Personal Finance

121 Pages·2013·8.92 MB·English

Personal Finance
C H A P T E R 9 O v e r a l l E x p e c t a t i o n s
Income and
Benefits By the end of this unit, you will
C H A P T E R 1 0 • distinguish the various ways in which individuals and households
How You Use
can acquire income and other benefits
Your Money
C H A P T E R 1 1 • develop skills in managing personal income effectively, such as
How You Manage skills in budgeting, planning, saving, and investing
Your Money
• analyse the role and importance of consumer credit
C H A P T E R 1 2
Consumer Credit
As a consumer you will deal with many businesses, but you must earn income in order
to meet your needs and wants. Over time, you will also want to build wealth in order
to afford the lifestyle of your choice. Building wealth requires wise decisions about
how to earn, save, invest, donate, spend, and borrow money. To make wise deci-
sions, you need personal financial goals, a financial plan, and a budget.
The most likely way that you will earn income is by working. This unit discusses
the factors that determine how much you can earn from a job or business. You will also
learn about the benefits that jobs and businesses offer, apart from wages or salary.
Knowing these things can help you find the job or business that is right for you.
In order to build wealth, people need to invest some of their income. A variety of
types of investment are available to Canadians. You will learn about the most common
ones in this unit. You will also learn how Canadians use a tax shelter (an RRSP) to
reduce their taxes while they save for retirement.
Most consumers need to borrow money at some point
in order to build wealth. For example, students who finance
postsecondary training, diplomas, or degrees often require
student loans. Homeowners usually require mortgages. In
this unit, you will learn the principles of wise borrowing (con-
sumer credit), so as to stay on track with your personal
financial goals.
239
Income and
9
Benefits
K E Y T E R M S S p e c i f i c E x p e c t a t i o n s
income
saving After studying this chapter, you will be able to
interest
service charges • summarize the various ways in which individuals and households
investment can acquire income
bonds
• describe the major factors that can influence a job’s income level
principal
stocks • describe other benefits of a job in addition to income
social assistance
personal performance
emotional quotient
benefits To meet most of your personal needs and wants, you must have money to pay for
self-actualization
telecommute goods and services. Most of us get money by earning income, and there are a num-
pension
ber of ways to get it: employment, saving, investing, and social programs. The most
stock option
bonus common method is through employment, or having a job. Most people would like to
earn a high income from their work. But what we actually earn is not determined by
what we would like to have. The income we earn is determined by our experience,
education, personal performance, and unique abilities, and by the success of a busi-
ness, the type of business, and the economy. Employment also provides many ben-
efits in addition to income, for example, skill development and self-fulfillment,
pensions, health insurance, and employment insurance. In this chapter, you will con-
sider the many ways you can acquire income and its benefits.
B U S I N E S S
P R O F I L E
Successful Financial Goals
and You
Bobby Fuller, a popular Grade 12 student at Newmarket’s Portland Heights
Secondary School, knows he is the kind of guy who doesn’t get excited about
programming computers, like some of his classmates. “Sure, I wish I was
another Bill Gates and could start a company like Microsoft, but I’m just not,”
he likes to say. Bobby is pretty good at building things, though, and he often
works from his own designs. He is also well organized and punctual and gets
along well with people. But his mother keeps telling him, “You can’t make a
good career out of building things and getting along with people.”
For a long time, Bobby thought that if he couldn’t become a profes-
sional—like a programmer or an engineer—he would end up operating
the cappuccino mill at a coffee shop that catered to people who could.
One day his uncle Roy, an electrician, heard him say this and told him to F igure 9-1 Bobby found
think again. “There’s going to be a shortage of workers in the skilled con- that a part-time job in the
struction trades in Canada in the next 15 years,” Roy explained, “Do you construction industry gave
know how old the average person in some skilled trades is? About 50 him a chance to learn a few
years old! Lots of them will retire soon.” things before he starts his
Okay, but is that because they won’t be needed, Bobby wondered. He apprenticeship. However, he
was smart enough to know a skill must be needed before he can use it to earn did have to give up spending
income. So he did some reading, and found out something that surprised him: a lot of time with his friends.
C H A P T E R 9 Income and Benefits • MHR 241
Toronto’s population is expected to nearly double between 2001 and 2016.
Bobby soon realized that he could take advantage of a business opportunity
and earn a good income. New homes, office renovations, conversions of old
factories into lofts — they all need skilled tradespeople.
Bobby realized that he could either work for someone else as a skilled
tradesman or become an independent general contractor. People who need
homes would hire him to oversee the project: He would find, supervise, and
pay carpenters, electricians, plumbers, bricklayers, and landscapers.
Uncle Roy encouraged him. “For starters,” he said, “Get your car-
pentry certification. That way, you can always get work. You can learn
enough about the other trades to be a contractor by taking courses and
getting to know skilled tradespeople.” Certification means that Bobby
must complete a three to four-year apprenticeship program or a combi-
nation of over four years of carpentry work experience, plus high school,
college, or industry courses. Bobby plans to start after Grade 12.
In order to apply for apprenticeship, Bobby has to be working in the
building trades. Roy has already found Bobby a part-time position for
$10.00 an hour helping drywall construction projects. Bobby hopes to
learn a lot even before he starts formal training. Besides, he needs the
money. He must budget and save for his courses. His mom, a low-income
single mother, supports his two younger sisters and cannot help him
much financially. And once he starts apprenticing, he will earn a lot more
while he studies.
Sometimes, though, Bobby isn’t sure if the effort is worthwhile.
Instead of hanging out with his friends Mike and Mario, he spends a lot of
time drywalling. Mike and Mario have told him to forget it and live for
today. “You don’t know whether your idea will really work out,” they say,
“And being the boss is a big headache.” But Bobby knows for sure the
kind of future he does—and doesn’t—want. He asks himself, “I wonder if
Bill Gates had this problem?”
As you read this chapter, identify the factors that determine how
much money a job or business pays. Can an individual influence or change
these factors in any way?
Suppose you made the same amount of money no matter what you
did for a living. What job would you prefer to have?
242 MHR • U N I T 3 Personal Finance
Acquiring Income
Where do you see yourself in five years? Qualities that Helped Self-made
Ten years? Twenty years? After graduation Millionaires Become Wealthy
will you go into the work force? To com- 60
munity college? University? What sort of job
50
or business will you have?
Do you think you will rent an apart- 40
ment or own a house? Take the bus or 30
drive a car? Will you take courses? Travel?
20
Each of these goals requires income.
Some require a higher income than oth- 10
ers. To achieve higher income goals, you 0
must plan carefully.
Earning a high income is rarely a matter
of luck. Some people get big inheritances or
win lotteries. But most people who earn a
high income had goals and strategies for get-
ting what they want.
When asked, self-made millionaires
said that the three factors most important Qualities
to their success were being honest, being Figure 9-2 733 self-made millionaires were asked what qualities
well-disciplined, and getting along with helped them become wealthy. Which qualities did you expect to see?
people (Figure 9-2). They rated these Which ones surprised you?
skills for living ahead of luck, inheritance,
intelligence, or knowing the right people.
Sources o f Income
The most common sources of income are
• employment (including self-employment)
• saving money you have earned but do not owe to anyone
• investing, including borrowing money to invest
• lending money and receiving it back with interest
• social programs that help you if you run into difficulties
What do you think are the advantages and disadvantages of each of
these sources of income?
C H A P T E R 9 Income and Benefits • MHR 243
Percentage
Honest with all
Well disciplined
Getting along
Supportive spouse
Working harder than most
Loving career/business
Strong leadership qualities
Very competitive spirit/personality
Very well organized
Ability to sell ideas/products
Wise investments
Seeing opportunities others do not
Employment Income
Some jobs pay a lot more than others. But money isn’t the only reason
WANTED. Alligator people take jobs. The job described in the margin note pays US$12 per
wrestlers. Must be brave hour. What factors besides money might motivate people to apply?
and a risk taker. Males
and females OK. No
experience needed.
How Employment Income Re la tes to Qua l i ty o f L i fe
(Advertisement in the Fort
Lauderdale Sun-Sentinel, In general, you will want to choose a career that you enjoy, that also pays
September 2000) a good income, and that lets you enjoy a good standard of living and
quality of life. But your income is only one of the factors that determine
your standard of living and quality of life. Recall from Chapter 3 that your
standard of living is the level of
Average 1999 hourly earnings of various goods and services that your
occupations in Canada. income can buy. However, hav-
ing quality of life does not just
Average Average mean spending money on mate-
Job Title
Starting Wage Hourly Wage
rial things. As the United Nations
Financial/Investment Analyst $19.81 $33.51 rating system which you learned
Electrical Engineer 20.55 29.78 about in Chapter 3 suggests, it
Computer Systems Analyst 19.52 27.68 also means being able to spend
Computer Programmer 17.19 22.72 money on education, fitness,
Registered Nurse 17.85 21.73 travel, and causes you support.
Bricklayer 15.17 21.67 In other words, if all your time
Medical Radiation Technologist 17.23 21.08 were spent earning money for
Auditor/Accountant 16.97 21.03 food, clothing, and shelter, you
Accounting Clerk 12.10 15.37 would have a low quality of life
even if you had a high standard of
Truck Driver 13.19 14.96
living. You might earn enough
Secretary 11.89 14.23
income to eat expensive food, but
General Office Clerk 10.79 13.18
if you had no time for physical fit-
Restaurant/Food Service Manager 9.34 11.46
ness, your health would deterio-
Cook 8.44 9.48
rate anyway. Career choices must
Source: “Ontario Job Futures 2000” Wage figures as at March 1999.
take into account quality of life as
Figure 9-3 A skilled well as income. That might be one reason to think carefully about the alli-
gator wrestling offer. Study Figure 9-3 to see what pay rate some other
bricklayer earns nearly as
jobs offer.
much as a registered
Do any of the jobs in Figure 9-3 pay more than you thought? Less
nurse. What market force
than you thought? Think about the factors that might determine what
is probably at work here?
a job pays. You will learn more about this later in the chapter.
244 MHR • U N I T 3 Personal Finance
Deve lop ing Sk i l l s That Earn Income
If you are unsure whether you have the right skills for a given occupa-
tion, see your school guidance counsellor. Guidance counsellors usu-
ally have skills and aptitude tests that students can take to learn what
areas of employment work best for them. Remember that if you did a
test a few years ago, you may have developed new skills and aptitudes
since then. Or, if your school offers a co-op program, you could dis-
cover if you and a job suit each other by working in the field.
Also, as you learned in Chapter 3, skills can be developed. Go back
and take another look at Employability Skills on page 76.
Remember that, according to the Conference Board of Canada, you
need to develop your employability skills in everything you do: at
school, in volunteer work, in sports, in clubs, and at home. Don’t wait
till you have a paid job. Many of the skills that you learn in everyday
activities can be transferred to work.
Volunteer jobs for student council, a science fair, or a school show,
for example, are an opportunity, not a burden. They help you to
develop and display skills. If you successfully organized a Hot Dog Day,
you can put that on your first résumé. It shows your ability to take
charge. Or, if you put up the tent and got the barbecue
going, you displayed valuable technical skills. Web
Connect
http://www.mcgrawhill.ca/links/exploringbiz
Sav ing Do you need to earn while you learn? Check out
the Skills Canada and Co-operative Education
in Canada Web sites for ways to finance
People save money for many things: vaca-
your education.
tions, education, retirement, and emergencies.
Saving means putting away a portion of your
income today, in order to have money in the future.
You choose not to use money for something you want now, so later
you have it for something you want much more. For example, you take
your lunch to school during the year so that you will have money for
tennis lessons in the summer.
By putting money in a savings account, you can make a kind of
income called interest. Interest means that the bank pays you a small
fee so it can use your money while it is in the account. However, it is
important to observe how this fee is calculated. Very few savings
accounts pay simple interest; most pay compound interest. Simple
interest is added to the principal (the sum deposited) but compound
interest is added to the principal plus the previous interest. Figure 9-4
C H A P T E R 9 Income and Benefits • MHR 245
150
shows the difference. You will
135
learn more about compound
120 Lisa
interest in Chapter 11.
105 Why does a bank or other
90 Maria financial institution want to
75 use your money? Because the
60 institution lends it to other
people. It charges them a
45
higher rate of interest than it
30
pays you. It keeps the differ-
15
ence, and so makes a profit.
0
1 2 3 4 5 6 7 8 9 10 Sometimes, saving to earn
Year interest income doesn’t really
pay. To make sure it does, ask
Figure 9-4 Simple versus compound interest. Lisa deposited $100 in a bank
how the interest is calculated
account at simple interest. Maria deposited $100 at yearly compound interest for
when you open a savings
the same period. Both got 4%. Who came out ahead after ten years? Why? account. Banks compete for
your business and may offer
different plans to attract customers. Also watch that your bank’s
service charges (the fees charged for transactions) are not so high that
they reduce or eliminate the value of your interest income.
Benjamin Franklin said of
compound interest, “‘Tis
the stone that can turn
all your lead into gold.”
I nvestments
You cannot earn much income from savings account interest unless you
have a really large amount of money. You would make more income if
you invested the money. Investment means that you give up the use
of the money for a period of time in exchange for a chance to make
more. Here is the difference between investment and savings: When
you are saving money, you can take the money out of your savings
account at any time, and use it. But when you invest, you buy an invest-
ment. If you don’t want it any more, you must sell it if you can.
The two most common types of investments are bonds and stocks.
Other names for these investments are debt and equity.
Bonds
When governments and companies want to raise money for projects,
they often issue bonds. They borrow a sum of money from you and
agree to pay it back, with interest, on a certain date. The government or
246 MHR • U N I T 3 Personal Finance
Money
company is in debt to you for the whole sum, including the inter-
est. Because they are debts, bonds are known as debt instru-
ments. Bonds usually pay you higher interest than savings
accounts. However, you must do research to ensure you are get-
ting the best rate available.
Because you know exactly how much interest you stand to
make on a bond, it is called a fixed income investment. What you
originally paid is called the principal. But, as with savings, you
come out with more money than you originally paid for the bond
when you cash it in. The difference is your income from bonds,
which is called interest.
The best known bonds, purchased by many Canadians, are
Canada Savings Bonds. These are very popular because you can
Figure 9-5 To vacationers,
buy one for as little as $100 and can cash it in at any time. Most
Disney is entertainment, but Disney is
government bonds, as well as corporate bonds, cost much more,
also a company earning money for its
and can’t be cashed in until a specific date, called the maturity date.
shareholders on the stock market.
S tocks
Stocks are the money organizations raise by selling ownership in the
company in the form of shares. When you purchase stock, or shares, you
become one of the owners or shareholders of that company. As you
learned in Chapter 2, shareholders are not responsible for the debts or
decisions of the company. If the shares go up in value, you can receive
income. You can sell your shares for more than you paid and keep the
difference. The company may also send you a small share of the profits
(a dividend). Shares are sold on stock exchanges such as the Toronto
Stock Exchange and the Vancouver Stock Exchange.
Stocks are a riskier investment than bonds because if the company
does poorly, you can lose money. Take a look at this share price trad-
ing chart for Walt Disney Company in Figure 9-6. Look also at
Amazon.com (Figure 9-7) and Nike (Figure 9-8) on the next page.
The Walt Disney Co. as of 1–Mar–2001
45
40
35
F igure 9-6 How would you feel in March
30
2001 if you had bought Disney shares in May
25
May 00 Jul 00 Sep 00 Nov 00 Jan 01 Mar 01 2000? You would probably feel better than the
15000
10000 people who bought shares in May 2000 of
5000
0 Amazon.com, an Internet entertainment retailer.
Volume (1000’s)
C H A P T E R 9 Income and Benefits • MHR 247