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Personal Finance Unit 6: Consumer skills and major purchases

Smart consumers compare options, understand contracts, and plan major purchases like cars and homes carefully.

Covers: Consumer decision making, contracts and consumer protection, renting vs. buying a home, mortgages, buying a car, planning for retirement and the future

Study guide

Good consumer decisions start with comparing options. Comparison shopping looks at price, quality and total cost, including unit prices, warranties and fees. Marketing uses tactics like limited-time offers, anchoring and influencer promotions to encourage spending, and buy now, pay later plans can make purchases feel cheaper than they are. Opportunity cost reminds consumers that every purchase means giving something else up. Contracts are legally binding agreements; read the fine print before signing. Consumer protection laws and agencies, including the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB), fight fraud and unfair practices.

Housing is usually the biggest monthly expense. A common guideline is to spend no more than about 30% of gross income on housing. Renting offers flexibility and fewer maintenance costs, and requires a lease and usually a security deposit. Buying builds equity, the share of the home you own, but requires a down payment, closing costs, property taxes, insurance and maintenance. A mortgage is a loan to buy a home, typically over 15 or 30 years. Fixed-rate mortgages keep the same rate; adjustable-rate mortgages (ARMs) can change. A down payment under 20% usually requires private mortgage insurance (PMI). A 15-year mortgage has higher monthly payments but much less total interest than a 30-year mortgage.

Buying a car means considering the total cost of ownership: price, insurance, fuel, maintenance and depreciation (the loss of value over time). New cars depreciate quickly, so used cars can be a better value. Research prices, get pre-approved for a loan, compare the APR and loan term, and avoid focusing only on the monthly payment; longer loans lower payments but increase total interest. Leasing means renting a car for a set period with mileage limits. Long-term planning includes setting SMART goals (specific, measurable, achievable, relevant, time-bound), saving for retirement early, and preparing documents like a will.

With layaway, the store holds an item while you pay for it in installments, and you get it only after it's paid off. Rent-to-own lets you use the item right away but usually costs far more in total than buying it outright. Scarcity means people have unlimited wants but limited money, time and other resources. That forces trade-offs, and those trade-offs create opportunity costs.

A will states who receives your property and who cares for minor children after you die. Beneficiary designations on retirement accounts and life insurance pass money directly to the people you name. A power of attorney and a health care directive let trusted people act for you if you can't. Owning a home limits how easily you can move and makes you responsible for repairs. Renting builds no equity, and rent can rise when the lease is renewed. Renting often makes more sense for people who may relocate soon or haven't yet saved for a down payment and closing costs.

Key ideas

• Comparison shopping considers total cost, not just price.
• Read contracts carefully; the FTC and CFPB protect consumers.
• Spend no more than about 30% of gross income on housing.
• Buying builds equity but has many upfront and ongoing costs.
• Consider the total cost of car ownership, not just the monthly payment.

Formulas and rules

Common mistakes

• Choosing a car loan based only on the monthly payment; longer terms cost more in interest.
• Thinking renting is always 'throwing money away'; it can be the better financial choice.

Words to know

Comparison shopping

Comparing products on price, quality and terms.

Unit price

The cost per unit of measure.

Warranty

A promise to repair or replace a product.

Contract

A legally binding agreement.

Federal Trade Commission

Agency that protects consumers from fraud and unfair practices.

Lease

A contract to rent property for a set period.

Security deposit

Money paid upfront to cover possible damage.

Equity

The share of a home's value you own.

Down payment

The upfront portion of a home's price paid in cash.

Mortgage

A loan used to buy a home.

Fixed-rate mortgage

A mortgage with an interest rate that never changes.

Adjustable-rate mortgage

A mortgage whose rate can change.

PMI

Private mortgage insurance, often required with under 20% down.

Closing costs

Fees paid when finalizing a home purchase.

Depreciation

The loss of an asset's value over time.

Total cost of ownership

All costs of owning something over time.

SMART goal

A goal that's specific, measurable, achievable, relevant and time-bound.

Will

A legal document stating how property is distributed after death.

Sample practice questions

5 more questions like these, from level 1 to 5, are in the practice set.