My Best Birthday Ever 2

Study Unit

Consumer Math, Part 3

Are you developing a feeling for handling your money? By now, you should be acquiring a vision of the “big picture,” the master plan that you’ll use to help you manage your money.

In this study unit, you’ll receive information about different financial areas of your life—your car, your personal insurance, and your savings and investment plans.

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When you complete this study unit, you’ll be able to

• • • • • List the factors to consider before buying a new or used car Discuss the options available regarding your personal insurance Determine when you’ve saved enough money to start investing Explain the difference between common stock and preferred stock Explain why it’s important for you to plan for your retirement

Refer to the Glossary at the end of the study unit if you’re unfamiliar with any terms mentioned in the text. After absorbing this material, you may want to organize your own master plan, following the suggestions given at the end of this study unit.

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YOUR CAR YOUR PERSONAL INSURANCE

What Is Insurance? life insurance Insuring Your Personal Possessions Health Insurance Buying a New Car Buying a Used Car

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Contents Contents

YOUR SAVINGS

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USING A CALCULATOR AND COMPUTER FOR CONSUMER MATH

The Business plan on Senior Care Marketing Plan

Senior care is a specialized service that provides a combination of medical assistance, compassionate care and companionship. Whether it’s adult day care, long term care, or assistance on demand, Bessie V. Rose Senior Care is there to make life that much easier for the entire family. Today’s baby boomers and the older Gen X group face a dual challenge: They’re caring for their own ...

Your Calculator How to Use a Calculator Computers Are Everywhere Your Computer

Acquiring the Savings Habit Where Shall I Put My Savings? Investments The Stock Market Bonds Mutual Funds Reevaluating Your Investments Retirement Planning

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YOUR MASTER PLAN

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SELF-CHECK ANSWERS GLOSSARY

Beginning Your Plan A Little Dreaming Goals Adjusting for Goals Help with Your Master Plan

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Consumer Math, Part 3

YOUR CAR

To most people, having “wheels” is as important as having a place to live. The mobility a car gives them makes it a highly prized item. Because a car is a very expensive possession, it’s important to take a realistic look at some of the costs and decisions involved in car ownership.

Will you buy a new car or a used one? Cost, of course, will be a major factor in your decision. Do you have, or can you borrow, the $15,000 or more needed for a new car? If your present financial situation doesn’t warrant purchasing a new car, you may be able to buy a used one. Then, in a few years, you can purchase a new one when your financial position improves. However, you may not ever want to buy a new car—there are advantages and disadvantages involved in buying either a new car or a used car.

Sounds great, doesn’t it? But before you rush out to buy a new car, consider some other factors, such as depreciation and insurance.

Some new-car dealers also offer extended service contracts, which you can purchase. You may consider such a contract if you intend to keep your car for a long time. If you do plan to keep your car for a long time, a new car may be best since you can control the maintenance costs to some extent. You’ll know exactly what has happened with the car since delivery from the dealer.

First, you can assume that a new car will be in better condition than one that has already been used by another person. But this doesn’t mean that the new car will be free from defects. Any car can be a “lemon.” However, most new cars are covered by warranties. A warranty states that the dealer who sold you the car will pay certain repair and maintenance costs for a given length of time. Most warranties last for at least 36 months or 36,000 miles, whichever comes first. You should also know that there are “lemon laws” in effect to protect consumers from defective new cars.

Five Year Business Plan

SMC Company Five-Year HR Forecast The local labor market has continued to shrink and labor costs have continued to soar over the past two years. SMC's workforce has now become bilingual and has had to deal with occasional unsuccessful attempts for its labor force to organize a union. To remain competitive for the next five years and sustain its growing sales, SMC Company will have to address ...

Buying a New Car

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Depreciation is the decline in the value of your car. This decline begins as soon as you purchase the car and drive it home. The car continues to decline in worth as time goes by. Cars usually depreciate the most in the first two years. In general, a new car will depreciate 30 percent in two years. This means that in two years, a car you paid $15,000.00 for will be worth $15,000 (100% 30%) = $10,500.00.

Of course, the rate of depreciation varies widely, as does the actual resale value of that car. The resale value depends, in large part, on the condition of the car at the time it’s being sold.

Insurance rates are higher on a new car than on a used one. The reason is apparent—the new car will be more expensive to replace if involved in an accident. After weighing the facts, suppose you decide to buy a new car. So you rush out to the nearest showroom, right? Wrong. You rush out to your nearest newsstand, or search the Internet, to check out your options.

CHECKLIST FOR TEST DRIVING When you’re test-driving either a new or used car, be sure to check for the following: • How is visibility from the driver’s seat? Can you see clearly when using the inside and outside rear-view mirrors? • Do any of the windows cause distortion? • Is the ventilation system adequate without air conditioning? • Are the controls easy to see? Are they easy to reach, even with the seat belt fastened? • How does the seat fit you? Can it be adjusted to fit just right? • Is the motor quiet? • Do the brakes bring the car to a smooth stop in a short distance? • Does the power steering work with the ignition off? If you think about your personal circumstances and your type of driving, you’ll come up with additional questions for this list. For example, if you live in a hilly area, does the car have enough power to efficiently handle those hills?

Before you buy a new car, you should study consumer magazines and other publications that compare safety, performance (mileage and so on), and comfort of various makes and models of cars. Some of these publications are the Consumer Reports’ annual car issue, Consumer’s Guide’s auto series, and magazines like Motor Trend, Car and Driver, and Road and Track. Prices of cars and their available options are also found in periodicals like New Car Prices and Autofacts.

The Essay on Exchange Rate Euros Goods Price

Foreign Exchange Markets and Exchange Rates When Americans buy goods or services produced in foreign countries, they normally must first buy the currencies used in those foreign countries. For example, when an importing firm in New York buys European beer, payment to the European brewery must be made in euros, not dollars. Similarly, if a European resident wants to vacation in Florida or buy goods ...

2 Consumer Math, Part 3

Research Your Options

When you’ve studied the market, sit down and think about what you want in a car before going to look at new cars. You must decide • How much you can, or want to, pay for a car. How much money can you obtain for a down payment? What monthly loan payments can you afford?

• What optional equipment you want. Some options, such as a backup camera, are valuable for safety’s sake. Others, like heated power side mirrors, are fairly expensive to buy and repair. So, consider each option carefully before you talk to the car salesperson.

Now you’re ready to visit car showrooms—but only to look, not to buy. Try to choose those within a reasonable distance of your home since you’ll be going there for checkups, inspections, and repairs.

• What type of car you want. This will depend on how you’ll be using the car. You would want a different type of car for running around town than you would for long, frequent business trips. A two-door sports car is impractical if you have small children (Figure 1).

FIGURE 1—Many factors must be considered before making a car-buying decision.

Consumer Math, Part 3

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You may want to visit several showrooms and test-drive several different cars. Compare their passing and braking ability. Compare their prices, dealer preparation costs, warranties, and gas mileage ratings. Also, check the Web for information on the reputations of specific new-car dealers.

The Price

Now for the price you pay. Many factors will change that price: your ability to bargain with the salesperson, whether you’re buying a car the dealer already has on hand (he or she may be anxious to get rid of it), the time of year (salesmen are looking for sales during holidays and before the spring/summer rush), how popular a model is, and where you live (big-city dealers have higher overhead costs than those in the suburbs).

Once you have a firm price from a car salesperson, add the tax, car licensing fee, and registration fee to determine its full cost. Then go home and compare the price with those other cars you’ve shopped for. Finally, review all factors and decide which car you want. For example, let’s say Janice Lasso is going to buy a new car for $15,865.00, with options costing $732.00. The registration costs $30.00, the car license $25.00, and there’s a 5% state tax. How much does her car cost? Car plus options: $15,865.00 + $732.00 = $16,597.00 Total cost: $ 16,597.00 829.85 30.00 25.00 $ 17,481.85 State sales tax: $16,597.00 5% = $829.85

The Essay on How to buy car insurance

... consideration when buying car Insurance is price. According to Glenn Hardman at San Diego Insurance, ?There is no one company that has great rates for ... equipment installed or attached to the vehicle not factory or dealer installed. This will usually include rims, stereos and custom ... and is the amount of money you must first pay and the insurance will pay the rest. Deductibles range from $50 to $ ...

Before you go back to buy the car, you must decide on two additional factors—financing and insurance. Just as you’ve “shopped around” for the car, now you’ll shop around for financing and insurance.

Make the down payment as large as you can afford and the loan period as short as you can manage. Both will cut down on the finance charges.

If you pay cash for the car, that’s great. No finance charges will be involved. But most people borrow money to buy a car. When you have an idea what the car will cost, decide how much you can afford as a down payment. Then see which sources will loan you the rest of the money.

Financing

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Consumer Math, Part 3

Usually, the lowest interest rates can be obtained from a credit union (if you are a member) or a bank. The highest rates are usually from a car dealer or car finance company. Ask each possible loan source for its APR (annual percentage rate).

Let’s calculate the APR for financing a car that costs $9,685.00, on which the purchaser has placed $2,000.00 as a down payment and will borrow the rest. If there are monthly payments of $359.00 for two years, we would use the formula to find the annual, or yearly, percentage rate:

R= 2ml P(n + 1)

R m I P n R m I P n

= Percentage rate = Number of payments per year = Interest charges = Amount borrowed = Total number of payments

= Unknown percentage rate = 12 (payments are monthly) = $359.00 24 – $7,685.00 = $931.00 = $9,685.00 – $2,000.00 = $7,685.00 = 2 12 = 24

2 12 931 = 0.116, or 11.6% 7,685(24 + 1)

R=

To make an accurate comparison, be sure the amount of the loan and the repayment period are the same from each source. Write down the APR for each source to see which has the best—that is, the lowest—rate. Your listing might look something like this: Automobile Finance Company Bank A Bank B Car Dealer _______% _______% _______% _______% _______%

The Essay on Car Insurance

The most exciting moment of our life is when we learn how to drive and actually get on behind the wheel. Who wouldn't insist to learn to drive especially we turn to the age of 15 or 16. I was really excited when my dad taught me how to drive. When I actually started the first turn on the road, I realized that driving was not easy for me. Since that time, I had told myself that I should not drive ...

Credit Union

When you go back to the car dealer, you’ll already have decided where you want to obtain your loan.

There are several types of car insurance. You should be aware that some car insurance is mandatory, while some additional coverage is optional.

Car Insurance

Consumer Math, Part 3

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Collision insurance. When your car collides with another car or object, the insurance company pays for the damages over the amount of your deductible. The deductible, usually $100.00 to $500.00, is the amount of money you must pay before the insurance company picks up the balance of the claim. The agent lending you money to buy a car usually insists on collision insurance.

Liability insurance. The insurance company pays the claims against you if your car injures people or damages property. Comprehensive coverage. This covers your car if it’s damaged by fire or stolen. Medical coverage. This pays your medical bills if you’re injured in your car. Most states require liability insurance or proof that you could pay a claim. Some states have “no-fault” insurance laws, under which your insurance company pays you whether or not the accident was your fault. Your insurance agent will know your state’s requirements. Drive defensively and with care to minimize the number and severity of accidents you may have. Because, no matter whose fault the accident is, when you present a claim to your company, there’s a good chance your insurance rates will rise.

Drivers under the age of 26 pay the highest insurance rates because they have the highest accident rate. If you’re under 26, there may be ways you can save on insurance premiums. Check with your state insurance commission to see if there are lowered rates for taking driver education classes, defensive-driving courses, and so on. Regardless of age, you can save on insurance premiums—and the cost of a car—by buying a less expensive model.

Another way to decrease your insurance rate is by increasing your deductible. The deductible is the amount which you agree to pay whenever you have an insurance claim. But be sure that you have resources to pay the deductible amount in case you have a claim.

The Business plan on Term Insurance Life Permanent Policy

Why buy life insurance? Many financial experts consider life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways: Income replacement For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to ...

Now, armed with your decisions on a loan and insurance, you return to the car dealer. But before signing any papers and accepting the car, check the car to be sure it’s the one you ordered or the one you looked at before. Check with the salesman to see if the car has been serviced. If possible, get a signed copy of the dealer preparation checklist. This is a list of things the dealer is supposed to do when the car arrives from the factory.

Back to the Dealer

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Consumer Math, Part 3

Next, test-drive the car, again using the checklist for test-driving. If it’s possible, get any small problems corrected before accepting the car. If there are any major problems, don’t accept the car.

Buying a Used Car

Now, let’s look at buying a used car. A car depreciates the most in the first year or so. Therefore, you can save the most on the initial cost of a car by purchasing one that’s at least one year old. It’s important to determine that the car has been well maintained, however, or your savings could quickly evaporate. In the used-car marketplace, more than in any other area of purchasing, “Let the buyer beware!” You may be looking at a beautiful, shiny exterior that conceals any one of several problems including the following: • The car has been in an accident. • The odometer (mileage indicator) has been turned back (illegally, of course).

• The car may be a lemon (unable to be fixed, or requiring expensive repairs).

Used Car Guides

• The car may have been exposed to rough usage (a police car or taxi, for example).

Keep in mind that the “book” prices are just estimates. The price may be more or less, depending on the individual car’s condition and mileage, and the demand for that particular make and model. You can buy a used car from three major sources—an individual, a used-car dealer, or a new-car dealer.

Many of the new-car suggestions we’ve discussed also apply to the purchase of a used car. Shop around for the loan and insurance. Find the best rates for each, figuring out exactly what you want in a car. There are many used-car guides that will give you an idea of what a used car of a certain make and year might cost. Many banks use the National Automobile Dealers Association Used Car Guide. Consult that guide to see how much the bank would loan you on a certain car.

Sources

Individual. You may purchase a car from someone you know or from someone who has advertised a car for sale. These are private-party sales. You would probably be able to buy the car at a lower price from a private party than from a car dealer. Also, the individual may be willing to tell you about the car’s maintenance record.

Consumer Math, Part 3

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If the car is in good condition, it may be a good buy. But if not, you’ll have to pay for any necessary repairs—and you’ll have no contract or warranty.

Make sure the car owner has documentation to show that he or she owns the car. You’ll thus avoid taking possession of a car that may be stolen or is about to be repossessed by a finance company. Used-car dealer. Used-car dealers usually have reasonable prices, and they’ll help you with financing. But the financing rates will probably be higher than elsewhere.

Used-car dealers give limited warranties, usually 30 days or 1,000 miles. But used-car dealers often get their cars from wholesalers, and so they’re not always familiar with the former owners. Those cars may be damaged or abused, or may come from taxi companies or police departments. Also, the probability that the odometer has been set back increases when you buy a used car from a dealer.

You may want to consider asking the dealer for a vehicle history report from a company such as Carfax®. This could significantly lower your chances of buying a used car that is a “lemon.”

New-car dealer. Since new-car dealers sell used cars that are traded in, they often know the history of the cars and their maintenance records. If they’re willing to tell you, get the name and address of the previous owner of the car you’re interested in. Then you can talk with the owner and learn its repair history and how it was used. Also, you’ll find that the new-car dealer will have more complete facilities for repairs than does the used-car dealer. There are other sources for used cars that you might consider, such as rental agencies and government surplus.

Be sure to read the warranty if you receive one. Also, if any problems arise, get back to the seller within the warranty period. If you can’t obtain satisfaction, you might try your local consumer protection agency. You’ll find such agencies on the Web. Access http://www.usa.gov/directory/stateconsumer/ to retrieve an index of state and local consumer agencies. Before going on to learn about personal insurance, take time to complete Self-Check 1.

Regardless of the car’s source, be sure to test-drive it. Use the checklist given previously. If it’s at all possible, have a mechanic you trust examine the car. If that isn’t possible, ask a mechanic to tell you what trouble spots to look for. Or you can find a list of potential problem areas to check and test in consumer-oriented magazines from your library or bookstore.

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Consumer Math, Part 3

Self-Check 1

At the end of each section of Consumer Math, Part 3, you’ll be asked to pause and check your understanding of what you’ve just read by completing a “Self-Check” exercise. Answering these questions will help you review what you’ve studied so far. Please complete Self-Check 1 now. Questions 1–3: Answer the following questions. 1. Daniel Potter bought a new car for $16,000.00. Two years later, he wanted to sell it. He was offered $11,730.00 for it. If he sold it for that amount, what was his depreciation rate?

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2. Daniel is now going to buy another new car. It will cost him $17,855.00. The options he chooses add $625.00 to its cost. The car license and registration together cost $40.00. There’s a 6% sales tax in the state in which he lives. What is the total cost of the car?

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3. John Simone is buying a used car for a total cost of $11,805.00. He is making a down payment of $1,500.00 and borrowing the remainder. If he makes monthly payments of $343.00 for three years, what APR has he paid?

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Question 4–6: Indicate whether the following statements are True or False. ______ ______ ______ 4. An agreement between buyer and seller that the seller will pay for certain car repairs during a certain period of time is called a warranty. 5. The lowest interest rate for a car loan can usually be obtained through the car dealer. 6. The letters APR, related to a loan, stand for the yearly percentage rate.

Check your answers with those on page 39.

But before we discuss any specific type of insurance, let’s take a closer look at just what insurance is. This information will help you to understand and apply the material that follows.

YOUR PERSONAL INSURANCE

What Is Insurance?

All insurance is based upon a principle called division of risk. This means that if a loss to an individual or to several individuals is shared by a large number of individuals, the loss won’t be an excessive burden to anyone. We can illustrate this concept and show how it works by a very simple example.

Consumer Math, Part 3 9

Suppose that 1,000 people seeking protection from a common danger, such as fire, pay $1.00 per week into a fund. The total yearly contribution to this fund will be $52,000.00. It’s understood that they’ll use this fund to pay the losses incurred by any one of the contributors due to fire. Thus, if one of the participants suffers a loss, say of $5,000.00, they’ll pay him $5,000.00. In doing this, they’ve actually divided his loss among 1,000 persons so that each individual’s share is only $5.00.

Another basic concept of insurance is that there’s always a contract issued. Every person who’s insured or who buys insurance receives from the insurance company a contract called a policy. We often call the person who buys insurance the insured, and the company providing the insurance, the insurer.

It’s obvious that the larger the group of participants, the larger will be the total fund provided to meet the risks, and the greater will be the division of risk. All insurance is based on this concept of division, or distribution, of risk. Insurance companies are formed to receive the money paid into funds like the one in our illustration. These companies will invest the money received so that it will increase by earning interest. The insurance company will then pay the losses whenever they occur.

The insured and the insurer are required by the insurance policy to do certain things. The insured agrees to make a specified payment or payments called premiums, and the insurer agrees to pay for certain losses if they occur, up to an agreed amount, which is called the face value of the policy.

Life Insurance

The major reason for buying life insurance is to provide the insured person’s dependents with an income if he or she dies. How do you determine if you need life insurance? If someone will have a difficult time financially when you die, you need it (Figure 2).

If you have no dependents, you may still want enough insurance to cover your death costs and any debts you leave behind.

The beneficiary is the person or people to whom the face value of the policy will be paid. If no beneficiary is named in the policy, the amount of the policy is paid to the estate of the insured.

A life insurance policy is a contract that requires certain premium payments by the insured and obligates the insurance company to pay a certain sum called the face value of the policy when the individual dies.

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Consumer Math, Part 3

FIGURE 2—What are your insurance needs? What people depend on you for their day-to-day needs?

Actuaries (specialists in the mathematics of insurance) can predict with great accuracy how many deaths will occur in a large group of individuals each year. They can also estimate the life expectancy (how long a person will live) for a man or a woman of a certain age. By using these facts and some very complicated mathematics, actuaries can determine the rate of premium for the various kinds of life insurance policies.

With insurance such as fire insurance, the insurer pays a claim only when there’s a loss. You’ve seen this in the case of car insurance, since the insurance company must pay when, and if, an accident or theft occurs. It’s obvious that life insurance is different in this respect because the death of the insured is sure to happen, and the insurance company will be required to pay the entire face value of the policy, assuming the policy’s in effect at the time of death. Hence, the big question in life insurance isn’t if there will be a loss, as it is in auto insurance, but when the face value of the policy will have to be paid in full.

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Types of Life Insurance Policies

The common types of life insurance policies are term, whole-life, limitedpayment, and endowment life insurance. Term life insurance is sold for a fixed number of years. This type of insurance policy has no cash value, and no payment is made by the company unless the insured dies within the period for which the policy is in force. At the end of the term, both premiums and insurance cease. Premiums on term insurance are the lowest of all premiums, but you must remember that a term policy gives protection only for a limited time. This period of time may be one, five, ten, fifteen, or twenty years, and the premiums are due annually for the term of the policy. With whole-life insurance, the insured agrees to pay a specified premium each year until his or her death. The policy provides low-cost protection for the life of the insured.

A limited-payment life insurance policy requires premium payments for a fixed amount of time, such as 20 years, but you’re insured for your whole life. With endowment life insurance, you pay premiums and are insured for a fixed time, such as 20 years. At the end of this time, you’re paid cash for the amount of the policy. An advantage of whole-life insurance is that it accumulates a reserve of money that you can borrow. Or you can collect its entire cash value. But then, of course, you have no insurance protection.

Your Life Insurance Needs

To help you to determine how much insurance you need, list all the debts or obligations you would leave—a mortgage, car payments, education for your children, and so on. Then consider your assets—any savings or investments, social security benefits, retirement funds, and any benefits from a group insurance plan. Finally, consider how much it will take to keep your dependents financially secure until they can take care of themselves. Make these assessments before you seek out a life insurance agent to help you plan your insurance needs, so you’ll know specifically what those needs are. Try to find an insurance agent who has been around for a while, preferably two years or longer. You’ll also want one who has had professional training, which is indicated by the letters CLU (Chartered Life Underwriter) on his or her business card or letterhead.

The financial obligations of a young couple decrease as time passes and their children grow up and their mortgage is paid off. Thus, term insurance (with its lower premiums) might be a wise choice in their long-range insurance plans. Term insurance could be used in combination with a whole-life policy to increase coverage during the years of greatest financial obligation.

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Consumer Math, Part 3

Ask around about insurance agents, just as you would about car dealers. Your employer or someone experienced in the financial field may be able to recommend a good agent.

Life insurance rates vary from company to company, so you may want to compare rates. Since rates vary by the age of the insured and the type of policy, be sure you are comparing similar policies.

Insuring Your Personal Possessions

If you own a home, your house insurance probably covers your personal possessions—the contents of that home, such as furnishings, clothing, and so on—but check to be sure.

If you’re renting, you’ll need to purchase an insurance policy to cover your furnishings (if they’re your own) and your other personal possessions: clothing, jewelry, antiques, paintings, a boat, and so on. When purchasing insurance for personal possessions, be sure to check the policy to see which things are excluded from the policy. For example, the policy may limit or exclude coverage of such items as paintings, antiques, jewelry, and firearms. Also, determine if the property is covered when it’s removed from your home. For example, if you wear your gold earrings or cuff links to a party and they’re stolen, will your insurance cover the theft?

Health Insurance

Types of Policies

These days there’s a lot of discussion about the health-care industry. There are many different types of insurance companies offering varied levels of coverage. There are a wide array of options available, from HMOs and private insurance companies to Medicare and Medicaid.

Medical costs have increased dramatically in the last decade. Having to pay the cost of a major illness could bankrupt a person or family, so health or medical insurance is practically a necessity.

It’s most important for you to gather all information to make an educated decision. There are two types of health insurance policies that complement each other. The first type offers basic coverage. This type of insurance pays for at least part of the hospital costs and fees for the doctor, the surgeon, and other services while you’re in the hospital.

Consumer Math, Part 3

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The second type of policy offers major medical coverage. This type of insurance provides coverage (usually 75 to 80 percent) for major illnesses or accidents that aren’t paid for by basic coverage.

Which Policy Is Best for You?

Once again, the best advice is “shop around.” Not all policies offer the same rates or the same coverage. If you can obtain group coverage (from your employer, professional society, or other group), you’ll probably get lower rates. Your employer also might pick up part or all of the premium cost.

As an individual, look at well-established group plans like Blue Cross and Blue Shield. If the premiums are too high for your budget, shop around for lower rates. But remember that benefits usually decrease as rates do. No matter what health insurance policy you’re evaluating, consider the following items:

• Some policies have waiting periods during which any new illness isn’t covered. This waiting period could be from one month to six months from the policy’s date of enforcement. Usually, maternity coverage doesn’t begin for nine months to one year from that date.

• Read your policy carefully to be sure just what coverage is offered. You don’t want any surprises when you need to make a claim on your policy.

Changing Needs

Before going on to learn about savings and investments, take time to complete Self-Check 2.

Whatever policy you choose, be sure it includes basic hospitalization and major medical protection. Also, choose a policy in which exclusions, waiting periods, and clauses regarding preexisting conditions are kept to a minimum.

If you’re young, you may still be covered by your parents’ insurance. If not, you’ll have to provide your own coverage. If you marry and have children, be sure your policy includes your spouse and children. If you’re covered by Medicare (for those over age 65 or disabled), you may need to supplement it to cover the areas that Medicare doesn’t. That supplementary coverage usually can be obtained rather inexpensively from an organization such as Blue Cross.

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Consumer Math, Part 3

Self-Check 2

Indicate whether the following statements are True or False. ______ ______ ______ ______ 1. The major reason for buying life insurance is to save money regularly. 2. All health insurance policies offer the same rates and same coverage. 3. If you have homeowner’s insurance, all your possessions are insured under your homeowner’s policy. 4. When looking for an insurance agent, you should look for a person with the initials CLU after his or her name.

Check your answers with those on page 39.

YOUR SAVINGS

Acquiring the Savings Habit

Perhaps your “savings habit” started when you were a child and a wise grandmother gave you a toy bank with coins in it. Or perhaps your parents started a savings account for you, to which you added any gifts of money you received. Or maybe you opened your own savings account when you got your first baby-sitting job. As an adult, you need to continue that savings habit. Your savings will provide emergency funds or pay for something you want in the future.

A painless way to save is through a payroll deduction plan for savings bonds or a credit union. Inquire to see what possibilities your employer offers.

If you haven’t yet acquired the savings habit, begin today, or at least make the decision to start as soon as possible. Even if the amount you save seems ridiculously small to you, it’s a beginning. And, if you save regularly, every payday, you’ll be amazed at how those savings will mount up. Also, you’ll have acquired the ability to save, an asset you’ll possess throughout your life.

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Where Shall I Put My Savings?

You certainly shouldn’t keep your savings under the rug or in an old cookie jar in the kitchen. There are two reasons for this: first, the savings aren’t safe; second, hidden money doesn’t earn interest. You want your savings where it will work for you. But where? Today, there are many institutions and organizations competing for your savings dollars. So once again, you’ll “shop around” to see where your money will earn the most dollars. But there’s more to consider than the highest rate of return for your dollar. You must also decide how safe you want your savings dollars to be. Of equal importance is how easily you can get your money if you need it. So, let’s look at some of the places for saving money, such as commercial banks, savings and loan associations, credit unions, and U.S. savings bonds.

Commercial Banks

Commercial banks offer a wide range of services for your banking needs— checking accounts, savings accounts, loans, and so forth.

Since the rate of interest paid on a savings account varies from bank to bank, check to see which bank in your area offers the highest rate. In addition, it’s important to inquire as to how the interest is computed, when the interest is compounded, and when it’s credited. How the interest is computed. Some banks pay interest on the lowest balance in the account during the interest period. Others pay from day of deposit to day of withdrawal, which is a better arrangement for you.

When the interest is compounded. Compounding is calculating interest on the interest. The more often the interest is calculated, the higher it will be.

The checking account is a demand deposit—that is, you can withdraw money from it whenever you write a check. But the savings account may have some strings attached to it. Some banks charge a fee if you make several withdrawals from a savings account during one interest period. Other banks require a minimum balance before they pay any interest.

When the interest is credited. The interest is calculated but not put into your account until it’s credited to your account. Daily crediting, of course, is best.

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Commercial banks also offer certificates of deposit (CDs) that carry a high interest rate. But they also carry a heavy penalty if you withdraw your money before the end of the period you agree to. So ask questions about all of the points mentioned before you choose a commercial bank for saving your money. The accounts in most commercial banks are insured by the FDIC (Federal Deposit Insurance Corporation) for up to $250,000.00 per account (or one depositor’s total accounts in one bank).

Credit Unions

A credit union is a group of people who agree to save their money together and to make loans to each other at a relatively low rate of interest. Usually, there’s a common bond between members—they work together or belong to the same professional union, club, or church.

The interest rates on savings in a credit union are usually higher than those of other savings institutions. And individual accounts are insured in most credit unions, just as they are in commercial banks. One advantage of belonging to a credit union where you work is that the money usually can be deducted from your paycheck. Another is that you can easily get a loan when you need it.

U.S. Savings Bonds

Savings bonds are issued by the United States government, with a promise to pay a certain amount to the holder of the bond on a certain date. The buyer of a Series EE bond is paid a fixed rate of interest for up to 30 years. Series EE bonds are a safe investment and provide a way to save small amounts regularly, especially if your employer has a payroll savings plan. The interest on Series I savings bonds is calculated by combining a fixed rate and the inflation rate. The rate can and usaully does change twice a year. Interest can be earned for up to 30 years. Each type of bond can be cashed in after one year. But if cashed before five years, three months interest will be deducted.

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Investments

When you first begin saving your money, you’ll want to put it in a comparatively safe place, such as those just mentioned. That money then will be readily available for your short-term personal needs. Those savings places are safe, but they don’t allow your money to grow as fast as it could. Depending on the current inflation rate, your money could actually be shrinking, not growing—for example, if your savings yield 5% interest and the inflation rate is 8%. To make your money grow, you want to obtain an interest rate greater than the inflation rate. To achieve this goal, you must invest your money. Investing money involves a degree of risk—you may lose your money. Therefore, you shouldn’t invest money that you can’t afford to lose. Most financial advisers suggest that you should save enough money to cover expenses for six months before considering investing.

Let’s say that you’ve saved regularly and you now have enough money to live on comfortably for six to eight months if your present income were cut off. You may also have saved enough for that newer car you want to purchase, or for that trip to the Bahamas next winter. That takes care of next year. But what about beyond that? Do you want to make a further effort to ensure your future with an income beyond what you actually earn? If so, then you’re ready to invest your money. You also are ready to set some financial goals. How much of your income are you willing to set aside for savings and investment purposes? Ten percent? Five percent? Determine the amount that you can live with and discipline yourself to stick with it. Next, determine how much you’ll put into savings and how much you’ll invest.

Once you’ve decided upon your goals, you must decide how much of a risk you’re willing to take. All investments involve an element of risk, but some are riskier than others. However, the greater the risk, the greater the reward may be. You must weigh the risk against the potential return.

Now decide what your investment goals are. These goals may be for short-term fast growth, for steady long-term growth, or for a flow of interest on dividends as income. Younger people, especially if they’re single or newlywed, will probably want short-term fast growth. But most people, especially as they approach middle age, want steady long-term growth that will make life a little easier financially as they grow older. Older investors are interested in the income their investments will provide, to supplement their decreased income at retirement.

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Once you’ve decided that you do want to invest some of your savings or income, your next step is to learn about the investment market. This will be a lifelong, continuing process, especially if you want to closely supervise your investments.

First, you should become aware of the world around you and of general economic trends. Read a daily or weekly newspaper, such as the New York Times, that has a good financial section. This section will contain information about current economic and business conditions, as well as current stock market quotations. You might also want to read a weekly or monthly business magazine, such as U.S. News and World Report, to become aware of broader business trends and what’s happening in the marketplace. Once you’ve familiarized yourself with the current economic climate, it’s time to gain a basic understanding of the stock market.

The Stock Market

When a new company is formed, or an already established company needs money for expansion or for an expensive project, it may decide to seek that money from outside investors. In exchange for money, the investors are issued stock, a share in the company’s ownership. If the value of each share of stock is stated on the stock certificate, this value is the par value of the stock, and the stock is called par-value stock. On the other hand, if no value of the shares is given on the stock certificate, the stock is called no-par stock.

Kinds of Stock

Preferred stock. Preferred stock has a definite dividend rate that must be paid before any dividend is paid on the common stock. The rate of dividend is often given when we speak of such stocks. For example, “6% preferred” is stock that will receive as interest 6% of the par value. These dividends aren’t guaranteed, but if any profit is to be distributed, the stockholders having preferred stock must be paid before a dividend is declared on common stock.

Common stock. This type of stock receives an equal part of the profits on each share to be distributed after all other obligations of a company have been satisfied. Thus, if there are 1,000 shares of common stock, and if $5,000.00 is to be distributed to the holders of this stock, each share will receive a dividend of $5.00. If the par value of the stock is $100.00, the company may declare a dividend of 5% instead of $5.00 per share. Notice that 5% of $100 and $5.00 mean the same thing.

The main classes of stock, based on the way dividends are paid on the stock, are common, preferred, and cumulative preferred.

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Sometimes, the dividend paid doesn’t equal the rate stated on the stock. That’s a chance that the owner of preferred stock must take.

Cumulative preferred stock. This is preferred stock on which unpaid dividends may accumulate. That is, if the full dividend wasn’t paid, the unpaid part of that dividend—as well as any additional dividend due— must be paid when the earnings of the corporation are sufficient to do so.

The people who make a business of buying and selling stocks are called stockbrokers. Stockbrokers charge a fee for buying or selling for others. This fee is called brokerage and may be stated in terms of so many cents per share or as a percent of either the selling price or the purchase price. If you turn to the stock quotations on the financial page of your newspaper, you’ll see figures like 55, 44 , 32, and so forth. These prices are the market values, or the market prices, of the stock listed. If you read these quotations for several days, you’ll notice that the market values of some stocks change from day to day. This change in price is due to market conditions—a reflection of the eagerness of people to either buy or sell certain stocks. When the market value of a stock is greater than the par value, we say that the stock is selling above par. When the market price is less than the par value, the stock is selling below par. Investors buy stock with two thoughts in mind. One is to have their investment earn a good rate of interest in dividends; the other is to have their investment increase in value because of a rise in the price of the particular stock they bought. In other words, they hope that the corporation will continue to pay good dividends or that the market value of the stock will go higher. If you bought stock for this latter reason, you would probably sell it when the market value had increased enough to give you a desirable profit.

Buying Stocks

For example, suppose that Mr. Jones bought 100 shares at 15 1/4. This means that he paid $15.25 per share, or a total of $1,525.00, not counting the brokerage fee. Let’s imagine that the market price of this same stock rose to 19 1/8 in several months. Now Mr. Jones can sell his 100 shares of stock for $1,912.50, which will give him a profit of $387.50, or 25.4%, on his original investment. Of course, payment of brokerage fees, both on the purchase and on the sale, and the taxes collected by state and federal governments on the sale of stocks would decrease the profit somewhat.

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Don’t jump to the conclusion that buying stocks is the complete answer to your investment needs. And don’t let the preceding illustration blind you to the possibility that Mr. Jones might have lost money. If the market value of his stock had dropped a few points, or if the company had paid no dividends, he wouldn’t have sold at a profit, nor would he have received any interest on his investment. That’s the lure of the stock market. You never know for sure just what the stock is going to do—go up or down. The risk involved is balanced by the hope that you can buy low and sell high.

The Stockbroker

Perhaps you’ve studied business and economic conditions and followed trends in the stock market. That’s fine. You now have a feel for what’s going on. But perhaps you can’t (or shouldn’t) decide which stock is best for you all by yourself yet. You need some professional help. The best source for this help is a reliable stockbroker.

At the beginning of your investment career, you would probably be wise to find a full-service broker. In addition to access to the market, they can offer you experience, a research staff, and other information. A discount broker, whose fee may be lower, will probably offer only access to the market, without any consultation or advisory services. Also, you’ll probably want a broker or brokerage house with branches throughout the country and with a seat on one of the national markets, such as the New York Stock Exchange.

You should be aware that brokers have conflicting interests. On one hand, they’ll advise you on what and when to buy or sell. On the other hand, their salaries are based on the quantity of stock that they’re able to buy or sell for you. It may happen that a broker’s suggestions to buy or sell may be motivated by desire for commission, rather than by your best interests. So, it’s important that you find a reputable broker. You can inquire about them through the people you trust who are engaged in handling finances.

The New York Stock Exchange is one of two national markets where the stocks of the largest companies are traded each day. (The other large exchange is the Nasdaq.) The stocks of smaller companies are traded on regional exchanges located in cities such as Boston, Los Angeles, Chicago, and Philadelphia. Some stocks are sold via computer and telecommunication transactions—the “over-the-counter market.” You can track the action of stocks daily in the financial section of any major newspaper.

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The essential difference between stocks and bonds is simply that stocks represent ownership and bonds represent a particular kind of debt incurred. You learned earlier that a stockholder is a part owner. Now you’ll see that a bondholder is a creditor. A bond is a long-term promissory note issued by a government (federal, state, city, county, and so forth) or by a corporation for the purpose of borrowing money. Bonds are issued with a par value, or face value, of usually $1,000.00 or more. Most bonds provide for a definite rate of interest, which is generally paid semiannually.

Bonds

The maturity of a bond is the date on which the organization promises to repay the amount borrowed. The term of a bond is somewhere between 10 and 50 years.

Bonds are referred to by naming the issuing company, the rate of interest, and the maturity date. Thus, 4% bonds of the LOD Railroad maturing in 2020 would be called “LOD 4% – 20.” Also, when bonds are quoted at 96 1/ , 2 for instance, it means that the price is $96.50 for each $100.00 of par value.

Bonds, just like stocks, are bought and sold through brokers who charge fees for their services. Taxes and other charges are additional expenses that enter into every bond transaction. Bond prices fluctuate on the market just as stock prices do. Here again, these price changes reflect the eagerness of the owners to buy or sell, exactly as they do in the case of stock prices.

Bonds are considered safe and conservative investments for people who are more interested in a steady income than in rapid growth. However, bonds carry some risk, just as any investment does. Will the bond issuer be able to pay interest and repay the loan? Also, if you have to sell the bond before it’s due, what price will you get? To find out how good a risk a company or government is, you can consult a service, such as Standard and Poor’s or Moody’s, for their rating of that company or government.

The price you’ll get if you sell your bond before it’s due depends on the current market. If bonds are being sold at a higher percent interest than yours, you’ll have to sell yours for less than its face value. If bonds are being sold at a lower interest, then you may be able to sell it for more.

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Mutual Funds

What Are Mutual Funds?

When you start to invest, you may have limited funds at your disposal. So, you may have to limit your investment to one stock, rather than the safer alternative of owning stocks from several companies. Also, perhaps you don’t have the time or aren’t really interested in studying the market. Or maybe you haven’t found a broker that you feel is right for you. For these reasons, you may be interested in mutual funds. A mutual fund is a company or organization run by investment managers. Along with thousands of other investors, you buy shares in the fund. Your money is then invested by the managers in a diversity of stocks, bonds, and other securities. This ability to diversify, along with the intelligent management it provides, gives the mutual fund an advantage that the individual investor doesn’t possess.

You receive dividends from your mutual fund shares, just as you do from other investments. You can either collect those dividends or reinvest them.

A guide to mutual funds is published each year by Morningstar. It provides ratings of performance by various mutual funds.

Mutual Fund Fees

Some of the mutual funds, called load funds, carry a service charge, which is a percentage of your investment. For example, if Jane Benton invested $2,000.00 in the Grant Mutual Fund, which carries an 8% sales charge, she would calculate it this way: Sales charge: 8% of $2,000.00 = $160.00 Actual investment: $2,000.00 – $160.00 = $1,840.00

No-load funds carry no sales charge, but you may have to pay an annual management fee. So, if Jane also invested $2,000.00 in the Black Mutual Fund, which carries a 0.5% management fee, her fee would be 2,000.00 0.5% = $10.00.

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Types of Mutual Funds

Three common types of mutual funds are:

• Growth funds invest in stocks and bonds that will increase in value, rather than generate dividends.

• Income funds, as the name implies, invest in stocks that will generate steady dividends.

• Money market funds, during times that interest rates rise rapidly, provide larger dividends than other investments. During times of falling interest rates, though, the value of the funds decreases. But the rate of interest paid will still be comparatively higher than other investments.

Reevaluating Your Investments

Just as you need to reevaluate your budget from time to time, so you’ll also need to reevaluate your savings and investment portfolio (your collection of savings and investments).

Your salary may change, your status may change (if you get married or have a child), economic conditions may change, and so forth. So, you would be wise to go back periodically (perhaps once or twice a year) and reexamine your original goals to see if they need changing. Do you have more or less money to invest? Will your excess funds soon be used for mortgage payments rather than a mutual fund? You should examine these and other aspects of your life to see how they affect your financial planning. Adjust your goals to current conditions. Then see what changes may be needed in your savings and investment program. Seek help from someone whose financial know-how you trust. Then, make the necessary changes.

Your income at retirement could come from one or more of these sources: social security benefits, a company or union pension plan, or your investments. Let’s take a brief look at each.

“Retirement?” you say. “But I’m half a lifetime away from retirement.” That may be true, but you’ll probably spend a quarter of your life in retirement. So, your retirement planning should begin when you start working.

Retirement Planning

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Social Security

The FICA tax to which you must contribute each payday (by law) may enable you to collect social security benefits someday. You’ll receive full monthly benefits if you retire at age 67, and reduced payments if you retire from age 62 through 66.

Even with full benefits, you may find your social security check insufficient to cover your living costs. Therefore, you should plan now for some supplementary income to make your life more pleasant upon retirement. Two possibilities are pension plans and investments.

Pension Plans

You may work for a company or belong to a union that has a pension plan. The amount of your pension is usually determined by the number of years you work for an employer, your average salary, and the vesting provisions. Vesting means a period of time must elapse before you’re entitled to benefits upon retirement. Each plan has its own vesting requirements. In one plan, you may be vested, or entitled to benefits, after 20 years. In another, you may be vested a certain percent for each year you work.

For example, let’s say Betsy Wilson’s company has the following vesting procedure for its pension plan: Employees are 50% vested after ten years and vested 5% more each subsequent year. After ten years, 100% – 50% = 50% vesting remains. So at 5% a year, the remaining vesting will take 50% 5% = 10 years. Therefore, total vesting will take 10 + 10 = 20 years. Carefully read your employer’s pension plan, if there is one, to see just what conditions it sets forth. You’ll probably find that you lose your pension benefits if your employment is interrupted.

Your vested benefits are insured by a public corporation, just as the FDIC insures your bank savings. If your company goes bankrupt, you’ll still receive your benefits.

In addition to social security and pension benefits, you may, upon retirement, receive income from any investments you’ve made. The profits from most of those investments are taxed as income. But what if there were an investment where the taxes were deferred until a later time—say retirement, or age 70? Theoretically, at that age your income would be less and you would be in a lower income bracket. There is such a tax-deferred investment—an IRA (Individual Retirement Account).

This type of arrangement is called a tax shelter—probably the best one available to you as an individual investor.

Investments

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You can invest up to $5,000.00 per year in an IRA. Not only can you deduct $5,000.00 from your income on your federal income tax form, but you can defer taxes on your money’s earnings. The IRA funds rapidly increase in value, as interest is compounded (interest on interest) on your earnings. The $5,000.00 ceiling will probably increase with time. If possible, you should invest the maximum amount allowed each year. Before going on to learn about using a calculator, take time to complete Self-Check 3.

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Self-Check 3

1. The Buzz Tool Company issued 1,000 shares of common stock. If the total value of this issue was $50,000.00, what is the par value of each share?

__________________________________________________________

2. If the Buzz stock is quoted at 49 1/4, what is the market price?

__________________________________________________________

3. Is the Buzz stock selling above or below par?

__________________________________________________________

4. If the Buzz Tool Company has just declared an annual dividend of $5.00 per share, what will the dividend be on 20 shares?

__________________________________________________________

5. Suppose you paid 41 1/8 for 72 shares of Buzz stock and sold them at 49 1/4. If the total brokerage fee was 1/8 dollar per share and all other charges amounted to $32.52: a. What was the amount of your profit? ______________________________________ b. What was the percent of profit, based on your investment? ____________________ State whether each of the following is primarily a savings (S), investment (I), or retirement (R) device, by placing the appropriate letter in the blanks provided. ______ ______ ______ ______ 6. Corporation bonds 7. IRA 8. U.S. Series EE bonds 9. Savings account

______ 10. Common stock ______ 11. Mutual funds ______ 12. Credit union ______ 13. Savings and loan association Check your answers with those on page 39.

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USING A CALCULATOR AND COMPUTER FOR CONSUMER MATH

Your Calculator

Up to this point, we’ve recommended that you not use an electronic calculator for your math operations. The reason was that we wanted you to do the math yourself, so that you would better understand the processes. But once you have a firm understanding of the procedures, you can save considerable time by using a calculator. A calculator works quickly and accurately to solve a wide range of math problems for you. There are many types of calculators, each suited to the math needs of the user. The simplest calculator is capable of doing basic mathematical operations—addition, subtraction, multiplication, and division—plus square roots and percentages. Other, more complex calculators will have additional keys for higher math, such as trigonometry, and for scientific or business operations. Before you buy a calculator, think about the type of problems you’ll be solving on it. Then find one that will perform those necessary operations.

How to Use a Calculator

Although calculators differ in the placement of certain keys, the numbers 1 through 9 are usually placed in the same pattern.

Also, every calculator is turned on by pushing the key marked ON/C. The C on the key stands for the clearing function. If you enter a number incorrectly or wish to clear the display panel, you can press the ON/C key.

Let’s see how the calculator can be used in some practical, everyday situations. Suppose that Amy had a checkbook balance of $185.00. She then wrote a check for $98.50 and deposited $45.00. What would her new balance be? New balance = Old balance – Withdrawals (Checks) + Deposits New balance = $185.00 – $98.50 + $45.00

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Let’s solve this problem using a calculator. [ON/C] [185] [–] [98.50] [45] [=] Keystroke 131.5 Display

Description

Now, let’s say that Mark is considering buying a used car costing $4,500.00. How much state sales tax will he pay on it if the rate is 6%? Also, what is the total cost of the car, including the tax? Let’s use a calculator to determine the tax due and the total cost of the car. Keystroke [4500] [ ] [.06] [=] Display 270 Description

Press the on/clear button [+] to turn the calculator on. Then enter 185 minus 98.50, plus 45. Press the [=] key to get your answer. Answer: Amy’s new balance is $131.50

[+] [4500] [=]

4770

You need to multiply $4,500 times the 6% sales tax. Remember to convert 6% to .06 before multiplying. Mark owes $270.00 in sales tax.

For our last example, Judy is spending $25.00 of her $268.00 weekly salary on car payments. What percent of her income goes to car payments? Keystroke [25] [ ] [268] [=] Display 0.093283582 Description

Now add 4,500. Answer: The total cost would be $4,770.00.

If your calculator has keys in addition to the ones mentioned, read the instruction booklet that comes with your calculator to learn how they work. Some of them will prove quite useful—for example, if your calculator has parentheses keys, you’ll be able to perform several steps in one line.

Some calculators turn off automatically after a few minutes of not being used. But it’s a good idea to develop the habit of pushing the OFF key whenever you finish your calculations.

Using the formula R = P/B, divide 25 by 268. Round off the answer. Remember that 0.09 is 9%. Answer: Judy’s car payment is approximately 9% of her weekly salary.

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Computers Are Everywhere

Almost every time you open your mailbox, go to the bank, use your credit card, or play a video game, you’re interacting with a computer. The mailbox probably contains computer-generated bills and sales letters (Figure 4).

The bank computer is keeping track of that deposit you put in your savings account. The computer checks your current credit status when you attempt to use your credit card to buy something. And, of course, the computer is programmed to play that video game with you. You don’t often think about it, but computers are everywhere—in schools, medical offices, markets, gasoline stations, accounting offices, spaceships, cars, ovens, and even coffeepots. Computers can be used to simulate reallife situations, or to edit and process typeset material for newspapers and textbooks. They can easily transpose music from one key to another, or even be programmed to write music.

FIGURE 4—Most bills coming to your home or business are computer generated. The computer figures the amount of the bill, addresses it, and includes the appropriate message.

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Computers do a tremendous amount of work quickly and efficiently. They can perform calculations quicker than calculators and with less human assistance. They influence, control, and regulate almost all human activities. Computers will continue to influence your job, your home life, and your recreational activities more and more. Who knows? You may soon be programming a personal home computer to help assemble your budget, or that Master Financial Plan that we’ve mentioned.

Because of the increasing importance of computers, you should have at least a basic understanding of what a computer is and how it works. Then, when the time comes for you to use one, you’ll feel that you’re meeting someone with whom you have a nodding acquaintance, rather than a total stranger.

What Computers Do

The basic functions of computers are

• Accepting information that tells them how to operate • Taking in data from one or more sources • Processing data according to instructions

• Storing data, temporarily or permanently

In summary, computers manage data and information.

• Sending data to devices that display the data (for example, television screens and monitors) or to instruments which print or record the data

Your Computer

If you haven’t learned already, you’ll undoubtedly discover how to take advantage of the tools provided by computers. You may use it in your job or your leisure activities. Or you may decide that you want to get more use out of your computer. Your computer can be used for budgeting, storing files, and stock analysis.

If you go to your electronics store to look at computers, you may be overwhelmed by the wide variety from which to choose. So, it would be wise to do a little homework before shopping for a new computer, just as you would when purchasing a new car. First, let’s take a look at a computer system—the complete system you would need to receive, process, and store information. A complete system is comprised of several main components, or parts: • Input devices—Components such as the keyboard and the mouse are used to enter information into the computer.

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• Processing devices—Every computer has a central processing unit (CPU), which is the computer’s “brain.” The CPU processes information in many, many ways. Remember, however, that the CPU performs the instructions you give it; it can’t think or reason the way a human brain does. • Output devices—Information retrieved from a computer is called output. This information can be displayed on a video monitor or printed by a printer.

• Storage devices—Information can be stored on a hard drive, which is usually inside the main computer case, on memory sticks, or on CDRoms.

HARDWARE AND SOFTWARE What are the differences between hardware and software? Hardware refers to the actual equipment used, such as the computer, monitor, or automatic printer. Software refers to the sets of instructions and programs by which the equipment is directed to perform tasks. The instructions are usually in code form or computer language. For example, software may be in the form of an accounting program by which batches of data are sorted out in certain patterns and summarized in hard-copy form.

Before selecting a new computer, you’ll want to decide what you expect to come with your computer. The following are just a few questions to consider. Which type of operating system (OS) are you comfortable using? Do you prefer a laptop or desktop? How much storage do you want? Do you need a printer? You’ll want to take an even closer look at computer systems. You can do this by consulting magazines or Web articles. Make sure the information is current and the publisher is trustworthy. Computers are being improved so rapidly that it may take only a few months to make reference material outdated.

Make notes as you study the computer market and decide what components you’ll need. Then go to several electronics stores that sell those components. Talk with salespeople to see what advice they give you. Then go home and think about what you’ve learned. Decide exactly what you need before you purchase your new computer system. Before going on to develop a “master plan,” take time to complete Self-Check 4.

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Read the findings and reports in publications such as Consumer’s Guide or Consumer Reports. Popular Computing and PC Magazine are also excellent sources of information.

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Self-Check 4

Questions 1–5: Solve the following problems using your calculator. 1. Daisy tells you she is using 8% of her $220.00 income for clothing. How many dollars does this represent?

__________________________________________________________

2. Mary mentions that she spends only 5% of her weekly income on entertainment. You know that she usually spends about $10.00. What is her weekly income?

__________________________________________________________

3. Jim wants to buy an electric saw marked $98.00. If the salesman offers him a discount of 15%, how much will he have to pay for the saw?

__________________________________________________________

4. A room is 5 ft 6 in. by 9 ft 9 in. wide. How many square yards of flooring are needed?

__________________________________________________________

5. Paul worked 43 hours at a rate of $7.25 for straight time (40 hours) and time-and-a-half for overtime. What was his total pay?

__________________________________________________________

Questions 6–8: Indicate whether the following statements are True or False. ______ ______ ______ 6. Looking through consumer magazines is a good way to find out about the best computers available before you purchase a new computer. 7. Computer software consists of equipment such as the video monitor and printer. 8. You can use a computer to develop a personal budget.

Check your answers with those on page 40.

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YOUR MASTER PLAN

Beginning Your Plan

By now, you’ve considered all aspects of your life that involve finances— your job, purchases, financial records, budgets, home, car, life insurance, and savings and investments. Now let’s take an overview of your finances and see how they all fit together. You then can develop a master plan for your financial spending.

You’ve learned about budgeting, which involves determining how much you make each week or month. You learned to calculate your income and plan for expenses. Your master plan will go beyond your weekly or monthly planning. It will help you to think about goals for a longer period of time— for a year, or for several years.

A Little Dreaming

First, sit down and think about your long-range plans, some of the things you would like to do or to have. Do a little fantasizing: “If I could, I’d like to . . .” Go to college? Travel to Hawaii? Buy a recreational vehicle? Pay off debts? Get a new wardrobe? Or maybe something more practical and closer to home, like upgrading the quality of your food or home? New menus or slipcovers may temporarily help in these areas. People’s goals vary tremendously. It’s what’s important to you that matters. Now, write down all of your ideas. Choose several that you feel are within your financial grasp. List the ideas in the order of their importance to you. For example, Number 1 should be the idea that’s most important to you. If you share a budget or plan with someone else, you may want to make separate lists of ideas. Then compare them and discuss how you can adjust the differences.

Goals

Now, look over your list and see if these are the ideas that you really want to turn into long-range goals. Next, estimate how much each goal will cost. Then determine how long you’re willing to wait to achieve each goal. Divide the cost by the number of years for your plan, and see how much you’ll have to save each year to reach the goal if you decide to save for it instead of borrowing the money. You may decide to borrow the money and obtain your goal right away.

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If so, determine how much the loan will cost you in payments.

For example, let’s say that Don wants to buy a travel trailer in three years, when his children will be old enough to enjoy a camping vacation (Figure 5).

The vehicle he’s interested in costs $19,000.00. He figures that in three years the price will rise, because of inflation, to about $21,500.00. He wants to save enough money in those three years to make the down payment for a third of the cost. Let’s determine how much Don must save every year. Down payment = 1/3 of $21,500.00 = $7,166.67 Savings per year (for three years) = $7,166.67

3 = $2,388.89

FIGURE 5—Perhaps you would like to enjoy camping with your family or friends. Setting goals will help you realize your dreams.

Consumer Math, Part 3

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Adjusting for Goals

Once you’ve decided how much your goal or goals will cost, return to your annual budget. (If it’s a monthly budget, multiply by 12; if it’s a weekly budget, multiply by 52 to find the annual savings.) Are the savings you’ve already planned for sufficient to meet both your emergency needs and your savings for your goal? If not, you may have to take a closer look at the flexible expenses in your budget to see where you can trim spending to increase your savings. Take the flexible-expense section of your budget and list the categories in the order of their importance to you. Is recreation more important to you than education? Do household repairs take priority over your gift-giving? When you’ve listed the categories in order of importance, take the lowerpriority categories and see how you can reduce the money you spend there. Can you trim $250.00 from gift-giving by making some presents yourself this year? Join a car pool to cut your transportation costs? Find a co-op or discount store to lower the cost of household supplies? If the goal is one you really want to achieve, you’ll learn to be creative in trimming your expenses.

At this point, you may be thinking that long-range planning is rather involved. It may seem so in the beginning. But with practice you’ll learn to plan more easily the steps necessary to achieve your goals. And if those goals are important to you, you’ll work to achieve them. Half of the pleasure of working with goals is dreaming and planning to achieve them. The other half is in achieving them! You must review your master plan often, just as you do your weekly or monthly budget. Are you achieving your goals? Do they need revising?

Help with Your Master Plan

You’ll find that there are some devices you can use, or steps you can take, to help in your budgeting and planning:

• A planning center in a quiet corner of your house where you can keep all records and bills together will shorten the time you need to handle your finances. Provide yourself with a flat surface upon which to write, a chair, a place to keep “current” bills (variety stores sell holders for mail and bills), a file case or deep drawer for important records, and a record book. (Incidentally, when you receive a bill, open it and write its due date on the envelope. You can then file your bills in your “current bills” holder by due date so you won’t miss one.)

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Consumer Math, Part 3

• A simple calculator will make your math operations a lot easier.

• If you already have a computer or are thinking of buying one, invest in a program for setting up your budget on the computer. These programs are great time-savers once they’re set up. • Are you in debt? Do you need assistance in digging your way out? You might get help from a community family-service agency, financial planner, or credit union if you’re a member. They’ll help you set budget and master-plan goals. Once you’ve set up your goals, you’ll find it easier to cope with your money concerns. You’ll know that you’re doing something positive to improve your financial situation.

When you’ve applied the planning and spending principles you’ve learned, you’ll find that you’re slowly but surely gaining control of your finances. With intelligent planning and frequent review, you’ll find that you know where your money is going, and that you’re directing your spending and saving. And that’s the way it should be. Money should be your servant, not the other way around. Take time now to complete Self-Check 5.

Self-Check 5

Questions 1–3: Indicate whether the following statements are True or False. ______ 1. After you determine a long-range goal, you need to estimate how much money and time you need to reach that goal. ______ 2. If your present savings aren’t enough to meet both your emergency needs and your goal allotment, you’ll need to look at your flexible expenses to determine where you can trim spending to increase savings. ______ 3. Using a budget program for a personal computer is tedious and time-consuming and is better left to the professionals. Check your answers with those on page 40.

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NOTES

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Consumer Math, Part 3

SELF-CHECK ANSWERS

1. Daniel sold the car for 11,730 = 0.73 or 73% of its original value.

16,000

Self-Check 1

1

2. $49.25 4. $5.00

$50,000.00

Self-Check 3

1,000 = $50.00

2. The basic car including options costs $17,855.00 + $625.00 = $18,480.00. The sales tax is $18,840.00 6% = $1,108.80. Thus, the total cost of the car is $18,480.00 + $1,108.80 + 40.00 = $19628.80.

2ml 3. R = P(n + 1) R = Unknown rate P = $11,805.00 – $1,500.00 = $10,305.00 m = 12 I = $343.00 36 – $10,305.00 = $2,043.00 n = 3 12 = 36

2 12 2,043 R= = 0.129, or 13% 10,305 (36 + 1)

Thus, the depreciation rate was 100% – 73% = 27%

3. Below par

5. Initial investment: $41.125 72 = $2,961.00 Selling price: $49.25 72 = $3,546.00 Total brokerage fee: $0.125 72 = $9.00

20 = $100.00

b. Percent: $543.48 6. I 7. R 8. S 10. I 11. I 9. S

a. Profit: $3,546.00 – $41.52 – $2,961.00 = $543.48 $2,961.00 = 0.1835, or 18.4%

Total expenses: $9.00 + $32.52 = $41.52

4. True 6. True

5. False

1. False 2. False 3. False 4. True

Self-Check 2

12. S 13. S

39

Assuming that your calculator is a basic one, pressing the following keys will provide the correct answers. 1. P = rb = $220.00 8% = $17.60 ON/C 220 .08 = $17.60 2.

b= p 10 = = $200.00 r 5%

Self-Check 4

1. True 2. True 3. False

Self-Check 5

3. $98.00 – 15% of $98.00 = $83.30 Step 1: ON/C 98

ON/C 10

.05 = $200.00

Step 2: ON/C 98 – 14.7 = $83.30 Total 4.

1 3 9 9 (9 sq ft = 1 sq yd) = 2 4 5.958333 square yards (rounded to 6 square yards) 5

1.5 = $14.70 Discount

5. (40.00 $7.25) + (3 $7.25 $290.00 + $32.625 = $322.625 $322.63 Total pay Step 1: ON/C 40 pay Step 2: ON/C 3 Overtime pay

ON/C 5.5 3 9.75 4 9 = 5.958333 square yards (rounded to 6 square yards)

1.5) =

7.25 = $290.00 Regular 1.5 = $32.625

7.25

6. True 8. True

Step 3: $32.625 (still displayed) + 290 = $322.63 (rounded)

7. False

40

Self-Check Answers

Bond An interest-bearing certificate issued by a government or corporation for the purpose of borrowing money. Computer A programmable electronic device that stores, retrieves, and processes data. Deductible The amount an insured must pay before the insurance company pays any damages.

Glossary Glossary

41

Depreciation The decline in value of personal property, such as a car.

English system Common name for the system of weights and measures currently in use in the United States. The English system includes such measures as pounds, gallons, miles, bushels.

Endowment life insurance Insurance providing for an amount payable to a designated beneficiary upon death of the insured or at the end of a specified period. Premiums are paid and coverage is provided for a fixed time. At the end of this time, cash is paid for the amount of the policy.

Limited-payment life insurance Insurance providing for payment of an amount to a designated beneficiary upon death of the insured. Premiums are paid for a fixed amount of time, but coverage is provided for life.

Metric system A decimal system of weights and measures based on the number 10. The base measurements in the metric system are meter, liter, and gram. Mutual Fund An investment company that invests money of its shareholders in a diversified group of securities of other corporations. Stock A share in a company’s ownership represented by transferable certificates.

Premium The amount paid at regular intervals for a contract of insurance.

Term life insurance Insurance providing for payment of an amount to a designated beneficiary upon death of the insured. Premiums are paid and coverage is provided for a fixed amount of time.

Whole-life insurance Insurance providing for payment of an amount to a designated beneficiary upon death of the insured. Premiums are paid and coverage is provided for life.