Unit 9 · Personal Finance

Think of three workers. Dana earns $15 an hour at a grocery store (an example wage). Luis earns a salary of $52,000 a year. Kim serves food and earns a lower hourly wage plus tips from customers. All three receive income, money that comes in.

A wage is pay for each hour you work. If Dana works 30 hours, she earns 30 times $15, or $450. A salary is a fixed amount for a year, paid in equal parts. Luis is paid every two weeks, 26 times a year, so each check starts at $52,000 divided by 26, or $2,000.

Tips are extra money customers give for good service. Young people also get income from an allowance or small jobs like mowing lawns. Adults may earn interest from savings or money from a business. A common mistake is to think income only means a paycheck. Any money that comes in counts.

A lifeguard and a nurse both keep people safe. Yet the nurse usually earns more per hour. Why? Wages are a price, the price of work. Like other prices, they depend on how many people can do the job and how many employers want them.

Becoming a nurse takes years of school. Fewer people have that skill, and hospitals need many nurses. Many people can learn lifeguarding in a short course. The skills and knowledge a worker builds are called human capital. More human capital usually means higher pay.

Other things matter too. Hard or risky jobs, like work on a high bridge, often pay extra. Jobs in big cities may pay more because living there costs more. A common mistake is to think pay shows how important a job is. It mostly shows how scarce the skill is compared with how many employers want it.

Go back to Marcus. His gross pay was $480, the full amount he earned. Two lines on his stub are set by federal law. Social Security takes 6.2% of pay, and Medicare takes 1.45%. So 6.2% of $480 is $29.76, and 1.45% of $480 is $6.96.

Two other lines were income taxes. In this example, $15 went to federal income tax and $14 went to Illinois income tax. Money taken out of a paycheck is a deduction. Some workers also have deductions for health insurance or retirement savings.

Add the deductions: $29.76 + $6.96 + $15 + $14 = $65.72. Subtract from gross pay: $480 - $65.72 = $414.28. That is his net pay, the money that reaches his bank account. The big lesson: plan your spending with net pay, not gross pay.

Marcus has $414 from his check. He wants new sneakers for $120, a game for $60 and concert tickets for $90. He also must pay $40 a month for his phone and give $50 toward bus fare. These are example prices.

A need is something you must have to live or work, like food, housing, or a way to get to your job. A want is something nice to have but not required. Marcus’s bus fare is a need because he rides the bus to work. The concert is a want.

Money is scarce, so each choice has an opportunity cost, the next-best thing you give up. If Marcus buys the sneakers, he may give up the concert. A common mistake is to call something a need just because you want it badly. Another is to list every item you skipped as the opportunity cost. It is only the next-best one.

A budget is a plan for your money. Start with income. Then list what you expect to spend and save. The two sides should match. Let us build one for Ana, a young adult with $2,000 a month in net pay (an example).

Ana plans: rent $800, food $300, bus pass $75, phone $50, fun $250, clothes $125 and savings $400. Add them: $800 + $300 + $75 + $50 + $250 + $125 + $400 = $2,000. Every dollar has a job. Some expenses are fixed, the same each month, like rent. Others are variable, like food, which changes.

A budget works only if you track what really happens. Ana writes down what she spends for a month. She finds she spent $380 on food, not $300. So she cuts fun to $170 to stay even. If spending is more than income, a person runs short and may have to borrow.

There is no single right budget. One popular guide is called 50/30/20. It is just one example of a starting point. It says about 50% of net income goes to needs, 30% to wants and 20% to savings or paying off debt.

Try it with $2,000 a month. 50% of $2,000 is $1,000 for needs. 30% is $600 for wants. 20% is $400 for savings. Check: $1,000 + $600 + $400 = $2,000. Try $1,200: $600 needs, $360 wants and $240 savings.

The guide may not fit everyone. In a city where rent is high, needs may take 60% or more. Then wants must shrink to keep savings. A common mistake is to treat 50/30/20 as a law. It is a tool to help you think about balance.

Tasha wants a $600 laptop. She can save $50 a week from her job. $600 divided by $50 is 12, so she will reach her goal in 12 weeks. A saving goal names what you want, how much it costs and when you want it.

Now picture a surprise. Tasha’s bike breaks, and the repair costs $150. Without savings, she might borrow and pay extra. An emergency fund is money kept only for surprises like repairs, medical bills or losing a job. Many advisers suggest adults keep three to six months of expenses in one.

Savings goals can be short term, like a laptop in a few months. They can be long term, like college or a home years away. One helpful habit is to pay yourself first. Move savings out as soon as you are paid, before spending on wants.

When you keep money in a bank savings account, the bank pays you interest. Interest is a payment for letting someone use your money. The starting amount is called the principal. Say you put $100 in an account that pays 5% a year (an example rate).

With simple interest, you earn 5% of the $100, or $5, each year. After 3 years you have $100 + $5 + $5 + $5 = $115. The formula is principal times rate times years: $100 x 0.05 x 3 = $15 of interest.

With compound interest, you earn interest on your interest too. Year 1: $100 x 1.05 = $105. Year 2: $105 x 1.05 = $110.25. Year 3: $110.25 x 1.05 = $115.76. That is 76 cents more than simple interest. The gap is small at first, but it grows larger every year.

Meet two savers. Each uses an account paying 6% a year, an example rate. Maya puts in $1,000 at age 16. Sam waits and puts in $1,000 at age 28. Neither adds more money. Who ends up with more?

A shortcut called the Rule of 72 estimates how long money takes to double. Divide 72 by the interest rate. 72 divided by 6 is 12, so money at 6% doubles about every 12 years. By age 28, Maya’s $1,000 has become about $2,000, just as Sam starts.

By age 40, Sam’s money has doubled once, to about $2,000. Maya’s has doubled twice, to about $4,000. She saved the same amount, but she gave it more time. The key is time, not a big first deposit. A common mistake is to think small savings do not matter. Small amounts saved early can grow a lot.

Keeping cash in a shoe box earns no interest, and it can be lost or stolen. A savings account at a bank or credit union keeps money safe and pays interest. A credit union is a bank-like group owned by its members.

If a bank fails, deposits are protected. The FDIC insures bank deposits up to $250,000 per depositor, per bank, for each type of account. Credit unions have similar protection from a federal agency called the NCUA. So Marcus’s $300 in savings is safe even if his bank has trouble.

Banks offer choices. A savings account lets you take money out easily. A certificate of deposit, or CD, often pays a higher rate. The catch is that you agree to leave the money there for a set time. The trade-off is easy access versus higher interest.

Credit means borrowing money now and paying it back later. The person or business that lends is the lender. The borrower pays back the money borrowed, called the principal. Most lenders also charge interest, the price of using their money.

Here is an example. Jamal borrows $500 from a bank to fix his car so he can get to work. He agrees to pay 10% interest for one year. At the end of the year he owes $500 + $50 = $550. The $50 is the cost of getting the money early.

Credit can help. It lets people buy a home, pay for school or handle a real emergency. It can also hurt. Borrowing for wants can leave you paying for things long after you enjoy them. A common mistake is to think borrowed money is free. It always costs more than paying cash.

Two cards can look almost the same. A debit card takes money straight out of your bank account. If you have $80 in the account and buy a $30 shirt, $50 is left. You cannot easily spend money you do not have.

A credit card is different. Each purchase is a small loan from the card company. At the end of the month you get a bill. If you pay the whole balance by the due date, many cards charge no interest. If you pay only part, interest is added to the rest.

Both cards have benefits. Paying on time with a credit card can build a credit history. Credit cards often have strong fraud protection. The danger is that it is easy to spend more than you earn. A common mistake is to think the minimum payment is all you owe.

Loans and credit cards list an APR, or annual percentage rate. It is the cost of borrowing for a year, shown as a percent. It can include some fees as well as interest. Comparing APRs is a quick way to see which loan costs less.

Say a credit card has an APR of 24%, an example rate. Divide by 12 months: 24 divided by 12 is 2% a month. If you carry a $1,000 balance, one month of interest is about 2% of $1,000, or $20. Leave it for a year and it adds up to hundreds of dollars.

Now compare two offers for a $1,000 loan for one year. Offer A has an APR of 8%. Offer B has an APR of 20%. Using simple yearly interest, A costs about $80 and B costs about $200. A lower monthly payment can hide a higher APR or a longer loan. Look at both.

Lenders want to know if you will pay them back. So they check your credit report. It is a record of your loans and cards and whether you paid on time. Companies called credit bureaus collect this record. You have the right to see your own reports for free.

A credit score turns that record into one number. The most widely used scores run from 300 to 850. A higher score tells lenders you are lower risk. People with higher scores often get loans at lower interest rates.

Here is why that matters. Two people borrow $20,000 for a car. One gets an example rate of 5% because of a strong score. The other gets 12%. In the first year alone, that is about $1,000 versus about $2,400 in interest. A good score can save real money.

The company FICO makes the most widely used score. It publishes the rough weight of each part. Payment history, whether you pay on time, counts most, about 35%. How much you owe counts about 30%.

Length of credit history counts about 15%. New credit, meaning recent loan applications, counts about 10%. Credit mix, the kinds of credit you have, counts about 10%. Add them: 35 + 30 + 15 + 10 + 10 = 100.

So the best habits are simple. Pay every bill on time. Keep card balances well below the limit. Say your limit is $1,000 and you owe $900. You are using 90% of your credit, which can lower your score. Owing $200 uses only 20%. A common myth is that checking your own report hurts your score. It does not.

Some things cost too much to pay for all at once. Many people use a loan repaid in set monthly payments. Three common kinds are car loans, student loans and mortgages. Each one works a little differently.

A car loan usually lasts a few years. A student loan pays for college or training. Payments often start after school ends. A mortgage is a loan to buy a home, often over 15 or 30 years. If the borrower stops paying, the lender can take the car or the home. That property is called collateral.

Longer loans have smaller payments but cost more in total. Say a loan has payments of $300 a month for 48 months (an example). The total is $300 x 48 = $14,400. Another choice is $250 a month for 72 months. That total is $250 x 72 = $18,000. The lower payment costs $3,600 more.

Mia gets a text: "Your bank account is locked! Click here and enter your password now." It looks real. But it is a scam, a trick to steal money or information. This kind, where a fake message fishes for private details, is called phishing.

Scams often share warning signs. They rush you: act now or lose out. They ask for passwords, account numbers or a Social Security number. They ask you to pay with gift cards or a money app. They promise prizes you never entered to win.

What helps: stop and do not click. Contact the company yourself using a number or website you already trust. Real banks do not ask for your password by text. Tell a trusted adult. You can report scams to the Federal Trade Commission, the U.S. agency that protects consumers.

Identity theft happens when someone uses your name, Social Security number or account numbers without permission. A thief might open a credit card in your name. Then you learn about it when the bills or a low credit score show up.

Simple habits help. Use strong, different passwords for important accounts. Turn on two-step login when you can. Do not share your Social Security number unless it is truly needed. Shred papers with account numbers before throwing them away.

Check your bank statements and credit reports. You can get free credit reports from the three national credit bureaus through AnnualCreditReport.com. If something looks wrong, act fast. The FTC’s IdentityTheft.gov site gives step-by-step recovery plans. Catching a problem early limits the damage.

Imagine 1,000 drivers. Each year, a few of them will have a costly accident. No one knows who. Insurance is a deal: each person pays a small, regular amount, called a premium. The company uses the pool of money to pay for the few big losses.

Here is an example. Each driver pays $1,200 a year. That is $1.2 million from all 1,000 drivers. If 20 drivers each have a $40,000 accident, claims total $800,000. The pool covers them, plus the company’s costs. A deductible is the part of a loss you pay yourself before insurance pays. Say it is $500 and the repair costs $3,000. You pay $500 and insurance pays $2,500.

Common kinds are health, car, home or renters, and life insurance. Most states, including Illinois, require car insurance to drive. The trade-off is clear. You pay a sure small cost to avoid a possible large one.

At the store, a 12-ounce cereal box costs $3.60 and a 20-ounce box costs $5.00. These are example prices. Which is the better deal? Find the unit price, the cost for one unit. $3.60 divided by 12 is $0.30 an ounce. $5.00 divided by 20 is $0.25 an ounce. The bigger box costs less per ounce.

The same idea works for bigger buys. Go back to Priya’s phone. Paying $999 at once is cheaper than $35 a month for 36 months, which is $1,260. The total cost includes every payment and every fee.

A bigger box is only a better deal if you will use it before it spoils. A sale is only a savings if you meant to buy the item anyway. Comparing prices is about value for you, not just the lowest number.

A contract is an agreement between two or more people that the law can enforce. A phone plan, a loan or an apartment lease is a contract. Once you sign, you usually must do what it says, even if you did not read it.

Look for the key terms. What is the total cost? How long does it last? What fees are there, such as late fees or fees to cancel early? Priya’s phone deal had a $15 activation fee and a 36-month term. The fine print is the small text where these details often hide.

Before you sign, slow down. Take the papers home if you can. Ask what each fee is for. If a salesperson rushes you, that is a warning sign. In most states, anyone under 18 usually needs a parent or guardian to co-sign a big contract. Never sign a blank or unfinished form.