Business Education: Consumer Economics and Personal Finance Basics

Personal Budget
A personal budget can be created through a series of straightforward steps. First, one should set a manageable time span for the budget, such as a month. Once the timing is set, the individual should formulate his ultimate financial goals. Creating a financial reserve is important in case there is an unexpected expense. He should decide how much money he wants to have left for his reserve or other savings. Next, the individual should calculate income. He must be careful to take out money for taxes, interest, and automatic fees. He should then make budget line items for recurring fees that are unavoidable such as rent, mortgage payments, car payments, etc. Next, he should add in needs such as food. He should consider how much he spends in each category and formulate ways to save. He should then add in other items such as leisure activities and unnecessary items. As time passes, he can make adjustments as necessary.

Banks, Savings Plans, and Checking Accounts
Banks vary greatly in the accounts, programs, and financial tools they offer, thus consumers should spend time comparing them to find the best bank for them. First, individuals should consider their banking needs.
They might want a checking account, which typically pays little to no interest, but allows people to easily withdraw by writing checks.
Alternatively, they may want a savings account that doesn't allow for checks but which offers interest. The characteristics of these accounts differ greatly. Factors that should be evaluated include fees, minimums, interest rates on accounts, services, special features, and more. They should also evaluate customer service. Some banks might be better for one product and worse for another, so people should evaluate exactly what they need. In addition, services, prices, fees, and other details change very often, so people should evaluate their options right before they are ready to commit to a banking product.

Strategies for Making the Best Purchase Decisions
First, it is important for people to research the products they are considering. The internet makes it easy to read ratings and reviews to compare the features, benefits, and prices of different products. There is often a quality versus price trade-off, but not always. In addition, this trade-off is not always significant, especially if someone is paying more for a brand name. It is important to know exactly what is in the product, so check the product labels carefully before purchasing. Second, comparison shopping is key to finding the best price. Oftentimes the same item can be found for far less from a particular source. You can look at advertisements to find the best deals, but be wary. Advertised deals are not always as good as they say, thus consumers should be sure to read the fine print. Consumers should also investigate any service plans and warranties offered to ascertain their value.
The more research a customer does, the better the chance of getting the right product at the right price.

Factors Affecting a Purchase's Total Cost
Many factors affect a purchase's total cost beyond the retail price. For example, consider all the additional costs that come with purchasing a car. There are taxes as well as various fees. And one must consider what else he may need to purchase to be able to use the car, like a license tag. The cost of credit, if applicable, needs to be considered. If someone is financing a car, then he will pay more than the retail price because he will pay interest on the money. The costs to operate should also be considered. A car needs gas, so this is an additional cost that will be incurred. A car also needs maintenance. A person should consider how long the life of the product will be. Most cars do not last 20 years. Knowing how many years of life the product will last can give a better idea of the true cost. By considering all of these different factors, a consumer can get a better idea of the true cost of a product.

Lowering a Product's Cost
Consumers can save a great deal of money with various strategies for lowering a product's cost. First, they can take advantage of sales. Sales allow consumers to save a great amount of money on products, and many stores have significant sales such as buy one, get one free. Certain days such as holidays are often accompanied by sales. Consumers can also look for coupons for both in-person and online purchases. They can purchase items on clearance for even greater savings. Another option is to purchase in bulk.
Consumers will generally get a lower per item cost by doing this. Consumers can also comparison shop to look for the lowest price on an item. This is easy to do on the internet. Discount stores and low priced websites are great places to shop to save money. Combining all the above strategies leads to even greater savings.

Ascertaining Needs and Resources Before Large Purchases
Consumers should ascertain both their needs and resources before making large purchases. They may find that a less expensive option will fit their needs or that they have other items that can substitute for the purchase they were about to make. Consumers also need to consider their resources. Products may cost more than the retail price when one considers tax, other fees and interest on a credit card. Customers should honestly ask themselves if they can afford to purchase the product. By taking these measures, you can wisely limit your spending to get the most out of every dollar you spend.

Factors Influencing Employment Opportunities
Economic factors can have a significant impact on employment opportunities. When the economy is doing well, businesses will also be doing well and may be more likely to be expanding and hiring new people. When the economy is doing poorly, a person may have more difficulty finding a job. There may be a lot more supply (people looking for jobs) than demand (jobs hiring).
This ranges by job—certain jobs, such as nurses, will always have openings.
Geographic location also makes a large difference in employment opportunities.
There are many more opportunities for businessmen in New York City than in a small town in rural America. The opportunities also vary by industry. Some industries, such as computer systems design, grow faster than others, such as publishing. There are many personal factors that influence an individual's employment opportunities such as education, skills, and experience.

Factors Influencing Cost of Living
One factor that influences the cost of living is housing prices. Housing prices can vary a great deal and change by many percentage points, even when salaries remain relatively stagnant. When housing prices go up, so does the cost of living. This can vary greatly depending on the area. A person's family size also greatly affects her cost of living. Kids are expensive, with costs such as medical bills, housing costs, food, education, and so forth. Someone with a larger family will have a greater cost of living.
Inflation also influences the cost of living. When there is high inflation, the cost of living can go up. Things will cost more, even though individual income may be the same. This can make it more difficult to afford the basics.

Factors Influencing Personal Income
A person's education influences their personal income.
Someone with a higher degree, such as a master's degree or doctorate, will generally make more than someone with a lower degree or someone without a degree at all. Many companies offering higher paying jobs want people with higher educations. Some fields need people with certain certifications.
Experience also matters—those with more experience will generally earn more money. Someone who is skilled will earn more money, especially if the skills are particularly unique or valuable. Factors outside the individual, such as the job market or the average wage in a chosen field, also affect income. When the economy is doing well and a lot of people are hiring, a person might earn more. The geographic location also makes a difference. An employee will generally earn more in a place like New York City as compared to a small town.
A higher cost of living will balance some of that.

Income Tax Preparation and Tax-Reduction Strategies
Personal income taxes are taxes on the money a person earns. The federal government applies these, as do some states. Individuals pay a percentage of their income (after deductions and credits). The percentage is based on how much they make and goes up as income rises. The Federal Insurance Contributions Act (FICA) and Medicare taxes fund the federal programs of social security and Medicare, which provide money and health benefits to senior citizens, people with disabilities, and other eligible individuals. Property taxes are levied on properties and are generally based on the amount the property is worth. Gains taxes are based on profit from a non-inventory asset such as bonds, stocks, property, and precious metals. Sales taxes are paid on items people buy.
Individuals must prepare income tax returns yearly, and many use an accountant to do so. They can look for deductions such as dependents, charitable contributions, or business expenses, which can reduce the amount of wages eligible to be taxed. They can also claim credits, which reduce the taxes owed. Contributing to retirement plans can also reduce taxes. After all credits and deductions are account for, some will owe tax money, while others will enjoy a refund.

Credit
People use credit in order to buy things that cost more than they can currently afford. One reason people use credit is because it is convenient. Credit cards are accepted almost everywhere and are quicker and easier than writing a check. The second reason people use credit is to make large purchases, such as homes and cars, without having to use cash. Sometimes people borrow part of the purchase amount and repay it on a loan schedule basis. This way, people can receive an expensive asset immediately and make small payments over time. Credit also provides a way to cover a financial emergency in unforeseen situations like illness or employment and can be used to partially fund finance investment options.

Types of Credit an Individual May Possess
Credit cards allow people to make purchases in advance and then pay it back monthly. People can keep a balance on the cards, but the interest can be very high. Auto loans are loans that are tied to cars. They allow people to pay off their cars slowly, but they could lose the car if they can't pay. Mortgages are loans made to let people purchase homes. Generally these come from the bank and allow homebuyers to slowly pay off the house with interest. Foreclosure could occur if the loan is not repaid.
Student loans help students pay for education. Home equity loans are loans in which the person's home equity is put up as collateral in case the person defaults on the loan. People may use this for large expenses. A variable loan is a loan in which the interest rate changes along with the market interest rate, changing the payments. Alternatively, a fixed interest rate loan has the interest rate stay the same during the life of the loan. How high the interest rates are and the length of the loan determine which is best.

Establishing Credit
Opening a checking and savings account will show lenders that you are financially responsible and will help you establish credit.
Opening one or two credit card accounts and using them now and then (being careful not to overdo it) will also prove that you are a reliable credit customer. Even if you do not need a loan, getting a small one (and putting it in a CD or money market account) can help establish a good credit history. Any interest that accumulates can be used to cover the expense on the loan, especially if you pay it off ahead of schedule. Do not pay off the loan too quickly since lenders are looking for evidence of financial responsibility over a period of time. You may want a larger loan in the future, and your ability to get this will be based in part on your past history of paying off small loans.

Building a Strong Credit History and Maintaining Credit-Worthiness
You can build a strong credit history and maintain credit-worthiness in a number of ways. When first applying for credit, be honest; credit agencies will do a thorough background check and misinformation will only hurt your credibility. Avoid overextending yourself and only use credit when you can afford the repayment schedule. Make sure that you live up to all of the terms of the credit card and be on time with monthly payments. If you will not be able to make a payment, let the lender know; often they will work with you.

5 Cs of Credit
The 5 Cs of Credit are the five things a lender looks at when trying to determine how well a borrower will be able to repay a loan. Character is demonstrated by how well a borrower lives up to the loan's requirements. Capital refers to the borrower's assets. Collateral secures the loan and can be claimed by the lender in the event of default. Capacity is whether the borrower will pay back the loan in a timely manner. Condition looks outside the individual borrower's profile to any economic factors that could affect whether the borrower can pay back the loan.

Line of Credit, Cash Advance, and Base Rate
Line of credit is the most credit a customer can have at any given time as determined by the issuer of the credit card. An applicant can request a certain amount, and this is taken into consideration along with the applicant's financial status. A cash advance is a loan that banks or other financial institutions offer a credit card holder. The advance happens at a bank but the transactions are like merchandise purchases. Instead of receiving a good or service, the person receives a check or cash. When giving loans to individuals and small/medium size business, the rate of interest banks use is called the base rate.

Factors That Could Affect Personal Credit
Bankruptcy has a major impact on personal credit. Chapter 7, 11, and 13 bankruptcies remain on credit reports for as long as a decade, although Chapter 13 may come off in seven years. Negative reports about delinquent accounts that lower credit may stay for seven years, although positive closed accounts can stay for longer. Credit can go down with collections and these can stay for seven years as well. Credit score can even be slightly lowered for two years when an individual just applies for credit.
Late payments also lower credit rating. Balances on credit cards can cause credit rating to drop, thus if an individual is only making minimum payments, he will have a lower credit rating and thus less ability to get and use credit.
Inflation may make it harder for some people to pay their credit cards. Credit cards are governed by many laws and regulations.

Managing Personal Credit and Debt
Consumers should work to manage personal credit and debt.
They should try to get rid of unhealthy, high-cost debt such as credit card debt by paying off loans and balances. They can start by creating a budget.
They should separate things into needs and wants and try to focus on only the needs until they have managed their debt. They should not buy things they cannot afford. People can also try to increase their income. People may also be able to talk to the creditors and come up with a payment plan or a reduction in their debt, which will make it easier to pay back. They should try to do this as soon as possible before a debt collector begins to make collection calls.
There are debt relief services that offer credit counseling. These can be very useful, but consumers should be careful because many involve scams. Debt management plans and debt settlement programs can be done if researched properly (again, there are a lot of scams out there) and if there aren't other options. This may help get a person out of unmanageable debt.

True Costs of Credit
Credit has a much higher cost than many consumers realize, especially if they are only paying the minimum amount and have high interest on credit cards. The cost of the interest is based on the annual percentage rate (APR) and the amount.

For instance, if someone buys a television for $100 on a credit card with 20 percent APR and paid it in one year, then they would pay $120. The interest would be the APR multiplied by the principal amount. This calculates to $100 × 20% (0.2), or $20 interest. Sometimes the credit cards have such a low monthly minimum payment that it does not even cover the interest. If people are only paying the minimum, they might continue to owe more and more money. For instance, if in the last example the minimum payment was only $10 a year, then after the year, the consumer would still owe $110.
Then the interest for that year would be $110 × 20%, or $22. The exact cost of the credit depends on APR and how long it takes a person to repay the loan.

Credit Danger Signs
There are a number of credit card danger signs to watch out for. Taking sixty to ninety days to pay bills that used to be paid in thirty; struggling to make minimum payments; or ignoring bills altogether out of fear are signs of credit danger. Using a credit card for impulse purchases, exceeding borrowing limits, and using cards to pay off other debts are clear warning signs. You should also be concerned if you have no savings, are using more than 20 percent of your take-home pay to pay credit card bills and personal loans, are postdating checks to keep them from bouncing, or borrowing money for simple day-to-day standard living expenses. Finally, it should serve as a red flag if collection agencies repeatedly call.

Credit Problems for Women
Lenders once vieweed women as credit risks because they could become pregnant and lose their jobs. The Equal Credit Opportunity Act
(ECOA) removed creditors' ability to consider marital status or child-bearing plans, and mandated lenders must consider a woman's income on the same basis as the man's. Divorced and widowed women may not have an established credit history, making it difficult for them to get credit. This can be avoided by using one's own name when filling out credit card applications, reporting any information to the credit bureau using the maiden name, and keeping a separate credit file.

Importance of Credit to Businesses, Governments, and Consumers
Credit allows individuals and companies to purchase goods and services when sufficient cash is not available. It allows businesses, governments, and consumers to make transactions and supply the goods and services consumers demand. Credit allows businesses and governments to employ people and provide various projects and programs; these boost the economy and raise our standards of living. Consumer credit permits the purchase of expensive items without jeopardizing the budge; however, the buy now, pay later mentality can lead to serious financial problems, including bankruptcy.

Credit Cards
Economists do not consider credit cards to be money since credit cards do not make payment at the point of sale. For example, if you use your credit card to buy a pair of shoes at the mall, you do not actually pay for the shoes when you swipe your card. Instead, you pay for the shoes when you pay your credit card bill a few weeks later. At the shoe store, basically you have obtained a loan from the bank that issued the credit card. The credit card, then, is really just a piece of identification ensuring that the proper account is charged for the value of the shoes. Payment is not made until later, however, so economists do not count credit card transactions as money transfers.

Electronic Checks
Electronic checks likely will become a more popular means of making purchases, especially online purchases. An electronic check is not considered money, because it merely instructs the bank to move currency to another account in order to complete a transaction. As such, an electronic check has no paper basis; although the early versions were designed to resemble paper checks. The Financial Services Technology Consortium developed these prototypes. Many banks and financial institutions are excited about the advent of electronic checks, which they feel will reduce paperwork and lag time in transactions.

Debit Cards
A debit card functions much like a credit card, except that it draws from the cardholder's funds rather than from the bank's funds. When a debit card is used to complete a transaction, the bank receives instructions to transfer a certain amount of money from the cardholder's account to the recipient's account. As a result, the debit card functions just like a paper check. It is not considered money; instead, the debit card serves as a means of instructing a bank to move deposits. For most consumers, the advantage of a debit card is that it can complete transactions much more quickly than a paper check.

Electronic Cash
Governments, banks, and other financial institutions hope that electronic cash will become a viable method of payment in the future.
However, in order for this to happen, electronic cash needs to be secure, convenient, and recognizable. Most designers envision a system in which cards are assigned certain amounts of money and then can be used to make purchases in stores. The difference between this model of electronic cash and a debit card is that the value of the electronic cash is in the card itself, rather than in the card's ability to move bank deposits. At present, the online company PayPal offers the most popular electronic cash venue.

Automated Teller Machines
Automated teller machines (ATMs) are one of the most important advances in personal banking over the last two decades. In 2020, more than 3.5 million ATMs were in operation around the world. An automated teller machine is linked to a central computer, which in turn has connections to the computers of specific banks. When an identification card is inserted into the machine, the account holder can check his or her balance, withdraw money, transfer money, make loan payments, and make deposits. ATMs have increased the convenience of personal banking, although some critics say that they encourage frequent withdrawals and irresponsible spending.

Savings Account
While savings accounts typically yield only around 2 percent, they are safe because they are insured. After thousands of banks failed in the Great Depression, the federal government created the Federal Deposit Insurance Corporation (FDIC) to insure money in savings accounts up to $100,000. In this way, if a credit union or bank were to go out of business, your money would still be safe. Sometimes, a low minimum balance is required to keep a savings account active without being charged a fee, but sometimes there is no minimum balance required, depending on the type of bank and account.
A bank savings account pays interest because the bank is borrowing the money from you. The bank lends your money to other people, and by charging a higher interest rate on that loan than the interest rate they are paying you, they are able to make money. Since the interest in a savings account is compounded daily and paid monthly, you can also receive interest on the money that has been earned as interest.
The two types of savings accounts that banks offer are a basic savings account and a money market account. A basic savings account usually does not require a minimum balance, but it also has a very low interest rate. However, you can take money out of a basic savings account whenever you want. A money market account pays a higher interest than a basic savings account but it also may require a higher minimum balance. Also, you can only write a maximum number of checks (usually three) each month and you may only be able to make a certain number of withdrawals each month.

Starting a Savings Program
To help start a savings program, look at your spending habits to see where you can cut back. Have your employer regularly deduct money from your paycheck and automatically deposit it into your savings account.
Deposit any unexpected extras like raises and bonuses in your savings account, and reinvest the interest and dividends made from your savings account. Work a little more to earn extra money, and if any loan payments end, write checks for those same amounts but deposit them into your savings account. Keep track of the returns you receive on your savings account, and if it's only 2 or 3 percent, consider opening a money market account. Establish a retirement plan and contribute to it on a regular basis. It is all right to splurge every now and then to have a bit of fun and make saving money easier.

CDs
CDs (certificates of deposit) differ from other savings types because the money deposited has to stay put for a certain amount of time. With a CD, you deposit your money for a specified amount of time, usually anywhere from three months to a number of years; the longer the period of time, the higher the interest rate. CDs earn more interest than savings accounts and money market accounts, but there is a penalty if you take your money out before the time is up.

Treasury Bills
Treasury bills (T-bills) are a simple way for the government to raise money to help pay off the national debt. T-bills are popular because they are affordable (they start in denominations of $1,000), are risk-free since they are backed by the U.S. government, and are exempt from state and local taxes. T-bills are issued through a bidding process at auctions, and the bids can either be noncompetitive (you receive the full number of securities you want as determined at the auction) or competitive (you specify the return that you want, but if it is too high, you may only receive a portion of the securities or none at all). The one downside to T-bills is that they are so safe that they do not yield great returns.