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How do economic

conditions affect
financial decisions?
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Economic Factors and Financial Decisions
Consumer prices
changes in how much the dollar is worth

Inflation
rising prices for goods and services and lower buying power of the dollar

Consumer Spending
the demand for goods and services, which affects prices and job opportunities

Interest Rates
the cost of borrowing money. Lower interest rates encourage consumer spending; higher rates
encourage saving and less borrowing.

Unemployment Rate
the number of unemployed people who are willing to work, which affects consumer spending and
job opportunities
Economic Influences on Financial Decisions

Before you make a decision about money, what do you need to know about our economy?

• Consumer Prices
• Inflation
• Consumer Spending
• Interest Rates
• Unemployment Rate

Considering the current above factors discuss the following financial dilemma. You
don’t have enough money to buy a CD player you want. Should you cash the
birthday check that your grandfather gave you? Your parents want you to put that
check into a savings account? What current economic conditions should you think
about before you make this decision?
Risk that can affect financial decisions
Personal Risk
your decision can affect your well-being. Your actions may result in inconvenience, embarrassment or safety
and health concerns.

Inflation Risk
inflation involves rising prices, meaning you will be able to buy less for your money. If you will wait to buy an
item later, it may cost more.

Interest- Rate Risk


interest is the money you pay to borrow money. Banks also pay you interest when you deposit your money
there. Interest rates can change, affecting the cost for you to borrow money and the money your savings earn.

Income Risk
your income can change for a variety of reasons. When people buy fewer goods, other’s may lose their jobs.
You can get laid off without much notice or your job can be transferred and you don’t want to move.
Risk Factors and Financial Decisions
Let’s consider the following risk factors:
 Personal Risk

 Inflation Risk

 Interest-rate Risk

 Income Risk

You have worked hard over the past year and earned about half
of the money that you’ll need to buy a used car.
 Should you put your money in a savings account?
 Should you keep working until you’ve saved the full amount?
 Should you take out a loan and buy the car now?
 What risks might there be?
Family Values Affect Our Financial Decisions

 Giving & donating – what are your families values about


giving money to charity.

 Saving – what are you families values about saving money.

 Spending – what are your families values about spending money,


about living within your means.

 Credit – what are your families values about using credit cards.
What financial decision would your
family like choose?
The family room TV has stopped working. Your parents have been
saving for a new one but the one they really want will cost
another $1000 more than they already have in savings. What are
they most likely to do?

 Wait until they have saved the additional $1000 and the buy the TV they want.

 Purchase a TV that fits the current budget they have in savings.

 Purchase the TV they want and use a credit card to cover the additional $1000
needed.
More Family Financial Decisions
 Your family gives regularly to a local charity or their church. One
of your parents gets their hours reduced at work. Your parents
are most likely to:

 Stop giving to their charity or church.

 Reduce spending on entertainment or dining out and continue to give the


same amount of money to their charity or church.

 Reduce the amount they give to their charity or church but still continue to
give some.

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