Question

Lori is a student who teaches golf on Saturdays. In a year, she earns \(\$ 20,000\) after paying her taxes. At the beginning of \(2014,\) Lori owned \(\$ 1,000\) worth of books, DVDs, and golf clubs and she had \(\$ 5,000\) in a savings account at the bank. During 2014 , the interest on her savings account was \(\$ 300\) and she spent a total of \(\$ 15,300\) on consumption goods and services. There was no change in the market values of her books, DVDs, and golf clubs. a. How much did Lori save in 2014 ? b. What was her wealth at the end of 2014 ?

Short answer

a. Lori saved \( \$ 4,700 \) in 2014. b. Her wealth at the end of 2014 was \( \$ 11,000 \).

Step-by-step solution

Determine Income and Consumption

Lori's income for the year is given as \( \$ 20,000 \). She spent \( \$ 15,300 \) on consumption goods and services.

Calculate Savings

To find out how much Lori saved, subtract her total consumption from her income: \[ \text{Savings} = \text{Income} - \text{Consumption} = \$ 20,000 - \$ 15,300 = \$ 4,700 \]

Initial Wealth

At the beginning of 2014, Lori had \( \$ 1,000 \) worth of books, DVDs, and golf clubs, and \( \$ 5,000 \) in a savings account.

Interest Earned

Her savings account earned \( \$ 300 \) in interest during 2014.

Calculate End of Year Savings Account Balance

Add the interest earned to her initial savings account balance: \[ \text{End Savings Account Balance} = \$ 5,000 + \$ 300 = \$ 5,300 \]

Calculate Wealth at the End of 2014

Lori's wealth at the end of 2014 includes her savings and the value of her books, DVDs, and golf clubs. Therefore: \[ \text{Wealth} = \text{End Savings Account Balance} + \text{Value of Books, DVDs, and Golf Clubs} = \$ 5,300 + \$ 1,000 = \$ 6,300 \]

Adjust for New Savings

Finally, add her savings for the year to this total: \[ \text{Total Wealth} = \$ 6,300 + \$ 4,700 = \$ 11,000 \]

Key concepts

income

Income is the money you earn from various sources like work, investments, or any other means. For Lori, her income comes from teaching golf on Saturdays, which totals \(\$ 20,000\) annually after taxes.
Understanding your total income is crucial as it forms the basis for planning your expenses and savings.
To calculate Lori's income, you just need to add up all her earnings for the year.

consumption

Consumption refers to the money spent on goods and services. It includes everything you buy to support your lifestyle.
For Lori, her yearly spending on various goods and services is \(\$ 15,300\).
Knowing your consumption helps you understand how much of your income you are using and what is left for savings.
To find out Lori's consumption, you look at all her expenditures throughout the year.

savings

Savings represents the portion of income that is not spent on consumption but set aside, often in a bank account.
Lori's savings for the year are calculated by subtracting her consumption from her income: \[\text{Savings} = \text{Income} - \text{Consumption} = \$ 20,000 - \$ 15,300 = \$ 4,700\]
This leftover money can be used for future expenses, investments, or emergency funds.
It's important to save so you have money for future needs or unexpected events.

interest

Interest is the extra money earned from keeping your savings in a bank or investing it elsewhere.
In Lori's case, her savings account earned an additional \(\$ 300\) during the year.
This interest is added to her initial savings, increasing her total savings.
Formulaically: \[ \text{End Savings Account Balance} = \$ 5,000 + \$ 300 = \$ 5,300\]
Earning interest on your savings helps your money grow over time, giving you more financial security.

wealth

Wealth is the total value of all your assets, including money in savings and the value of possessions like books and clubs.
At the start of 2014, Lori's initial wealth included \(\$ 1,000\) in books, DVDs, and golf clubs, and \(\$ 5,000\) in her savings account.
Her wealth at the end of 2014 can be calculated by adding her end savings balance, the value of her possessions, and her savings for the year: \[\text{Wealth} = \text{End Savings Account Balance} + \text{Value of Books, DVDs, and Golf Clubs} + \text{Savings} \] \[= \$ 5,300 + \$ 1,000 + \$ 4,700 = \$ 11,000\]
Building your wealth over time provides financial stability and the ability to handle larger expenses.