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Personal Finance PDF

121 Pages·2013·8.92 MB·English
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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

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