commerce for australian citizens chapter 5

8/10/2019 Commerce for Australian Citizens Chapter 5

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Finance andthe economy

2


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5Personalfinance

CORE TO

IN THIS CHAPTERYOU WILL

Learn about:

earning an income and types of income spending and saving income

borrowing money, getting a loan

managing finances, including budgeting

investing money, including reasons and

options

investment options such as shares, property,

superannuation and managed funds

Learn to:

identify different types of income discuss the reasons for and against borrowing

money

use a spreadsheet to prepare and monitor a

budget

research and report on the financial services

industry

analyse the reason for saving and investing

create and modify a portfolio of shares using

a database


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Chapter 5 Personal finance

Earning an incomeIncomeis the money you receive from various sources to pay for the things you

buy in everyday life. Income that is not spent is regarded as savings.

In Australia, income is derived mainly from:

working for wagesor a salary

working for yourself

investingyour savings and retirement money

renting out your property to someone else

working on contract for organisations

payments from the government.

Wages for workMany people in Australia earn their income by working for a business or the

government and are paid wages. A wage is generally calculated on a weekly

basis and the hours worked each week usually determine the amount of

wages paid to each worker. Factory workers, builders labourers and shop

assistants are examples of wage earners [5.1].

It is now common, and in some workplaces compulsory, for workers

wages to be paid directly into their bank accounts, after tax has been taken

out. Workers receive a pay advice slip or they can access this information via

the employers intranet.

Generally, no worker in Australia is required to work more than eight

hours a day as part of a normal days work, but people can work longer hours

by mutual arrangement with their employer. Each hour worked above the

number stated in an awardis considered overtimeand must be paid at a higher

hourly ratereferred to as penalty rates. A small group of workers may receive

extra money for difficult or dangerous work, such as soldiers serving in a

war-torn country.

incomethe amount of money received

by an individual, a household, a

company or government from

any source

savingsmoney or other financial assets

that are stored for future use

wagesmoney paid on a regular basis

for a period of work or services

salaryincome paid to people on a

yearly basis

investing

putting your money somewhere

where you can earn interest on it

intranet

a restricted, private computer

network used by an employer

for communication within the

organisation

awardthe minimum rate of pay and

working conditions specified for

a particular job and set by an

industrial court

overtime

time worked over and abovenormal hours of work

penalty rateshigher than normal wage rates

to compensate for working

outside normal hours

[5.1] Factory workers typically

earn a wage.

CALCULATING WAGESIf you worked a normal 38-hour week at

$20 an hour, you would earn $760. If you

worked overtime for 6 hours at time-and-

a-half you would receive an extra $180

($20 + $10 x6). This would bring your

gross wage to $940; however, you would

not receive that full amount because tax

has to be taken out of your earnings. Your

employer then passes this tax on to the

Australian Taxation Office on your behalf.

Theeight-hourday,

or40-hourweek,was

negotiatedbythetrade

unionsandintroducedin

1947.


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120 Commerce for Australian Citizens

Receiving a salaryA salary is paid to people who are employed on a yearly basis. Salary earners

may still receive their pay weekly, fortnightly or monthly but their rate of

pay will be calculated as an amount per year rather than an amount per

hour or per week. Generally, people who receive a salary as their income are

managers, teachers, administrators and other professional people. This is

because their job usually needs to be flexible and normal office hours may not

always apply. People earning a salary are therefore not eligible for overtime

or penalty rates. Sometimes they must work long hours to finish the work

required. On the other hand, they know exactly what amount of money they

will be paid for each weeks work.

Fringe benefitsMany salary earners, and some wage earners, receive income that is not paid

in cash. This is called income in kind and involves various fringe benefits, some

of which are discussed below.

Thewordsalary

originatedfromthe

moneyallowedtoRoman

soldiersforthepurchase

ofsalt.

For more information on awards,see Chapter 14.

A typical salary earner tends

to work in an office.

flexitimeworking a set number of hours

but using different starting

and finishing times from those

normally set

rostered day off (RDO)a day off to compensate for

longer hours worked during a

week or fortnight

FLEXITIMEThe flexitimesystem was developed to allow some workers to start

or finish at times to suit themselves. For example, a worker may

prefer to start at 7.30 am and finish at 3.30 pm, or start at 9.00 am

and finish at 5.00 pm. Both workers are on the job for seven hours

(plus one hour for lunch) but at times to suit themselves.

In some offices workers may be allowed to accumulate

or build up extra hours of work over a four-week period. After

working sufficient extra hours, they may apply for a day off, called

a flexi-day. In other offices, the flexitime might be built in so that

people work a nine-day fortnight and over a two-week period

have a rostered day off (RDO).

EXPENSE ACCOUNTS OR EXPENSE CARDSAn expense account allows a person working for a firm to entertain

clients who may have business with the company. Expenses such

as the cost of a business lunch are paid by the company, usually

by means of a credit card. An employee may also use it to pay for

expenses such as accommodation, travel and meals that arise

while on company business.

fringe benefitspayment of non-income items

received in addition to normal

wages or salary


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COMPANY CARSMany employees are provided with a company car as a fringe benefit. This allows the employee

to use a car provided by the employer, not only during the working day, but often after work and

at weekends. This benefit is valuable for many reasons:

the employee does not need to buy a car

the company pays for fuel, maintenance, insurance and registration

the company car is the one that suffers the wear and tear.

FREE OR CHEAPER GOODS AND SERVICESSome employees receive free samples of the goods their company produces or they may be

offered goods at reduced prices. Bank employees, for example, can borrow money at rates ofinterestmuch lower than those that normally apply to customers. Airline workers are generally

entitled to heavily discounted airfares; factory workers may be able to buy the products

produced by their employer in a factory shop at considerably reduced prices.

interest

a payment (or charge) for the

use of money that has been

borrowed

bonusa one-off extra payment to an

employee as a reward for good

work

SALARY PACKAGESSome highly paid executives can be offered a negotiated salary

package that might consist of a number of the fringe benefits listed

above. Some employees also receive a bonusif the company has

done well. This is sometimes paid as a Christmas bonus. Together

with these, some tax advantagessuch as having the company pay

the employees childrens private school fees or the familys private

health insurancemay also be offered.

LEARNINGABOUT

1 What is the difference between a wage and a salary?

2 You get a job after school working four hours a day, five days a week for twelve weeks.

The hourly rate is $8.50. What are your wages (before tax):

a each day?

b each week?

c for the twelve-week period?


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3 Review the text above on penalty rates and then answer the following questions.

a As a worker, prepare the arguments for and against keeping penalty rates.

b As an employer, prepare the arguments against penalty rates. Are there any

supporting keeping them?

4 How much do these people receive per week before tax?

a Salary $20 800

b Salary $15 600

5 What is the salary before tax of these people?

a Weekly pay $560

b Weekly pay $468

6 Review the text on fringe benefits and then answer the following questions.

a What is meant by the term fringe benefits? Why do you think fringe benefits are

offered to employees?

b What is flexitime? How does it work?

c Why are expense accounts offered to employees? What sorts of things are put on

expense accounts? What do you think might happen if an employee overspent on

their expense account?

d What are the benefits to an employee of having a company car?

e What other fringe benefits have you heard about? Is a bonus a fringe benefit? Explain.

7 Look at [5.2] below. Calculate the total wages earned by each employee.

[5.2] A wage rate calculation

Employee Normal wagerate per hour

Hours worked Overtime rate Hours of over-time worked

Total wages(before tax)

G Wizz $12 35 $18 5

R Fermoe $15 35 $22 10

J Walker $20 37 $30 3

A Wong $25 38 $37 nil

LEARNING TO

1 Look through old copies of newspapers to find and cut out job advertisements that

offer the employee a salary. Either individually or in groups, prepare a collage of these

advertisements. Discuss the salary level in each advertisement and how it might be

justified.2 Working in groups, discuss the advantages and disadvantages of working for wages as

opposed to working for a salary. Use examples of actual people, such as members of

your family or older friends.

3 Using the internet, find out more about salary packages, types of fringe benefits and

fringe benefits tax. Write down your findings in point form.


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Income from profits: owning your ownbusinessMany people earn an income by going into business for themselves. This

income is called profitand is the result of risk-taking. It involves using your

energies to produce a good or service and selling it at a higher price thanit cost to produce. If successful, the owner is able to make a profit. If not, a

business could run at a loss and may eventually go out of business. There are

no guarantees of making a profit. People who go into business for themselves

are also called entrepreneurs.

Income from saving andinvestmentIn Australia, many people receive all or some of

their income from the money that they save and

invest. Investing is simply letting your savingsmake money, or letting your money do the work

for you.

Financial institutions such as banks and

credit unions allow some people to save their

money with them and pay interest for the use of

that money. Other people wish to spend more

money than they may have at the time and so

wish to borrow money. The financial institutions

therefore effectively match up people saving and

people wishing to borrow.

profitthe reward for risk-taking, after

selling something at a higher

price than it cost to produce

entrepreneurspeople who embark on owning

and running businesses

For more information on runninga business, see Chapter 15.

Thewordentrepreneur

isfromtheFrenchword

meaningtoundertake.

Many people go into business for themselves as a

way of earning an income.

Investing your money isdiscussed more fully later in thischapter.

For more information on findingand renting accommodation, seeChapter 4.


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Income from renting or hiringRent is money paid for the use of someone elses property. In renting a house

or unit, the owner or landlord charges rent to the tenant. There are, however,

many different types of property that can be rented and so earn the owner

rental income [5.3].

When you let others hireyour property, you maintain ownership of the

item and so must keep it in good working order. It may wear out and need to

be replaced. Such costs need to be offset against the income you earn. There

are advantages and disadvantages in renting or hiring property.

hireto have temporary use of an

asset for a fee

[5.3] Real estate is often rented.

LEARNINGABOUT 1 Explain how banks and credit unions match up savers and borrowers.

2 What is the difference between saving and investing? For example, would someone who

put their spare money under their mattress for 12 months end up with the same savings as

someone who invested the same amount of money? Explain why or why not.

3 Why do borrowers expect to pay interest? Why do investors expect to receive interest?

4 Study the details of Acme Enterprises Pty Ltd in [5.4] and answer the questions that follow.


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withAdobeReader6.0. OpenReadMefileforconditions

andins

Windowssystemandsoftwarerequirements:Win

dowsXP

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ISBN978 1 4202 2929 5

Brian Parker and

Macmillan Education Australia20

CommercforAustralia

Citize

Brian Parker


[5.4] Acme Enterprises Pty Ltd

Year Sales Price Income Expenses Profit or loss?

2006 500 $10 $5000 $3000

2007 600 $12 $4500

2008 200 $12 $3500

2009 400 $15 $5500

a Print the table out from your student CD or copy it into your workbook, and fill in the

blanks.

b In what years did the business make a profit?

c Suggest reasons why the business could make a good profit one year and then run at

a loss the next.

5 Suggest some of the expenses that a business might have.

6 A lease is a long-term contract to hire a property. Why would owners prefer long-term

contracts rather than day-to-day ones?7 Most families rent or hire an item at some time. Make a list of all of the things your family

rents, and write down the most significant reason why they rent rather than buy.

LEARNING TO

1 Working in groups, discuss the importance of the profit motive in our economy. Share

your views with other groups.

2 Using a newspaper or the internet, find 20 businesses that offer the rental or hire of

different products. Cut out, print or photocopy the advertisements and then answer the

following questions.a Use the list to determine why you think these things are hired rather than bought.

(There may be many reasons.)

b From the list, make a judgment as to what costs could be associated with each item

over a year.

c Estimate the income the owner could expect each time the product is rented out.

Calculate on a weekly basis, if the product is used for long periods.

3 Working in groups, discuss the advantages and disadvantages of hiring as opposed to

buying. Record your points for and against on a large sheet of cardboard (or whiteboard).

Compare your list with other groups.

Income from other sourcesIn Australia, people earn income in many different ways. Fees, commissions,

royalties and prize money are yet more examples of forms of income.

FeesA fee is usually a set charge for the completion of a job or task. Professional

people such as accountants, doctors, dentists and solicitors receive fees.

commissionsfees paid to agents who arrange

a sale


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Such people often follow a schedule of fees that

may be set by a professional association, such

as the Australian Medical Association. These

fee schedules are meant to help standardise the

charges that are made by these people. This

means that:

an accountant will charge a fee for preparing a

taxation return

a dentist will charge a fee for filling a tooth

a doctor will charge a fee for performing an

operation

a solicitor will charge a fee for preparing a will.

Musicians, artists and theatrical people (such

as film stars, television actors, rock groups and

entertainers) all charge a fee for their services.

Many famous people also charge fees for speaking

at conferences and seminars. This usually meanssigning a contract of agreement, which states

what activities they must perform in order to earn

their fee. For example, a television star will know

that her contract states that she must complete

fifteen one-hour episodes of a show and be paid an

agreed fee for each episode.

CommissionsA person acting as an agent or a go-between

may be paid a commission. These agents areusually involved in the transaction by either

selling a product or getting buyers and sellers

together to trade. When the product is sold,

the agent will be paid a commission, which is a

percentage of the selling price. For example, if a

salesperson selling new cars arranges a sale of a

$15 000 car, that person could receive a 10 per

cent commission$1500. If a real estate agent

arranges the sale of a house for the seller, they

could be paid between 2.5 and 5 per cent of the

selling price (or even higher for luxury homes).For example, an agent may be paid 5 per cent

commission on a $400 000 home$20 000.

Many retail salespeople also work with a commission income built into

their working conditions. Their weekly income may be determined by the

total sales they have achieved for the week. This clearly presents a problem

for people who wish to have a stable income and so many companies will use

a retainersystem. Employees who work under this system may be paid a lower

sum (similar to a wage) on a weekly basis, and earn a commission on sales

A salesperson in an electrical goods store

retainera base amount paid to an

employee who also works on a

commission basis

[5.5] Fee earners


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as well. The retainer can help salespeople through hard times when sales are

low. Paying a commission does, however, ensure that people who are talented

at selling can enjoy high incomes.

Royalties

If a person composes music, writes a book or an article, or even inventsa new product, royaltypayments may be paid as an income. This type of

income payment is made when a person is granted copyrightor a patentfor an

original idea and someone else uses the idea to make a profit. The inventor or

composer need not produce or perform to make income but others who wish

to do so must pay royalty payments for the use of that idea. The author or

creator has what is called intellectual property.

Many films and television shows are based on books or stories. A film

company or television station wishing to use a story must pay royalties to

the author or buy the rights to the book. Some pop stars have been known to

change companies because of disputes over royalties. Royalty rights may even

be bought and sold. However, in Australia, after 50 or 70 years, work thatwas subject to copyright is normally available to be used by anyone without

payment of royalties.

royaltypayment to a creator for the use

of their product or invention

copyrightthe exclusive legal right to use

created works such as books,

music or dramatic works

patentan invention that has been

registered and for which usersmust pay

intellectual property

ownership of an idea, concept or

original work for which payment

may be due

Thezipperwasinvented

byanAmericanengineer,

WhitcombeLJudson,

in1893atatimewhen

peopleworehigh-

buttonedboots.

Teflon,discoveredin

1938,wasthetrademark

oftheDuPontcompany,

whichdevelopedit.

ItwasanAustralian

fromVictoriawho

tookoutapatent

afterinventingthefoil

containerusedinthe

makingofwinecasksor

fruitjuicecasks.

[5.5] Musicians earn royalties as income

People who invent products are granted a patent. If a company wishes to

use this invention, it has to pay a royalty to the inventor. Biro pens, zippers

and the Teflon non-stick coating on frying pans are examples of inventions for

which a patent has been registered.

Prize moneyA small number of people earn their income from prize money for

professional sports. Tennis, golf, racing, athletics, boxing and wrestling are

some examples. If prize money is a large part of your income, or you earn it

regularly, you are called a professional for tax purposes.


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Many top professionals earn millions in prize

money and even more from endorsement deals

for clothes, shoes or equipment. Tiger Woods

(golf) and Roger Federer (tennis) [5.6] regularly

earn millions of dollars in prize money as well

as earning income from endorsements and

advertising of various products.

Prize money may also be gained from winning

lottery tickets, quiz shows or gambling activities.

The risk, of course, is that you may also lose,

so this is not a particularly good way to earn

your income, although some highly talented

sportspeople even receive appearance money,

meaning that they receive an income even for

entering a tournament, even if they do not win.

[5.6] Roger Federer

LEARNINGABOUT

1 Name four professional occupations that receive income in the form of fees. Which

factors determine the actual amount paid for each service?

2 Study [5.5] on page 127 showing some people who receive fees and then answer the

questions that follow.

a Rank them in order of income received for one hours work (in your opinion).

b Rank them in order of their value to society (in your opinion).

c Explain your decisions and the reasons for any differences.

3 Make a list of five products that may be sold by people who are paid a commission.

Why do you think some companies would employ people in this way?4 What are the advantages of a commission to the employee? What are the

disadvantages?

5 Why would a retainer be preferred by:

a employees?

b employers?

6 Commission payments are often blamed for some questionable consumer products.

Why do you think a commission earner may try a little harder to sell products? What do

you think is the effect on honest salespeople in the long term?

7 Give two different examples of people who would be entitled to charge royalties for the

use of an idea.

8 What would determine the amount of royalties that would be charged for an originalidea? How much would you ask for the royalties for a best-selling book or a world

number one song?

9 If you ever did write a book or song, or invent something, what would you need to

consider before you sold the rights to your idea to someone else forever?

10 List all of the activities you can think of that pay prize money. What do you think

determines the amount of prize money that is offered at various events? Why is one

tournament worth millions to the winner, while other tournaments are not?


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LEARNING TO

1 Working in groups, make a list of possible inventions that would make you a very rich

person if they were to be produced. Discuss a project that you could undertake to create

something subject to copyright or a patent. (You may have to be very imaginative!) Draw

a diagram or provide details showing how it works. Consider how you might market your

invention or work.

2 Hold a class or group discussion on one or more of the following topics.

Do pop stars get too much money for their talents?

Do you think it is fair for people to pay for the use of anothers ideas even after the

author or inventor has died?

Should tennis stars and golfers be paid millions when the world cannot even feed its

people?

3 Working in groups, prepare a collage of newspaper clippings that show people who have

won large sums of prize money.

4 Use the internet to find out more about inventions such as the zipper, Teflon coating and

the wine cask. Also try to find out about such inventions as Velcro, Portland cement and

Scotch tape.

Income from social security benefitsMany Australians receive some or all of their income from the federal

government through social welfare payments [5.7]. By paying or

supplementing family incomes, the government provides a safety net so that

all Australians can have a liveable income.

Although Australia is seen as a relatively wealthy country, the incomeof all Australians is not evenly spread. While there are some very rich

Australians, there are also many who are poor. So the Government tries to

redistribute income through a taxation system and a social security system.

Payments are made to poor families, the disadvantaged, the disabled and

those unable to find work through Centrelink offices

For more information on socialsecurity payments, seeChapter 4.

[5.7] Social security payments

Child care benefit

Disability pension

Austudy

Carer allowance

Age pension

Newstart allowance

Youth allowance

Abstudy

Disaster relief payment


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LEARNINGABOUT

1 Make a list of the social welfare payments made by the government.

2 Should every person be able to claim these benefits?

3 Should people who have other wealth or income from savings be paid a pension?

4 Pensions are also called transfer payments. From where is the money transferred?5 What type of income do the following people normally receive? Give reasons for

your answer.

a A plumber f A door-to-door salesperson

b A doctor g An unemployed person

c A teacher h A building contractor

d A film actor i A champion golfer

e A real estate agent j The owner of a corner store

LEARNING TO

1 Working in groups, access the Centrelink website. What benefits are provided by

Centrelink? How might abuse of the system be controlled? Write down your ideas on a

large sheet of cardboard or present your work in a PowerPoint or multimedia display.

2 As a class, hold a debate on the topic Pensions are too high.

Spending and saving incomeSavings represent the amount of your income

that is not spent straight away. It may be kept for

spending in the future or it may be invested to

earn interest.

People save for many reasons; some of those

reasons are outlined below.

Some things you want to buy are outside the

reach of your income. Saving allows you to

build up funds to the amount necessary to buy

these things in the future.

You may be unsure of what you really want tobuy now, and so put the money aside until your

choices become clear.

Your purchase may require a long-term loan,

over many years, and saving is a way of gaining

the deposit to show a bank that you are able to

manage your money properly.


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You may save money for a rainy day. If you

are injured, sick or lose your job and are

unable to earn income, you will want to have

some savings to call on.

You may save for when you retire.

Spending patterns can vary according topersonal circumstances. For example, a sudden

loss of income, a health scare or a promotion at

work can alter the percentage of income saved.

Other factors, such as the persons age, their

wealth or place of living, can also play a part.

Sometimes spending levels may drop when

economic conditions are unfavourable and there

are high levels of unemployment.

Sales invite people to spend.

LEARNINGABOUT

1 What reasons do people have for saving some of their income? Why do some people

save a higher percentage of their income than others?

2 Why do people rarely 'hide their savings under their bed' anymore?

3 Explain how the following factors affect saving levels.

a Age d A promotion at work

b Wealth e Loss of job

c A health scare

4 How do sales advertisements encourage people to spend? Should they resist the

temptation?

LEARNING TO

1 Working in groups, prepare a collage on the spending and saving trends of different

groups of people in the community, such as teenagers, retirees and Indigenous

communities. Share your ideas with other groups.

2 Share your spending and savings goals with others in your class or group.

Borrowing moneyWhen you purchase items such as a motor car or house and you need to

borrow money, you should be aware of consumer credit laws. The New South

Wales Government has introduced laws, known as consumer credit laws,

that are designed to give consumers greater protection when they enter into

credit contracts.


16/35


There are three types of credit contracts:

a credit sale contractunder this type of

contract the person who sells you the goods or

services also provides the credit

a loan contractthis contract is for the loan

of money, for example, a bank loan for $5000over a three-year period

a continuing credit contractan example of

this might be a credit card or charge account at

a department store.

Credit contracts must:

be easy to read and understand, so that the

consumer is not confused by complicated legal

language

state the rights and responsibilities of the

borrower

set out all of the costs involved.

How much does the loan cost?When you borrow money from a bank or other financial institution, you must

repay the amount borrowed plus interest. Interest is the price that you pay

for using someone elses money. You therefore want to know how much it is

going to cost you to borrow the money you need. If you shop around for the

best price on a particular product, then you should also shop around and get

the best price on the money you borrow [5.8].

When you are looking for a loan to buy that new car, the first question

you should ask is: How much does the loan cost? Advertisements for credit

can no longer make simple claims such as only $241.10 per month. All of

the details must be set out fully and clearly, as shown in the sample

calculation below.

SAMPLE CALCULATION OF THE COST OF A LOANTori considered a loan of $12 000 for a new car she wanted to buy, to be repaid over four years

(48 months). Her monthly instalment was determined by the amount of the loan and the rate of

interest. The total amount she had to repay was then divided by 48.Cash price: $12 000

Interest rate: 6%

Length of loan: 48 months

Total amount repayable: $12 000 + (6% x4 years = $2880) = $14 880

Monthly repayments: $14 880 48 = $310 per month


17/35


Fixed vs variable interestIf you borrow $1000 for one year at a fixed rate of 9 per cent, you would pay$90 in interest that year. Variable rates are offered to borrowers who wish to

gamble on the fact that the general level of interest rates will vary according

to economic circumstances. If they fall, the borrower gains, but if they rise the

borrower loses. Some home loans offer a combination of fixed and variable

rates, such as 8 per cent fixed for two years, then variable for the remainder of

the loan.

Problems with creditBuying on credit is a normal part of a consumers way of life but it doesrequire some responsibility and wise management. The most important things

to remember are:

you have to pay for the goods sooner or later, plus interest charges

you must sign a contract before the credit is providedread it carefully

and if you do not understand what your responsibilities are, then before

you continue, find out:

the total amount of the credit (or the limit for cards)

the credit charge and when it is payable

the total cost

the annual percentage rate of interest

instalment paymentshow much per instalment and how many

what happens if you fail to make your instalment payments.

Credit problems rarely happen overnight and with wise budgeting you

will be able to avoid problems. You need to get your budgetin order and

determine what you owe and what you can afford to repay. As a last resort,

you can contact Wesley Credit Line, Australias largest financial counselling

service, or the New South Wales Office of Fair Trading for advice or mediation

with your credit provider.

[5.8] Before you borrow money

budgeta plan of your income, spending

and saving patterns for a period

of time

Do I need this loan?

Are there any unexpectedcosts to consider? Can I afford the loan?

Have I shopped around?


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CASES

TUDY


Brett

At 23 years of age Brett had already accumulated five credit cards. One day when

he was wandering around a large department store he was encouraged to apply for a

store card. He noticed that if you paid for the goods by the due date you would not have

to pay the high interest rate charges. Encouraged by this, he set about purchasing a whole

new wardrobe of clothes. He was confident that he could afford to pay in full at the end of the month.

When the account came, Brett found that it was much higher than he had expected. Furthermore, he

had received accounts from his other five credit cards for sporting equipment, DVDs, computer games

and other goods. He had also been using the EFTPOS facility in many of the stores he visited without

realising how much he was spending. In short, he simply could not pay all of his accounts. He therefore

paid a small amount on each of his credit card accounts, thinking that this was the best solution.

At the end of the following month, Brett was astonished to see the interest charges that had

accumulated on the unpaid portion of his previous accounts. The interest was backdated to the original

date of purchase. He soon realised that every time he was unable to pay the full amount owing on a card

he would have to pay interest charges and these charges could quickly mount up. He needed help.

LEARNINGABOUT

1 What are the three types of credit contracts? How are they different?

2 Why should credit contracts be easy to read? What information must be shown on them?

3 Dave bought a new boat for $12 000, paid a deposit of $2000 and borrowed the remainder.

How much interest would he be paying if the monthly instalments were $475 and the loan

was for 24 months?

4 Make a list of all of the things you should check in a credit contract. Which of these do you

think are the most important?

5 Read the case study about Brett and the answer the questions that follow.

a What do you think he did wrong?

b How were his problems compounding?

c What sort of help would you recommend for Brett?

d Continue Bretts story in your own words. You might like to think of alternate endings

one happy and one sad.

LEARNING TO 1 As a class or in groups, construct a role-play involving a credit provider, a customer and a

financial mediator. The customer is six months behind with their repayments.

2 Working in groups, discuss the problems that people like Brett experience when they do not

manage their money wisely.

3 Using newspapers or the internet, research the different types of loans and different types

of lenders. Make a list of each and beside each one write down your view of the advantages

and disadvantages of each type.


19/35


Managing financesIt is important for everyone to realise that some planning is necessary to

ensure that you do not get into financial difficulties. By preparing a budget

you can help to avoid these difficulties. It is an estimate of how much you will

receive in income and pay out as expenses over a period of time. Budgets arenot only prepared by individuals, but also by families, businesses, clubs and

even governments.

A personal budgetA budget is a means of achieving your goals by planning ahead and keeping

your goals, especially your long-term goals, in mind.

For more information ongovernment budgets, seeChapter 8.

PERSONAL BUDGETS AND SETTING GOALSSTEP 1Set your goals, whether long term, short term or both.

STEP 2List your sources of income. This includes your regular income

sources, pocket money, jobs and all of money that you are sure of

receiving. Keep a track of any money that you receive that you did

not expect.

STEP 3List of all of the expenses that you know you must pay. This is a veryimportant process, so think carefully.

STEP 4Record when your income and expenses are due. Have a section

for each month of the year, and perhaps each week, and write in the

items in their proper section.

STEP 5Plan to save a regular amount and keep a record of this in your

budget.

STEP 6Add a safety valve in case of unexpected expenses. A good budget

will be able to handle this. You can add more to your savings for this

purpose. Finally, always keep your budget in mind and keep it up

to date.


20/35

CASES

TUDY


Omars personal budget

Omar has a paper run for which he receives $40 a week. He spends $6 a week in bus fares getting to

work. He sometimes gets extra income for odd jobs he does, such as mowing the lawns and washing

the family car. He likes going to the movies and to concerts, and has an old bike that sometimes needs

repairs. He plans to save $10 a week for future purchases, such as a new stereo. Omar draws up a

budget and checks what happens each week [5.9]. He already has $50 saved up.

[5.9] The budget plan of a typical teenager

Omars personal budget planner

June July August

1 8 15 22 29 6 13 20 27 3 10 17

Income $

Pocketmoney

20 20 20 20 20 20 20 20 20 20 20 20

Paper run 40 40 40 40 40 40 40 40 40 40 40 40

Extraincome

Grand-dad15

Lawns10

Carwash

10

Lawns10

Totalincome

60 60 75 60 70 70 60 70 60 60 60 60

Expenses $

Weekly

spending& fares

15 15 15 15 15 15 15 15 15 15 15 15

Specialdates

Movies16

Concert55

Roller-blading

30

Birthdaypresents

Dad30

Mum30

Sister20

Otherexpenses

Bikerepair

35

Bikerepair

70

Totalexpenses

15 31 45 50 70 15 45 45 35 15 85 15

Plannedsavings

10 10 10 10 10 10 10 10 10 10 10 10

Whathappened

+45 +29 +30 +10 0 +55 +15 +25 +25 +45 -25 +45

Savingsbalance($50)

95 124 154 164 164 219 234 259 284 329 304 349


21/35


The family budgetFamily budgets are very similar to personal budgets but the consequences for

not having a budget are even more serious. There are more bills and expenses

that must be paid. A family that budgets will need to keep records that span

the whole year, as many bills come at around at the same time each year.

A family budget allows a family to plan its finances so that predictable

expenses throughout the year are covered by savings. The estimated amount

of each expense, based on last years amount, should be calculated in the

month when it falls due. A family should also build in to its budget:

an additional amount to cover annual increases in expenses

an amount for regular savingsthis can be done by checking the total

against the number of pay days.

[5.10] A family budget planner

LEARNINGABOUT

1 Study the cartoon on p. 130. What do you think it is trying to say about budgets? What

are the likely pitfalls confronting an unsuspecting teenager?

2 Budget planning can be based on short-term and long-term goals. Consider your goalsby following these steps.

a Write down five things that you would set as your short-term goals (things to have in

a week or a month).

b Write down five things that you might set as long-term goals (those that you may wish

to have in a few years time when you leave school).

3 Using Omars personal budget [5.9], describe the features that make it a good budget.


22/35


Use your calculator to work out the following yearly totals:

a total pocket money

b total paper run money

c total weekly spending

d total of the planned minimum saving.

4 How is the family budget planner [5.10] different from the personal budget [5.9]?

LEARNING TO

1 As a class, discuss the importance of sound budgeting.

2 Working in groups, use the family budget planner and prepare a spreadsheet for a family

budget with some realistic figures. Include things such as income and expenditure,

borrowings, fixed expenses and variable expenses, and savings. Discuss the reasons

for your choice of figures. Create a pie graph in Excel to examine the budget you have

prepared. You may wish to discuss this budget with members of your family.

3 Discuss the total amount of income needed to run a family. Which expenses would beeasiest to cut and which would be very difficult to reduce at all?

InsuranceInsurance is simply a way of protecting yourself against risk. There are

different types of risks, such as damage to your property or to your health

and wellbeing.

How insurance worksWhen a large number of people pay money into a fund for their mutual

protection, they are really sharing the risk [5.12]. When you take out any

type of insurance, you contribute a sum of money, called a premium. The

document you receive that explains the conditions of your insurance is

called an insurance policy. It is a legal agreement between you (the insured)

and the insurance company (the insurer). If you suffer any loss, you make a

claim against the company.

The cost of insurance is directly related to the level of risk involvedthe

greater the risk, the higher the insurance premium. Insurance companies

use an actuaryto study the chances, or the odds, of something happening.

The insurance company must handle its finances very carefully so that it isalways able to pay for claims.

There are many forms of insurance but the main ones are:

life insurance (or life assurance)

accident insurance (workers compensation, incapacity and loss of

income)

property insurance, which can include travel insurance

health insurance, which can also include travel insurance.

premiumthe amount payable for

insurance

insurance policya contract that sets out terms

and conditions of insurance

actuary

a person who calculates riskpercentages for insurance

purposes


23/35

Protection

Sharing the risk

Premiums

Insurance policy

Insurance company

Insurance company

Claim

Payment for damage


Property insuranceProperty insurance is designed to protect you from loss or damage to your

property. You may insure your house or car, or other valuable items of property.

Property insurance aims at providing financial compensation if loss or

damage to property occurs. This is the principle of indemnity. It is not intended

that people should make a profit out of an insurance claim. The person

insured should be compensated by exactly the amount of the loss, no more

and no less. The insurance company has to calculate the value of the property

that was damaged at the time the damage occurred. Insurance companies

have assessorsto make valuations on the amount of loss or damage sustained.

In addition to indemnity, there are two other important principles of

insurance:

For more information on lifeinsurance, see Chapter 6.

For more information onhouseholders insurance andmotor vehicle insurance (andmaking insurance claims), seeChapter 4.

For more information onhealth insurance and accidentinsurance (and workerscompensation), see Chapter 14.

For more information oninsurance of non-profitorganisations, see Chapter 13.

For more information on travelinsurance, see Chapter 3.

[5.11] How insurance works

indemnityprotection against damage or

loss

assessors

people who value the extent of

damage to property

insurable interesta clause stating that the person

taking out insurance on an itemowns or has an interest in that

property

utmost good faith, which is an obligation on the

insured to disclose honestly all information that is

relevant to a claim

insurable interest, which means that the insured owns

or has an interest in the property or item being insured

(for example, you cannot insure another persons car).

It is possible to insure almost anything, provided that

an insurance company is willing to accept your proposal

and you are willing to pay the premium.

Property insurance commonly includes:

[5.12] A boat and ute like this would likely

be insured.

motor vehicles

insurance against

burglary

insurance against fire

crops and livestock

insurance against rain

marine boats [5.12]

travel insurance

houses, units, buildings

and contents.


24/35


LEARNINGABOUT

1 What is the purpose of insurance? Can we afford to do without it?

2 How does insurance work? How is it possible to be compensated for an expensive loss?

3 What is meant by the following terms?

a The insurer c Premiumb The insured d Proposal form

4 What is meant by insurable interest? What limitations does it have?

5 What is meant by the principle of indemnity? Give an example.

6 David Dagg wants to insure his pet cat against getting pneumonia. Can he do it? On

what would it depend? On what would his premium depend?

7 Why might a person not be covered against burglary if they went out leaving the front

door open all day?

LEARNING TO

1 Working in groups, prepare a collage of newspaper advertisements and articles on

insurance. Divide the items into the various categories of insurance.

2 Hold a class debate on the question Is insurance simply another form of gambling?

3 As a class, create a concept map on the theme of insurance.

4 Use the internet to find out more about insurance. (Try the websites for companies like

NRMA and AAMI.) Find a particular type of insurance that interests you and

write a half-page report on your research findings.

Consequences of poor budgetingMany Australians are currently in debt. This means that they owe money on theircredit card accounts or have a home loan (mortgage) or other personal loan.

Credit card debt is seen as a major problem. Sometimes people cannot repay

these debts, through poor budgeting or personal circumstances. With some

common sense and a little knowledge, you can withstand any financial crisis.

Creditcarddebtin

Australiaisnowover

$40billion.Theaverage

creditcarddebtisnow

$3000.

[5.13] Budget planning If you cannot pay your debts at an agreed rate,

talk to your creditors (the people to whom you

owe money). The aim is to reach a solution to a

problem, such as offering to make small, regular

payments. It is never too late to try to repay your

debts, even when legal action has been taken.

Set out the state of your financesbegin a new

budget. Then make the company to whom you

owe money an offer of a reasonable amount of

repayment.

Seek the advice of welfare organisations, a

magistrate or legal aid officer, who will be able

to give you valuable help.


25/35


WHAT TO EXPECTIf you still have ongoing financial difficulties, the following can happen:

HARASSMENT FROM DEBT COLLECTORS

Debt collectors cannot enter your home without your permission. A court order is necessarybefore any goods can be taken. Ring the police if anything odd takes place.

GARNISHEE ORDERSA garnishee order is an order to a person who owes money to pay that money to the creditor.

This order is often made to the persons employer or it may be made to the persons bank

accounts. If making one single repayment is too difficult, you may be able to pay in instalments.

BAILIFF SEIZUREThe courts officer can be instructed to go to your home, seize goods, sell them and use the

proceeds to repay your creditors.

BANKRUPTCYWhen a person becomes bankrupt, all of their affairs are placed in the hands of an official receiver,

who then does what is necessary to repay creditors. It is true that you may never pay the money

you owe, but:

you will have to contribute to the debt for the period of bankruptcy (up to three years)

you will lose most of your property (except clothes, trade tools and certain other basic assets)

you will lose your credit rating

you will not be able to borrow over $500 without declaring that you are bankrupt.

When you are bankrupt your debts are frozen so that the pressure of debt collectors and court

actions are lifted during the period of bankruptcy. People may make themselves bankrupt by

applying to the office of the Registrar of Bankruptcy or may be forced into it by any creditor who

is owed $1000.

Note: An individual may become bankrupt but a company in difficulties may become insolvent

or, ultimately, liquidated. Remember also that bankruptcy is not something that only happens to

older peopleit can happen to teenagers as well (see the newspaper extract overleaf).

bankruptwhen a person who is unable to pay

their debts and is declared so by a

court

receivera person or company appointed by the

court to take charge of the financial

affairs of an individual or company

insolventwhen a company that owes more than

it owns

liquidatedwhen a company is wound up because

it cannot afford to continue trading


26/35


Mobile phones main cause of teenage debt

Mobile phones are to blame for the increasing

numbers of young Australians seeking to declare

themselves bankrupt, the NSW government says.

Fair Trading Minister Linda Burney said today a

survey conducted by the Office of Fair Trading

(OFT) had highlighted concerns about premium

mobile phone content and the massive bills being

racked upoften unknowinglyby users.

Suddenly they have got bills of $3,000 to

$4,000 because they thought services they were

getting in term of downloads and ringtones, and

voting on Big Brother, were free, Ms Burney told

reporters.

In fact it is enormously expensive ... it has

become an enormous problem.The survey of 1,000 respondents found 75 per

cent were not confident their mobile phone

premium content provider would address their

concerns about a high bill.

Ms Burney said many users felt to get through

the maze, to talk to the telco, is almost an

impossibility.

Only half of the respondents knew there was

an external body where they could raise their

concerns and of those, only a quarter couldidentify the Telecommunications Industry

Ombudsman as the relevant authority.

Ms Burney said the OFT had received more

than 2,000 phone-related complaints over the

past 18 months.

She also said financial counselling services

were reporting a rising rate of young people

seeking to declare themselves bankrupt.

They are having young people in their late

teens, early 20s, suggesting they should become a

bankrupt because they have racked up thousands

of dollars in premium services on mobilephones, Ms Burney said.

More and more young people are seeking

financial counselling services ... and without

exception, every single person in the financial

counselling services area, who has spoken to me,

say the problem starts with a mobile phone.

The Telecommunications Industry

Ombudsman can be contacted by calling

1800 062 058.

Source: Daily Telegraph, 7 November 2007

Copyright 2007 AAP

LEARNINGABOUT

1 Why is credit card debt such a problem

today? Why do you think it has grown

so much in the last 10 years?

2 How would you feel if, through poor

budgeting, you were forced into

bankruptcy by your creditors?

3 How would you feel if, as a small

business owner, a person who owedyou $5000 was unable to pay when the

loan was due?

4 Would you lend money to a person

who had just told you that they were

bankrupt? Explain why or why not.

5 What would be your advice to a friend

who could not pay their debts on time?


27/35


6 Read the newspaper article Mobile phones main cause of teenage debt and answer the

questions that follow.

a What is happening to many teenagers who have high mobile phone bills? Why?

b Why are teenagers especially at risk?

c Why have mobile phone bills become such an enormous problem?

d What services did teenagers think were free?e What was meant by to get through the maze, to talk to the telco, is almost an impossibility?

f How can young people get some help with this problem? Whom can they contact?

g How can you avoid the traps?

7 Write a letter to a loan company to which you owe $2000, explaining that you will not be

able to pay as you have lost your job, but that you start a new job in a month and could

pay your loan off in two extra payments.

LEARNING TO

1 Working in groups, construct a role-play that illustrates good and bad budgeting, and theconsequences of bad budgeting. You can either write a script or it can be improvised.

2 As a class, construct a concept map on the theme of poor budgeting.

3 In groups, analyse the different mobile phone plans currently on offer. Which ones do

you think are exploiting people? Why?

Sources of financial adviceThere are plenty of options available for people who want to know how to

manage their money. Initially, students may ask their parents for advice or

they may get some help from their local bank. There are more than 12 000

financial planners registered in Australia. They vary from large companies

to smaller individual operators. Some advisers charge a flat fee while others

charge on a commission basis, so that the financial adviser makes more

money when more money is invested. Types of financial advice can include:

investment advice retirement planning

tax advice salary packaging.

estate planning

The financial services industry is subject to a strict legal code, which is

designed to protect investors against shonky operators. The industry is self-

regulated through organisations [5.14].The Fido homepage


28/35

CASE

STUD

Y


Investing moneyInvesting is a way to use your savings to make money. People invest their

money in order to make more money or to gain an income. Some may in fact

rely wholly on their investments as their only source of income.

[5.14] The financial services industry

The Australian Securities and

Investments Commission (ASIC)ASIC is Australias regulator of corporate, markets and financial services. ASIC is a

government-run consumer protection regulator for corporate and financial services.

They ensure that Australias financial markets are fair and transparent, and provide

information for investors and consumers. Fido is their consumer website, which

provides financial tips and calculators, and information about scams.

Financial Planning Association(FPA)

The FPA is an organisation that assists people in finding a financial planner in their

local area. Financial planners are registered with the FPA, as they are the peak

professional body.

Certified Practising AccountantsAustralia (CPA)

A certified practising accountant is a finance, accounting and business professional

with specific qualifications, such as a degree accredited by CPA Australia. Members

of CPA Australia must undergo a comprehensive postgraduate professional study

program and follow a strict code of conduct set by CPA Australia.

Jodi the saver

Jodi is 15 years old and has a part-time job at a localsupermarket. She decides to put away (or save) $20 a week

out of her pay. One years savings amount to $1040. Ten years

later, at age 25, her savings would have grown to $10 400 and

twenty years later, at age 35, to $20 800. But Jodi can count

on more than this as she has invested her money in a bank

account that pays interest. With the interest earned over that

time increasing her balance, she can expect her savings to

grow even more.

Investment optionsBanks and credit unions have traditionally been the safest places for you

to leave your savings and earn interest on them, however, there are many

other options available. You can put your money into a managed fund, you

can buy shares on the stock exchange, and you can buy debentures (lending

to companies), government bonds (lending to the government), or a whole

range of financial investment products.


29/35


BanksBanks offer a lot of different investment accounts, all with different and

sometimes complex features. Banks today refer to these different accounts

as products, but for everyday transaction accounts the interest paid by the

banks is very low.

Term deposit accounts are used by peoplewho want to earn some interest on their deposits

but do not necessarily want to have daily access

to their funds. They agree to leave a fixed sum of

money in the account for a fixed period of time,

such as three, six or twelve months, or more. With

these accounts, you earn a higher rate of interest

the more money you invest.

Financial deregulation has also allowed other

financial institutions, such as merchant banks,

insurance companies and finance companies,

to offer these types of accounts. It is thereforeimportant to shop around before investing your

money. There is now a wide range of accounts

available to customers.

An ANZ Bank branch


30/35


Credit unionsCredit unions are owned by their membersthe people who save and borrow

with them. In 2009, there were 136 credit unions operating in Australia.

Some serve a particular industry or profession, such as the Teachers Credit

Union, while others are based in a particular geographic area, such as the

Nova Credit Union based in Newcastle.The growth of credit unions is also part of the movement towards

deregulation of financial institutions, which allows credit unions to offer

what banks traditionally offered, such as issuing credit cards. Credit unions,

like banks, offer a range of investment accounts in which people invest their

money. Generally speaking, the greater the amount of money invested, the

higher the rate of interest paid.

LEARNINGABOUT

1 Where would you go if you wanted some sound financial advice?2 How is the financial services industry regulated? What role do the following organisations

play in this?

a ASIC

b FPA

c CPA

3 Describe some of the different types of bank accounts currently on offer.

4 Why do you think credit unions have grown so much in recent years? Why do you think

they have been able to take business away from the banks?

5 What is meant by the expression the deregulation of financial institutions? Why do you

think deregulation has happened?

LEARNING TO

1 As a class, discuss the growth of internet banking in the community. Conduct a class

survey of the number of families who use internet banking.

2 Visit a financial institution, such as a bank or credit union, and collect their pamphlets

on the services and accounts they offer. Make a brief summary of the main features

contained in the pamphlets.

3 Using the Yellow Pagesor the internet, list the names of all of the major banks, building

societies and credit unions. Find out which are known as the big four Australian banks.

Which bank has the most impressive internet homepage?

4 Access the website for ING and make a list of the financial products

offered by the company.

5 Visit the website of the CPA or the Financial Planning Association and

write a brief report on the services these organisations offer to their

members.

6 Research the global financial crisis that occurred in October 2008.

Write a brief account of how it happened and the long-term effects on

investors, superannuation funds and managed funds.

Itwascreditunionsthat

firstintroducedautomatic

tellermachines(ATMs)

in1977.


31/35


Other places to invest moneyThere are plenty of options available for anyone wanting to

invest money. They include:

shares property

superannuation managed funds.

speculation

SharesMany people buy shares as a means of investing their money.

They contact a brokerwith instructions about what shares to

buy and at what prices [5.15]. They do this in the hope that the share price

will rise and they will then be able to sell the shares for a profit. Meanwhile,

the shares may pay a dividend, which is a portion of the profit made by the

company due to the shareholder. There are no guarantees that buying and

selling shares will make money, as it depends on what shares are bought and

sold. Share prices rise and fall according to the state of the economy. Popularbelief that in the long-term share prices will rise was tested in October 2008

during a global financial crisis, which hit stock markets throughout the world.

superannuation

a pension or regular allowance

generally paid to a person on

retirement

speculationbuying assets with the intention

of reselling at a profit

broker

a person or company that acts

on behalf of people wishing to

buy or sell shares

dividenda payment made to shareholders

resulting from a part of a

companys profits

For more information on theglobal financial crisis, seechapters 8 and 9.

[5.15] Buying shares

Inthepast,shareswe

boughtandsoldonth

tradingfloorofthestoexchange,withbuyer

andsellersdealingw

eachotherface-to-fa

andreferringtoalarg

blackboard.

1 The client looks at the financialpages of a newspaper or atwebsites.

2 The client selects the shares theywould like to purchase.

3 The client contacts the stockbrokerby phone or via the internet andissues instructions.

4 The stockbroker buys sharesaccording to the instructionsgiven. They will enter it into aSEATS terminal and the computermatches the buying and sellingorders strictly in the order in whichthey were entered.

5 The stockbroker contacts the clientto say that their shares have beenpurchased and issues a contractnote. Using the SEATS system,the stockbroker will sometimes beable to confirm the purchase or

sale while the client is still on thephone.

6 The client pays for the shares bycheque or credit card.

7 Using the Flexible AcceleratedSecurities Transfer (FAST) systemgives the client the option ofreceiving a statement, similar to a

bank statement, which details all oftheir share holdings. The client mayinstead choose to be issued with ashare certificate, but this has to bereturned if the shares are sold.


32/35


You cannot buy or sell shares by yourself. You need to go through a

stockbroker, who acts as your agent. Commonwealth Securities Limited, or

CommSec, is an example of a stockbroking company.

Share prices are listed in the finance section

of the daily newspapers. They are divided into

industrial shares [5.16] and mining shares. Once

you have decided to purchase a parcel of shares

in a company, you contact your stockbroker and

place an order. You must give specific instructions

to the broker, including the highest price you

are willing pay, in case the value of the shares

increases dramatically over a short time. Today, all

trading is done through a computer system known

as the Integrated Trading System (ITS). This

computer network operates throughout Australia

to create a single national market. In recent times

there has been a marked increase in the numberof Australian households who own shares and a

similar increase in the number of Australians who

use the internet to access share information.

Tom Piotrowski is a market analyst who provides market

updates on television for CommSec, Australias number

one online stockbroking service.

To close of business 6 November 2008

Company Last sale + or

No. sold

100s

Closing quotesDiv yld*

%

P/E

ratio+

52 week

Buy Sell High Low

A

Adelaide 2.55 8.00 6441 2.55 2.59 6.0f 11.8 3.92 2.07

Brighton

AGL Energy 15.15 35.00 12 847 15.15 15.18 3.50f 28.8 15.84 10.20

Air NZ 0.82 0.5 197 0.78 0.82 8.89 5.0 1.80 0.72

Alcoa 46.00 17.25 1.54 17.7 49.5 46.0

[5.16] Selected industrial shares as listed in the daily newspapers

The increase or decreasefrom the previous day

What buyers andsellers are offering

* The return on investmentthis is often used as ameasure for companies in terms of the income returnsfrom an investment. It is calculated in the followingway: dividend per share x100 current share price

+ This means price/earnings ratioit is the marketprice, or earnings per share, and is basically thenumber of years it will take for a share to pay for itselfbased on current earnings

The highest andlowest in the past year

For more information on shares andthe stock market, see Chapter 6.


33/35


34/35


SpeculationThere are other ways in which you can invest your money, particularly in

investments that yield capital gain. A person with money to invest may try to

gain income by purchasing an item in the hope of selling it later for a higher

amount of money. This is sometimes called speculation and it is a riskier form

of income earning, but it can be very rewarding. You can speculate on any itemthat has a tendency to appreciate in value over time. The most common items

are real estate, artwork, jewellery, antique furniture and even vintage wines.

Some of the worlds richest people have gained their income, or at least

added to it, through speculation. It involves making a purchase, keeping that

item for a holding period and then reselling. The speculator does not need to

make any improvement on the asset or even use the asset before it is resold.

What potential speculators should be most concerned with is the likely rate of

return, bearing in mind the inflation rate and capital gains tax that may have

to be paid when the asset is finally sold.

capital gain

an increase in the value of an

asset held by a person

Opportunities for the speculative investor

LEARNINGABOUT

1 Make a list of the different ways in which you can invest money. Beside each one indicate

whether you believe the level of risk is low, moderate or high.2 Describe the steps involved in buying or selling shares.

3 Refer to the share list from the daily newspaper [5.16].

a What was the last sale price for AGL Energy?

b What was its price/earnings ratio? What does this mean?

c Why is there no figure for Alcoa in the sell column?

d Which company had the lowest range in the 52-week period, between high and low sales?

e Which company showed the highest dividend/yield%? What does this mean?

Antiques Vintage wines Jewellery Artwork


35/35

withAdobeReader6.0. OpenReadMefileforconditions

andins

Windowssystemandsoftwarerequirements:Windows

XPo

ISBN978 1 4202 2929 5

Brian Parker and

Macmillan Education Australia20

CommercforAustralia Citize

Brian Parker


4 What is superannuation? What is its basic purpose?

5 What is a managed fund? Who would be most likely to use this form of investment?

6 What do you think are some of the advantages of internet banking?

7 Look at the following items. Which speculative investments do you think would be likely

to result in the highest capital gains? Give reasons.

a An old stampb A painting by a famous artist

c An antique chair

d Two coins from the same year

LEARNING TO

1 Working in groups, collect advertisements for different financial products. Prepare a

collage to show the difference between the products.

2 Use CommSecs website to find out how you can buy or sell shares. What rules apply?

3 Working in groups, prepare an advertisement for a financial product orproducts. Mention the interest rate in particular, and any other aspects you

think are important.

4 Working in groups, undertake the share market simulation game. The aim of this game

is for each group to buy shares on a particular date and then check their value in three

months time. The group that finishes with the most value is the winner.

a Each group is given $10 000 to invest on a particular date.

b Use the price quoted in the last sale column of the share price lists in that days

newspaper.

c Do not buy small parcels of shares. Set a minimum of 100 shares. It

might also be convenient to limit your investments to no more than

10 parcels.d Either record your portfolio of shares in a table similar to the one shown below [5.17]

or use a spreadsheet.

e Check the total value of your shares on a set date, for example, three months from

the starting date.

f As an added interest, all groups could be given the option of buying or selling up to

three parcels of shares at the end of each month. You will then need to redraw your

share portfolio table showing current total value.

[5.17] Our share portfolio

Date Company name andASX code

Share price Number of sharespurchased

Total

Starting amount $10 000

Note: You could check themeaning of marketableparcels of shares.

commerce for australian citizens chapter 5

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