workers have become more productive. If it goes down, it means workers have become less productive.
Labor productivity is increased directly by giving more workers more skills, so they are able to produce something of higher value. For example, if a construction worker learns a new technique for building a house that makes the finished building stronger but uses less materials, his labor productivity increases.
Most countries invest heavily in schools to try to increase their labor productivity. People who can read are generally able to do more work than people who cannot, so over the last 60 years governments around the world have been working hard to increase their literacy rates.
Chart showing the average number of years a student in different countries have attended school
Generally speaking, the more years of school and training a person has, the higher their labor productivity is (including training they acquire on-the-job while working). As the average skill level of a country increases, they are able to produce more and better goods and services, which leads to economic growth.
Technology also plays an important role in increasing labor productivity and driving economic growth. As new machines and techniques are invented, each person is able to produce more output in less time. This includes better tools, but also better management techniques for helping large teams of people to work together.
For example, a farmer today with a modern tractor and harvesting machines can work nearly 500 times as much land as a farmer in 1800 using horses, oxen, and hand tools, and they need to work fewer hours per day.
This means that fewer people need to be farming to produce enough food, so more people can enter other industries (like manufacturing).
Another example of this is when personal computers became widely accepted in businesses around the world. This allowed people to keep more documents and records saved in an electronic format, making them easier to read, find, and share. This, in turn, allowed companies to spend less money on paper, and more on other technologies that helped workers be more productive.
Individuals do this by saving or investing directly in businesses. Even if you just have a savings account, your savings are used by your bank to make loans to new businesses and older businesses that want to expand, so this helps drive future growth.
Businesses do this by directing their profits back into research and development, or direct re-investment (like buying new computers).
Governments do this by reducing taxes for individuals who invest most of their income, or providing other incentives for people and companies to drive research and direct investment.
One of the most direct ways that the government tries to drive growth is by managing the interest rates that bonds pay out and banks charge for loans. When interest rates are low, it makes it cheaper for people and businesses to borrow money to use for growth. There is a constant balancing act between lowering interest rates to promote growth and raising interest rates to discourage risky borrowing.
Economic growth is wildly different between countries. The reasons for this are not always clear, but the biggest factor is that countries that have a lot of resources (both a skilled labor force and advanced technology) to start with will have an easier time developing newer and better skills and technologies, giving them a head start for growth.
Poorer countries might not have the same cultural drives that help encourage growth. For example, in many places in the world, it is heavily discouraged to ever borrow money. This can make it very difficult for a new business to get the funding they need to open, and also makes it difficult for established businesses to expand.
The opposite is also true, though. A country that starts off poorer can have much faster growth, since they can take advantage of the newer technologies and techniques developed elsewhere. This can help them “catch up” to richer countries.
Even very similar countries might have very different economic growth rates, since every country has slightly different economic incentives driving how resources are allocated, different levels of research and development in different sectors of the economy, and different changes that take place inside the economy over any given year.
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A contract is a legally binding agreement between two parties (people, companies, or both) in which something of value is exchanged. One party promises to do something in return for a something else. Since a contract is legally binding, if one party does not do what was agreed upon, the other party can sue them in court to either enforce the contract or receive compensation. Contracts are involved in personal and business dealings, so it is important that you understand the rules governing them.
Not every agreement is a binding contract, but every contract has a few required elements.
An offer refers to a promise one party makes in exchange for something in return by the other party. It’s an invitation to enter into a contract based on specific terms. An offer can be made orally or in writing. It can be a short statement or long and detailed. It’s important that your offer is reasonable and is clearly communicated, otherwise the party receiving the offer may not believe you are serious.
For example, if Alice owns 10 shares of Google GOOG stock and offers to sell some of her shares to Bob, that it not a valid offer. The offer was not clearly defined. It would need to include how many shares Alice is offering to sell, at what price, and when Bob would receive them.
An acceptance is when the party receiving the offer agrees to the terms being proposed. The acceptance must be relayed in the manner that the offer specified. For example, if you received an email offer from Repair Guys to fix your car’s radiator for $550 and the offer stipulated that you must accept the offer in writing, then you would need to reply to the email showing your acceptance. If you receive an offer and do not like the terms, you can reject the offer or you can start a new offer. For example, if your email reply to Repair Guys stated that you would like the radiator repair to be done for $500, you are creating a new offer to which Repair Guys can accept or reject.
Both parties need to actually intend to make a legally-binding contract. This might seem obvious, but this is the key difference between an informal agreement and a binding contract. For example, you might have an agreement where you mow your neighbor’s lawn for $10 a week. There’s a clear offer and clear acceptance. But if you failed to mow the lawn one week, would your neighbor sue you? Probably not. What you created is an informal agreement, not a contract.
However, if you agreed to paint your neighbor’s house exterior for $800 by next Friday, and the neighbor has given you $200 up front to purchase paint, both parties clearly intended for a legal contract to be made.
Legal capacity means that both parties have authority under law to make a contract in the first place. In most cases, if any of the following situations apply, the party might be considered to not have legal capacity and a binding contract could not be created:
There are exceptions to these guidelines. For example, someone under the age of 18 can still enter a binding contract for a necessity, such as food or shelter.
All contracts must be created through the free will of both parties. You cannot force someone to enter into a legally-binding contract.
If a contract is developed and the five previous requirements are included, your contract might still not be valid because it is asking a party to do something illegal. For example, you can’t have a legally-binding contract to sell illegal drugs.
It depends! As long as a contract has all of the required elements, it is considered legal. However, verbal contracts are tricky. Unless you have witnesses to the oral contract, it is difficult to prove the contract contains all of the necessary parts. By law, some contracts do need to be in writing, such as real estate sales.
If you want to make sure you have a legal contract, you should always get it in writing. More importantly, you should always read the full contract before signing!
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“Economics” is often called the Dismal Science – it studies the trade-offs between making choices. The purpose of economics is to look at the different incentives, assets, and choices facing people, businesses, schools, and governments, and see if there is any way to improve outcomes.
This is done by looking at how supply and demand are related throughout the economy, exploring different allocation methods, and investigating how to change (and what impacts there are from changing) the distribution of wealth.
The central problem in all economics is exploring different costs and benefits of choices made by everyone in an economy. This is not just the dollar cost of an action, but also what is being given up.
Every time a road is built in one place, that means there are not enough resources to build it somewhere else, so governments need to carefully plan construction to make sure each project gets the most possible benefit given all available alternatives. Likewise, if a school decides to build a new computer lab, they cannot use that money to hire a new teacher, do renovations on classrooms, or improve the school lunch menu.
Every choice made is a balancing act – trying to make sure the benefit you get from one action is greater than the benefit you would get from any other alternative.
At a bigger scale, when there are many people making the same kinds of decisions all at the same time, the economy as a whole also needs to balance everyone’s choices. This is how “Supply” and “Demand” appears, and how prices are determined.
For more examples on how prices are determined through Supply and Demand, read our full article on Supply and Demand Examples in the Stock Market.
Supply and Demand together are called “Market Forces“, large trends that result in one market outcome or another (such as the price of a good, and how much pollution is made in the production of those goods). When the supply and demand result in a particular number of goods to be produced and sold at a certain price, this is called a “Market Outcome“.
This means that all of the Market Outcomes are related – if a change in supply or demand cause the price of a good to go up, the people who make that good will earn more, and more people will start making it. This means that the income of those people goes up, which means the goods they like will have an increase in demand, and the cycle continues. The specific market outcome, and resource allocation, depends mostly on the total resources available (all raw materials, all available capital, and the entire work force number and skill level), previous market outcomes, and government policies.
Using “Prices” is just one of many possible ways to allocate the total resources available. Depending on what market outcome we are focused on, a different allocation method might be better or worse. Economists often try to determine what the best allocation method is for particular goods or services to try to improve market outcomes.
“Prices” let individuals measure their own individual level of demand against a prevailing market price – how much they have of a good or service depends on how much others are willing to make it, and how much everyone else values it. Market prices work best when there are many buyers and sellers of the same good or service. You can get more information on how market prices are determined from our article on Supply and Demand Examples in the Stock Market.
Auctions are commonly used when there is a large imbalance between the number of potential buyers and sellers of a good or service, and the quantity available is limited. Economists spend a lot of time analyzing auction systems
For sellers, individual goods or services are left for potential buyers to “bid” on. This means that the person who values the good or service the most (in this case, who is able to pay the most) will get the good, and the seller gets the best possible price.
Auctions can also go in the other direction – a buyer could ask for sellers to “bid” to sell their good at a particular price, and the buyer will take the offer of the seller who can offer the lowest price. This is generally the case when a government hires a contractor to build a road – many competing companies provide “bids”, and the government makes its choice based on the bid price and the expected quality of the work.
Entitlements is a different allocation method – everyone gets a certain amount of a good or service, which is then paid for by taxes. This allocation method is generally used for “Essentials”, or otherwise things where it is impossible to charge someone based on their usage. The availability of public parks, drinking water, and clean air all use an “Entitlement” distribution system. Certain levels of basic housing and food is also generally provided as an Entitlement.
Even in a normal supply and demand system, price controls can be put in place by the government if a society is not satisfied with the pure market price allocation. This can be things like adding extra taxes to increase the price, giving subsidies to decrease the price, or telling sellers they can’t sell a good or service above or below certain prices.
The distribution of wealth is more complicated than just how much the top 1% earn compared to the bottom 99% – it also examines how wealth is distributed between industries in an economy, how much different skill levels are worth relative to others, how taxes are paid and collected, and much more. When economists look at changes in the distribution of wealth, it is usually by making subtle changes to these smaller factors which add up to changes on a bigger scale, rather than trying to find a single way to transfer wealth from the “Rich” to the “Poor”.
For example, the Rich use most of their income for investment, while the Poor use almost all of it for direct consumption. This is because the rich generally don’t get much benefit out of an extra $100 worth of groceries in a month, but that might be a very large boost in living standards for the poor.
By giving a single rich person an extra $10,000 in taxes, and using that revenue to give $100 directly to 100 people, those 100 people will almost certainly be made much better off than the one rich person was made worse off. However, that means that $10,000 would not be invested to help new companies grow, which in turn means fewer jobs are created to help build new wealth. A central problem of economics is trying to balance the consumption and benefit of people today against taking measures to help more growth for the future.
Another example comes from direct government spending – some countries spend a large amount of money on biotechnology research to build a new sector of their economy, while other countries spend more on building more public housing connected to public transit, to try to help the poor get better jobs in economic sectors that already exist.
Every part of economics is measuring these trade-offs – the benefits and costs of one choice versus another.
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Have you ever wanted to start a business? Maybe you want to know the difference between a lemonade stand and Minute-Maid, besides just the size of the companies.
Different types of companies have different levels of liability (meaning level of responsibility) for the owner or owners. What this means is that the more liability an owner has, the more that owner is responsible for the company’s debts. Different types of businesses also have different rules on how they can be managed, and how the owners can be paid.
This is the simplest type of business – the entire business is owned by one person. There generally are no requirements to operate a sole proprietorship – if you ever sold something, you have already worked as a sole proprietor.
Sole proprietorships can have many employees, but the key factor is that the business itself is owned by just one person.
In a sole proprietorship, the owner takes the full liability for the entire company’s debt. That means that if, for example, the owner took out a loan to start the business but then goes bankrupt, he or she could have their other assets seized by creditors (such as their car or home).
This also means that if someone wants to sue the business, they can also just sue the owner directly (even if the business has already closed).
Most larger businesses don’t want to always have that much liability, so usually as businesses get larger, they tend to move on from sole proprietorships into other business types.
With a sole proprietorship, everything that is owned by the company is owned directly by its owner. This means that most owners can (and usually do) mix their personal finances and business finances. An example of this would be taking money directly from your cash register to buy your personal groceries.
This means that the owner keeps 100% of the profit from the business for him or her self, and reports all the income, profit, and loss on their own personal taxes.
A sole proprietor may still want to register a company name (although this is optional), which they can then use for bank accounts and legal paperwork. This is known as “doing business as” another name, and the rules vary by state. In this case, the sole proprietor still has unlimited liability, but can use another name for their business.
“Partnerships” exist when two or more people decide to run a business together. There are “General Partnerships” and “Limited Partnerships”.
Unlike a sole proprietorship, a partnership requires a contract in order to exist, where the partners establish the existence of the partnership. Like a sole proprietorship, the owners still own the entire company themselves, along with all its profits (and losses), and the partners can choose to use a “Doing Business As” name.
With a general partnership, the business works just like a sole proprietorship, but with several owners instead of just one.
All of the partners are fully liable for the entire business, just like a sole proprietorship. Partners are also liable for the actions of their other partners any time one of them is acting on behalf of the business.
For example, if you have a partnership that sells stereos, and your partner agrees to sell them at $1 each, you are obligated to honor that agreement.
All of the profits and losses are divided equally between the partners (although in the initial contract, the partners can specify that one gets a greater share than the others).
With a “Limited” partnership, there is at least one general partner, plus at least one “Limited Partner”. The limited partner does not have all the rights, responsibilities, and obligations as the general partner, but also does not share the full liability either.
The general partner has the same liability has the same rights as a general partnership, but the limited partner has somewhat less (usually only as much as they invested in the company to start with). This also means that the general partner might not be liable for the agreements made by the limited partner, if he or she can show that those actions were “negligent” or purposely harmful.
The limited owner usually has their compensation set to the same restrictions as their liability – there might be a cap to how much they can “take out” of the business. The specific rules depend on the terms in the partnership contract.
Limited partnerships are very common – even more common than general partnerships. A limited partnership will often occur when one person wants to start a business, but gets help (both financial and practical) from someone else. Rather than offering a loan, this “helper” might instead want to share in the future profits of the business, so they would prefer becoming a limited partner.
As a limited partner, they might not have a role in the day-to-day management of the company, but they might still have a role in the overall “vision” and the direction of the company. They also do get a share of all profits, but since they have limited liability, they are not risking their own personal assets (beyond what they specifically invested in the company), unlike a General Partner.
The biggest type of business is a corporation. These operate under different rules from sole proprietorships and partnerships – a Corporation is its own legal entity (meaning it can have its own bank accounts, and be sued directly). Corporation’s most useful feature (as far as the owners are concerned) is totally limited liability, but this comes at a high cost of management and organization.
Corporations can sell pieces of their ownership as stock. This allows a corporation to raise a large amount of cash to invest in new equipment and operations, which can help companies become profitable much sooner.
When a corporation is created, it exists with a certain number of shares of stock. Whoever holds those shares is a part owner in the company – how much they own is based on how many shares they hold.
Instead of the company being managed directly by the owners (like a sole proprietorship or partnership), the shareholders then elect a “Board of Directors”. The day-to-day management of the company is overseen by the Board, but for some larger decisions there are occasionally calls for each stockholder to vote. The Board of Directors is also responsible for hiring and firing the highest levels of management (like the CEO), and the Board is the direct “boss” of those managers.
The owners of the company (stockholders) have entirely “limited” liability – they can only lose as much as their stock is worth. This means that if a Corporation goes bankrupt, the individual stockholders will lose the entire value of their stock, but nothing more.
The shareholders of a corporation are entitled to the company’s profits, which are paid out as dividends. Read our full article on Stocks for more information.
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Knowing your net worth is the first step towards growing it! This tool will help you organize your assets in one place, and even help project how they will grow in the future.
If you have used our Home Budget Calculator to help see where you can improve your savings, the next step is measuring your net worth to see how to make it grow.
Once you have found your net worth, you can use our Saving to be a Millionaire Calculator to see what rate of return you need to reach to hit your savings goals!
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‘Allow Blocked Content’ to view this calculator.
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Remember, you’ve reached the end of this trip, but not THE journey. Keep practicing and constantly improving your personal knowledge base. You will learn which investment types work for you and which do not. Analyze your losses just as diligently as you do your winners.
Enjoy your investment career and the journey as much as the results.
Age | Average Net Worth |
---|---|
Under 25 | $9,660 |
25-29 | $37,229 |
30-34 | $136,629 |
35-39 | $298,500 |
40-44 | $491,100 |
45-49 | $690,090 |
50-54 | $702,552 |
55-59 | $1,123,000 |
60-64 | $1,507,000 |
65-69 | $2,294,492 |
70-74 | $2,546,213 |
75 and over | $2,734,001 |
Evaluate your financial situation as compared to the statistics for average net worth for different age groups.
Use this and other information you accumulate to construct an investing strategy that fits your finances, personality, and economic goals. You will make better decisions, enjoy your investment activities, and improve your chances of reaching your financial goals.
Your investment education should not stop with this course. Continue your education process and learn from your mistakes as you proceed.
You should have already have started trading in your practice portfolio – if you haven’t, its not too late to start!
Here are some suggestions that will keep you informed, knowledgeable, and ready to make excellent investment decisions. Your portfolio – and your bank account – will thank you.
You will have many choices of investment newsletters. Don’t be afraid to sign up for the free ones (from legitimate companies), and don’t hesitate to unsubscribe if you get too many or you don’t like their approach. There are so many free and valuable newsletters out there, but here are some of the ones we like:
Some you will love, while others might bore or confuse you. As a newer investor, you should sample these newsletters and find the ones you like and enjoy. Cancel those that make you crazy or offer no value.
Stick with the basics for now. As your knowledge increases and you become more comfortable with the terms and tips you’ve learned in this course, you may want to upgrade the level of information from those newsletters and I am sure you will find others that you like.
You’ve learned some wonderful money management techniques through this course. However, there are other, more sophisticated techniques and new ideas that are published on a regular basis. Surf the web to stay up-to-date and/or learn about new, cutting-edge money management techniques that might help you make even better decisions.
Don’t worry, money management ideas need not be complicated. Most depend more on common sense than mathematics or strange-looking formulae. Stay informed with money management strategies that work for YOU.
You might also be unable to make other timely purchases during a market low because of your lack of cash flow. This is just one example of the additional risks that you might easily overlook when creating your investment strategy.