Show Me the Money

There are two ways to earn money. You can either provide a product people want to buy or you can offer a service people will pay you for. Once you have earned your money, you have lots of choices regarding what to do with it. You can spend it, save it, share it, or invest it. Each of these options comes with risks and rewards, and you will choose your path based on your needs and wants. But those wants and needs will be influenced by the type of economic system you live in. There are many economic systems, and they affect what goods and services are available and how much they cost differently depending on the type.

In 1979, an American investment firm ran an advertisement on television with a line that became a household saying. The firm claimed, "We make money the old fashioned way, [dramatic pause]... we earn it." But what does that mean- "they earn it?" How does that impact you- how can you earn it? The first standard identified by the Council on Economic Education was "Earning an Income." So let's see how one goes about earning an income.

The simplest answer would be to get a job. That is not always as simple as it sounds. There are a lot of factors that go into getting a job, such as personal factors as well as market factors.

Let's look at the personal factors first. These include personal interests, skills, education, accessibility, and goals.

Now let's look at the market factors that will affect your choosing a job.

As you can see, there are a lot of factors in choosing the right job for you. As time passes and you get older, those personal and market factors will change. That is part of life. There are steps you can learn that will help you pick and get a job no matter how much those factors change in the future.

Steps to Getting a Job

Determine your interests and skills.
Determine your goals and expectations.
Match your personal factors with possible employment opportunities.
Make a resumé and begin your job hunt.
Apply for a job and participate in a job interview.

After a person picks a job, gets hired, and starts to work, that person should be receiving an income. What is an income? Simply put, it is the money that comes in from property, business, work, et cetera. Most people find that no sooner does the money start flowing "in" than it starts flowing "out." Where are the most likely destinations of income going when they flow "out?"

Buying Goods and Services

The second standard established by the Council on Economic Education is "Buying Goods and Services." Whereas you might not have much control over how much of your income goes to pay your local, state, and federal taxes, you do have a choice as to how much you spend on goods and services. Let's look into how you will determine what to spend your income on when you get it.

Buying Goods and Services
Taxes	Taxes are money paid by taxpayers to the government to support the cost of running a government and providing public works and services. There are different types of taxes imposed by the American government on its taxpayers. Some examples include income taxes, property taxes, sales taxes, social security taxes and corporate taxes. The amounts that people pay vary based on many factors. Some of these factors include the personal wealth of the taxpayer, the state and city the taxpayer lives in, the types of services provided, and the personal purchasing choices made by the taxpayer. There is an old saying by Benjamin Franklin that "in this world, nothing can be said to be certain except death and taxes."
Goods	"Goods" is a synonym for "wares." A ware is a manufactured thing or article that is for sale. When you go out shopping, those things that are placed in your shopping bag are considered goods. These might include food, clothes, furniture, toys, games- the list can go on and on. Goods are not just those things that fit into shopping bags. Goods include cars and houses. You might purchase a good outright or rent that good, but either way, your income is going out to fund the presences of those goods in your life.
Services	Not all things we purchase are tangible items that can be carried home after a shopping spree. Often, we pay others to provide a service to us. When you visit a doctor or barber shop, you are paying a person to provide you with a service. When you pay the electric company or trash collector, you are paying a business or person for providing you with a service. If you hire a tutor or a lawn service, you are paying for a service. Services that we pay others to provide can be cheap or expensive, but either way we are paying out money for them.
Donations / Gifts	We do not always use our money to buy ourselves stuff. There are times when we use our money to help others, and during those times we are paying out some of the money we have received through an income so that others might get goods or services. There are many reasons for making donations such as personal experiences, tax deductions, or the inability to say "no". There are many recipients of these donations such as the man on the corner, the family suffering from a tragedy, or a charitable organization. No matter how much or little or to whom this money goes, it is one of the destinations for our incomes.
Savings / Investments	There are times when we put our money in a safe location to be used at a later date. At times, this could be a simple savings account at the bank. Our income then is not going out, but it is still a destination. At other times, the "safe" location might include an investment in a company in order to increase the return of our savings. In this case, the money is going out, but with the expectation that it will return in greater amounts. We might invest in someone else's company or in our own. We might invest in property or education. The basic definition of an investment is the laying out of money with the expectation that this money will bring more money back to us in the future.

Debt

One of the destinations where your income might go is to pay off debt. Debt is defined as something that is owed to another. Since this module is talking about personal finances, you can assume that the debt we are about to discuss comes from spending money that you do not actually have. How does a person spend money that they do not have? They borrow or use credit to spend money that they do not have. "Using Credit" is the third standard listed by the Council on Economic Education for students to learn.

There are two ways to spend money that you do not have- you can borrow the money and pay as you go, or you can use credit and promise to pay later. When people borrow money to purchase something, they are usually purchasing expensive items- cars, houses, college educations...and they are usually borrowing from a large financial institution like a bank. When a person borrows money from a bank, they will have to pay the amount of the loan plus interest back to the bank. Have you ever played Monopoly or Life? These board games have "banks" from where players borrow money to make large purchases. If you have played these games, then you are familiar with the concept of paying back debt with interest. Interest is the cost of borrowing money. That is the one-way banks make their money. If you wanted to borrow $100,000 from a bank to buy a house, you would have to agree to pay the bank its $100,000 plus a certain percentage more in order to get the loan. The percentage that banks charge for loans varies on the person, the item to be purchased, and economic conditions of markets at the time of the loan...in other words, the percentage of the loan that is charged to the borrower is determined by the bank's determination on the likelihood of getting paid back. The bigger the risk a bank is taking in granting a loan- the higher the percentage they will charge to allow someone to borrow money.

The factors that influence a bank's decision to grant or not to grant a loan can be very personal. That's why you have seen so many commercials warning people to take care of their credit score. A loan from the bank is not the only source of money that people use to pay for items they do not have the ready cash to pay for. It is very common in today's world to find a person carrying a wallet that does not have any cash in it at all, yet that person is able to buy gas, drive to the grocery store and buy food, drive home and sit at the computer to buy a new book, and then relax on a couch watching a television show that they will get billed for later. How do they do that? They are using credit.

What is Credit?

Essentially it is a trust in a person's ability and intention to pay and it is just like borrowing. When a credit card company gives a person a credit card, that company is paying for the items that the person buys in the expectation that the company will be paid back according to a fixed schedule. So, if your parents used a credit card today to purchase gas, food, electricity, cable, clothes, or anything, their credit card company paid the store for the purchase and your parents will pay the credit card company back. Why would a company do this? The company collects fees from the person using the credit card and the company charges the person interest on the money spent that is not paid back on time. Different companies charge different amounts of interest- you can find out how much the interest will be by looking at the card's APR. APR stands for Annual Percentage Rate and it is a number that reflects the percentage a card will charge on any unpaid balance. Usually, people are expected to pay their credit card bills once a month, but if you can not give the credit card company all of the money you owe them, they will charge you interest on what you have not paid back. The amount you owe to a credit card company is your balance. Some people pay off all of their balance every month and they are not charged interest. Those people who only pay the minimum amount allowed or less than their balance owed have to pay interest on the remaining balance. A credit card company is in the business of making money, as with banks, and therefore the old saying "there is no such thing as a free lunch" applies here.

Look at the chart below. As you can see, the green represents the money spent on the credit card ($100) and the orange represents the amount paid to the credit card company. As the person did not pay off the entire $100 in one sitting, the person was charged interest every month on the remaining balance. It took this person 12 months to pay off the original $100 plus the interest owed that was added on every month. Look at the chart and notice that at the end of the 12 months when the loan was paid off, the person paid out much more than the original $100. By not paying off the balance at once, the credit card holder was exposed to the APR charges or interest. Those charges added to the total balance that the credit card holder ended up paying.

image of APR chart

You can use the APR to determine how expensive a credit card can be to use. If you are offered two credit cards- one offers a 15% APR and the other offers a 10% APR, which will cost you more in the long run if you keep a balance on your credit card? Hold that answer in your mind- you are going to come back to that question in just a moment.

Now ask yourself the same question as earlier but let's add a couple of words to the sentence...If you are offered two credit cards- one offers a fixed APR of 15% and the other offers a variable APR of 10%- which will cost you more in the long run if you keep a balance on your credit card. That question just got more difficult to answer, didn't it?

Take Away

Picking a career is a serious stepping point in a young adult’s life. Often many adults change careers multiple times. It is important to explore what you are interested in, test it out, and make financial decisions based on possible career opportunities. Once you have secured the job, creating a personal budget allows you to see all the expenditures that will affect you monthly so that you can budget your new income appropriately.

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