Commerce For Australian Citizens Chapter 5

2
Finance and
the economy
Personal
finance
In this chapter you 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
CORE TOPIC
Chapter 5 Personal finance 119
Earning an income
income
the amount of money received
by an individual, a household, a
company or government from
any source
savings
money or other financial assets
that are stored for future use
wages
money paid on a regular basis
for a period of work or services
salary
income 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
award
the minimum rate of pay and
working conditions specified for
a particular job and set by an
industrial court
overtime
time worked over and above
normal hours of work
penalty rates
higher than normal wage rates
to compensate for working
outside normal hours
[5.1] Factory workers typically

earn a wage.
Income is 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 wages or a salary

working for yourself
investing your savings and retirement money
renting out your property to someone else
working on contract for organisations
payments from the government.
Wages for work

Many 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 award is considered overtime and 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.
The eight-hour day,

or 40-hour week, was
negotiated by the trade
unions and introduced in
1947.
Calculating wages
If you worked a normal 38-hour week at
$20 an hour, you would earn $760. If you
worked overtime for 6 hours at time-anda-half you would receive an extra $180
($20+$10x6). 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.
120 Commerce for Australian Citizens
Receiving a salary
The word salary
originated from the
money allowed to Roman
soldiers for the purchase
of salt.
For more information on awards,

see Chapter 14.
fringe benefits
payment of non-income items
received in addition to normal
wages or salary
A typical salary earner tends

to work in an office.
A 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 benefits
Many 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.
Flexitime
The flexitime system was developed to allow some workers to start
or finish at times to suit themselves. For example, a worker may
prefer to start at 7.30am and finish at 3.30pm, or start at 9.00am
and finish at 5.00pm. 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).
flexitime
working 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
Expense accounts or expense cards

An 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.
Company cars
Many 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 services

Some 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 of
interest much 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
bonus
a one-off extra payment to an
employee as a reward for good
work
Salary packages
Some 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 bonus if 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.
Learning about
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?
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 $20800
b Salary $15600
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 wage
rate per hour
Hours worked
Overtime rate
Hours of overtime worked
G Wizz
$12
35
$18
R Fermoe
$15
35
$22
10
J Walker
$20
37
$30
A Wong
$25
38
$37
nil
Total wages
(before tax)
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.
profit
the reward for risk-taking, after
selling something at a higher
price than it cost to produce
entrepreneurs
people who embark on owning
and running businesses
For more information on running
a business, see Chapter 15.
Income from profits: owning your own

business
Many people earn an income by going into business for themselves. This
income is called profit and is the result of risk-taking. It involves using your
energies to produce a good or service and selling it at a higher price than
it 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.
Many people go into business for themselves as a

way of earning an income.
Income from saving and

investment
In Australia, many people receive all or some of
their income from the money that they save and
invest. Investing is simply letting your savings
make 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.
The word entrepreneur

is from the French word
meaning to undertake.
Investing your money is

discussed more fully later in this
chapter.
For more information on finding
and renting accommodation, see
Chapter 4.
Income from renting or hiring
hire
to have temporary use of an
asset for a fee
Rent 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 hire your 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.
[5.3] Real estate is often rented.
Learning about
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.
[5.4] Acme Enterprises Pty Ltd

Year
Sales
Price
Income
Expenses
2006
500
$10
$5000
$3000
2007
600
$12
$4500
2008
200
$12
$3500
2009
400
$15
$5500
Commerce
for Australian
Profit or loss?
Citizens
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 sources

commissions
fees paid to agents who arrange
a sale
Student CD
Brian Parker
In Australia, people earn income in many different ways. Fees, commissions,

royalties and prize money are yet more examples of forms of income.
Fees
A 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.
Second edition
ISBN 978 1 4202 2929 5
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Macmillan Education Australia 2009
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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:
[5.5] Fee earners
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.
A salesperson in an electrical goods store
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 means
signing 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.
Commissions
retainer
a base amount paid to an
employee who also works on a
commission basis
A person acting as an agent or a go-between

may be paid a commission. These agents are
usually 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
$15000 car, that person could receive a 10per
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 5per cent of the
selling price (or even higher for luxury homes).
For example, an agent may be paid 5per cent
commission on a $400000 home$20000.
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 retainer system. 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
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
The zipper was invented

by an American engineer,
Whitcombe L Judson,
in 1893 at a time when
people wore highbuttoned boots.
Teflon, discovered in
1938, was the trademark
of the Du Pont company,
which developed it.
It was an Australian
from Victoria who
took out a patent
after inventing the foil
container used in the
making of wine casks or
fruit juice casks.
If a person composes music, writes a book or an article, or even invents

a new product, royalty payments may be paid as an income. This type of
income payment is made when a person is granted copyright or a patent for 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 that
was subject to copyright is normally available to be used by anyone without
payment of royalties.
[5.5] Musicians earn royalties as income
royalty
payment to a creator for the use
of their product or invention
copyright
the exclusive legal right to use
created works such as books,
music or dramatic works
patent
an invention that has been
registered and for which users
must pay
intellectual property
ownership of an idea, concept or
original work for which payment
may be due
<www.copyright.org.au>
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 money
A 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.

[5.6] Roger Federer
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.
Learning about
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 original
idea? 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?
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 benefits

Many 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 income
of 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
<www.centrelink.gov.au>
For more information on social

security payments, see
Chapter 4.
[5.7] Social security payments

Disaster relief payment
Abstudy
Disability pension
Youth allowance
Age pension
Newstart allowance
Carer allowance
Austudy
Child care benefit
Learning about
1
2
3
4
5
Make a list of the social welfare payments made by the government.

Should every person be able to claim these benefits?
Should people who have other wealth or income from savings be paid a pension?
Pensions are also called transfer payments. From where is the money transferred?
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 income

Savings 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 to
buy 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.
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.
Sales invite people to spend.
Spending patterns can vary according to

personal 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.
Learning about
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 money
When 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.

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 $5000
over 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 loan

Tori considered a loan of $12000 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:
$12000
Interest rate:
6%
Length of loan:
48 months
Total amount repayable: $12000+(6%x4years=$2880)=$14880

Monthly repayments:
$1488048=$310 per month

[5.8] Before you borrow money
Do I need this loan?

Have I shopped around?
Are there any unexpected

costs to consider?
Can I afford the loan?
Fixed vs variable interest

If you borrow $1000 for one year at a fixed rate of 9per 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 8per cent fixed for two years, then variable for the remainder of
the loan.
Problems with credit

Buying on credit is a normal part of a consumers way of life but it does
require some responsibility and wise management. The most important things
to remember are:
budget
a plan of your income, spending
and saving patterns for a period
of time
<www.wesleymission.org.au/
centres/creditline>
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 budget in 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.
CASE STUDY
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.
Learning about
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 $12000, 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.
Managing finances
For more information on
government budgets, see
Chapter 8.
It 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 are
not only prepared by individuals, but also by families, businesses, clubs and
even governments.
A personal budget
A budget is a means of achieving your goals by planning ahead and keeping
your goals, especially your long-term goals, in mind.
Personal budgets and setting goals

Step 1
Set your goals, whether long term, short term or both.
Step 2
List 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 3
List of all of the expenses that you know you must pay. This is a very
important process, so think carefully.
Step 4
Record 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 5
Plan to save a regular amount and keep a record of this in your
budget.
Step 6
Add 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.
CASE STUDY
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
1
15
July
22
29
13
August
20
27
10
17
24
Income $
Pocket
money
20
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
40
Lawns
10
Car
wash
10
Granddad
15
Extra
income
Total
income
Lawns
10
60
60
75
60
70
70
60
70
60
60
60
60
60
15
15
15
15
15
15
15
15
15
15
15
15
15
Mum
30
Sister
20
Expenses $
Weekly
spending
& fares
Special
dates
Movies
16
Birthday
presents
Rollerblading
30
Concert
55
Dad
30
Bike
repair
35
Other
expenses
Bike
repair
70
Total
expenses
15
31
45
50
70
15
45
45
35
15
85
15
15
Planned
savings
10
10
10
10
10
10
10
10
10
10
10
10
10
What
happened
+45
+29
+30
+10
+55
+15
+25
+25
+45
-25
+45
+45
Savings
balance
($50)
95
124
154
164
164
219
234
259
284
329
304
349
394
The family budget

Family 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
Learning about
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 goals
by 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.
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 be
easiest to cut and which would be very difficult to reduce at all?
Insurance
Insurance 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 works

premium
the amount payable for
insurance
insurance policy
a contract that sets out terms
and conditions of insurance
actuary
a person who calculates risk
percentages for insurance
purposes
When 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 actuary to study the chances, or the odds, of something happening.
The insurance company must handle its finances very carefully so that it is
always 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.

05026
For more information on life

insurance, see Chapter 6.
[5.11] How insurance works

Insurance company
Sharing the risk

householders insurance and
motor vehicle insurance (and
making insurance claims), see
Chapter 4.
Premiums

health insurance and accident
insurance (and workers
compensation), see Chapter 14.
Insurance policy
Protection

insurance of non-profit
organisations, see Chapter 13.
Insurance company
For more information on travel

insurance, see Chapter 3.
Claim
Payment for damage
indemnity
protection against damage or
loss
Property insurance
Property 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
assessors
people who value the extent of
damage to property occurs. This is the principle of indemnity. It is not intended
damage to property
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
insurable interest
a clause stating that the person
and no less. The insurance company has to calculate the value of the property
taking out insurance on an item
that was damaged at the time the damage occurred. Insurance companies
owns or has an interest in that
have assessors to make valuations on the amount of loss or damage sustained.
property
In addition to indemnity, there are two other important principles of
insurance:
utmost good faith, which is an obligation on the
[5.12] A boat and ute like this would likely
insured to disclose honestly all information that is
be insured.
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:
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.
Learning about
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 Premium
b 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.
<www.nrma.com.au>
<www.aami.com.au>
Consequences of poor budgeting

Credit card debt in
Australia is now over
$40 billion. The average
credit card debt is now
$3000.
Many Australians are currently in debt. This means that they owe money on their
credit 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.
[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.
What to expect
If 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 necessary
before any goods can be taken. Ring the police if anything odd takes place.
Garnishee orders
A 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 seizure
The courts officer can be instructed to go to your home, seize goods, sell them and use the
proceeds to repay your creditors.
Bankruptcy
When 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).
bankrupt
when a person who is unable to pay
their debts and is declared so by a
court
receiver
a person or company appointed by the
court to take charge of the financial
affairs of an individual or company
insolvent
when a company that owes more than
it owns
liquidated
when a company is wound up because
it cannot afford to continue trading
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 could
identify 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 mobile
phones, 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
1800062058.
Source: Daily Telegraph, 7 November 2007
Copyright 2007 AAP
Learning about
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 owed
you $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?
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 the
consequences 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 advice

There 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 12000
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:
<www.fido.gov.au>
<www.fpa.asn.au>
<www.cpaaustralia.com.au>
The Fido homepage
investment advice
tax advice
estate planning
retirement planning
salary packaging.
The financial services industry is subject to a strict legal code, which is

designed to protect investors against shonky operators. The industry is selfregulated through organisations [5.14].

[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 Accountants

Australia (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.
Investing money
Investing 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.
CASE STUDY
Jodi the saver

Jodi is 15 years old and has a part-time job at a local
supermarket. 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 $10400 and
twenty years later, at age 35, to $20800. 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 options
Banks 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.
Banks
An ANZ Bank branch
Banks 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 people
who 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 therefore
important to shop around before investing your
money. There is now a wide range of accounts
available to customers.
Credit unions
It was credit unions that
first introduced automatic
teller machines (ATMs)
in 1977.
Credit 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.
Learning about
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 Pages or 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?
<www.ing.com.au>
<www.cpaaustralia.com.au>
<www.fpa.asn.au>
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.
Other places to invest money

superannuation
a pension or regular allowance
generally paid to a person on
retirement
speculation
buying 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
dividend
a payment made to shareholders
resulting from a part of a
companys profits
For more information on the
global financial crisis, see
chapters 8 and 9.
There are plenty of options available for anyone wanting to

invest money. They include:
In the past, shares were

bought and sold on the
trading floor of the stock
exchange, with buyers
and sellers dealing with
each other face-to-face
Shares
and referring to a large
Many people buy shares as a means of investing their money. blackboard.
They contact a broker with instructions about what shares to
shares
superannuation
speculation
property
managed funds.
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. Popular
belief 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.
[5.15] Buying shares

1 The client looks at the financial
pages of a newspaper or at
websites.
2 The client selects the shares they

would like to purchase.
3 The client contacts the stockbroker

by phone or via the internet and
issues instructions.
4 The stockbroker buys shares

according to the instructions
given. They will enter it into a
SEATS terminal and the computer
matches the buying and selling
orders strictly in the order in which
they were entered.
5 The stockbroker contacts the client

to say that their shares have been
purchased and issues a contract
note. Using the SEATS system,
the stockbroker will sometimes be
able to confirm the purchase or
sale while the client is still on the
phone.
6 The client pays for the shares by
cheque or credit card.
7 Using the Flexible Accelerated

Securities Transfer (FAST) system
gives the client the option of
receiving a statement, similar to a
bank statement, which details all of
their share holdings. The client may
instead choose to be issued with a
share certificate, but this has to be
returned if the shares are sold.

You cannot buy or sell shares by yourself. You need to go through a
stockbroker, who acts as your agent. Commonwealth Securities Limited, or
<www.comsec.com.au>
CommSec, is an example of a stockbroking company.
Share prices are listed in the finance section
Tom Piotrowski is a market analyst who provides market
of the daily newspapers. They are divided into
updates on television for CommSec, Australias number
industrial shares [5.16] and mining shares. Once
one online stockbroking service.
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 number
of Australian households who own shares and a
similar increase in the number of Australians who
use the internet to access share information.
[5.16] Selected industrial shares as listed in the daily newspapers

The increase or decrease
from the previous day
What buyers and

sellers are offering
The highest and

lowest in the past year
To close of business 6 November 2008
Company
Last sale
+ or
No. sold
100s
Closing quotes
Buy
Sell
Div yld*
%
P/E
ratio+
52 week
High
Low
A
Adelaide
2.55
8.00
6441
2.55
2.59
6.0f
11.8
3.92
2.07
15.15
35.00
12847
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
Brighton
AGL Energy
* The return on investmentthis is often used as a

measure for companies in terms of the income returns
from an investment. It is calculated in the following
way: dividend per share x 100 current share price
For more information on shares and
the stock market, see Chapter 6.
17.7
49.5
This means price/earnings ratioit is the market

price, or earnings per share, and is basically the
number of years it will take for a share to pay for itself
based on current earnings
46.0

Property investment is popular with many people.

economic cycles, see Chapter 8.
Property
Buying and selling real estate (land, houses

and apartments) is another means of investing
money. Real estate tends to appreciate in value
over time. While this is the general trend, as land
is always thought to be in limited supply, there is
no guarantee that all real estate will appreciate in
value. Some properties may, for various reasons,
actually decline in value. However, experience
has shown that buying and selling property can
be an effective way of accumulating funds. What
potential investors need to remember is that there
are significant costs involved in buying and selling
property, such as legal fees, government taxes
(stamp duty) and estate agents fees, so these costs
need to be taken into consideration when looking
at any gains.
To make money from property investment you
need to allow enough time for the value to rise and
cover your buying and selling costs. In some years
there may be a property boom, while at other times in the economic cycle
property values may stay the same or even fall.
Superannuation
Superannuation is an investment designed to provide money for your
retirement. People regularly contribute some of their income into a
superannuation fund with the aim of collecting the money at retirement.
This money may be paid out as a lump sum or in fortnightly instalments.
Today there are many different superannuation funds to choose from. They
superannuation and managed
generally divide into:
funds, see Chapter 6.
accumulation funds, which grow according to
The NRMA offers many financial services.
the investment success of the fund
defined benefit funds, which are subject to a
set formula.
Managed funds
Instead of putting your savings in a bank account,
you can invest your money in what is called a
managed fund. This means putting your money
with a company that has financial expertise. That
company then re-invests your money in different
financial products, which might include shares
in companies. The fund then pays a dividend
depending on the success of its investments.
Speculation
capital gain
an increase in the value of an
asset held by a person
There 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 item
that 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.
Opportunities for the speculative investor
Antiques
Vintage wines
Jewellery
Artwork
Learning about
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?
4
5
6
7
What is superannuation? What is its basic purpose?

What is a managed fund? Who would be most likely to use this form of investment?
What do you think are some of the advantages of internet banking?
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 stamp
b 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 or
products. Mention the interest rate in particular, and any other aspects you
<www.ing.com.au>
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 $10000 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.
Note: You could check the
c Do not buy small parcels of shares. Set a minimum of 100shares. It
meaning of marketable
might also be convenient to limit your investments to no more than
parcels of shares.
Commerce
Australian
10parcels.
Citizens
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.
for
Student CD
Brian Parker
Second edition
ISBN 978 1 4202 2929 5

Brian Parker and
Macmillan Education Australia 2009

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6.0. O
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[5.17] Our share portfolio

Date
Starting amount
Company name and

ASX code
Share price
Number of shares
purchased
Total
$10000

Commerce For Australian Citizens Chapter 5

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In this chapter you will

earning an income and types of income

Chapter 5 Personal finance 119

[5.1] Factory workers typically

In Australia, income is derived mainly from:

working for wages or a salary

Wages for work

The eight-hour day,

120 Commerce for Australian Citizens

For more information on awards,

A typical salary earner tends

Expense accounts or expense cards

Chapter 5 Personal finance 121

Free or cheaper goods and services

122 Commerce for Australian Citizens

Hours of overtime worked

Chapter 5 Personal finance 123

Income from profits: owning your own

Many people go into business for themselves as a

Income from saving and

The word entrepreneur

Investing your money is

124 Commerce for Australian Citizens

Income from renting or hiring

Chapter 5 Personal finance 125

[5.4] Acme Enterprises Pty Ltd

Income from other sources

In Australia, people earn income in many different ways. Fees, commissions,

126 Commerce for Australian Citizens

[5.5] Fee earners

an accountant will charge a fee for preparing a

A salesperson in an electrical goods store

Musicians, artists and theatrical people (such

A person acting as an agent or a go-between

Chapter 5 Personal finance 127

The zipper was invented

If a person composes music, writes a book or an article, or even invents

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

128 Commerce for Australian Citizens

Many top professionals earn millions in prize

Chapter 5 Personal finance 129

Income from social security benefits

For more information on social

[5.7] Social security payments

Child care benefit

130 Commerce for Australian Citizens

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

Spending and saving income

Chapter 5 Personal finance 131

You may save money for a rainy day. If you

Sales invite people to spend.

Spending patterns can vary according to

132 Commerce for Australian Citizens

How much does the loan cost?

Sample calculation of the cost of a loan

Total amount repayable: $12000+(6%x4years=$2880)=$14880

$1488048=$310 per month

Chapter 5 Personal finance 133

Do I need this loan?

Are there any unexpected

Can I afford the loan?

Fixed vs variable interest