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Consumer Economics: Paychecks, Budgets, Credit and Insurance

Read pay stubs and budgets, calculate interest and loan costs, understand credit scores and insurance, and match consumer problems to the laws that protect you.

Practice this skill 30 min Consumer economics Leer en español
Key idea

What you'll learn

In plain words: Consumer economics is the money side of everyday life.

It covers earning a paycheck, building a budget, borrowing and saving, protecting yourself with insurance, and knowing your rights as a buyer. In this lesson you will learn to:

  • read a pay stub and tell gross pay from net pay;
  • build and analyze a budget;
  • calculate simple and compound interest and compare the true cost of loans;
  • explain what moves a credit score;
  • compare insurance plans using premiums, deductibles and coinsurance;
  • match consumer problems to the federal laws and agencies that address them.

How it appears on the GED: Consumer economics questions almost always come with a stimulus — something to read or look at first. It might be a budget table, a pay stub, a loan offer, a graph of savings growth, or a short article about credit. You will be asked to:

  • read a value;
  • do a simple percent or subtraction;
  • compare two options; or
  • apply a definition from the text to a new situation.

The calculator is available. These are the questions where you will use it most.

Words to know

  • gross pay — total earnings before anything is taken out (40 hours × $20 = $800 gross).
  • net pay (take-home pay) — what is left after taxes and other deductions ($800 gross might be $620 net).
  • deduction — any amount subtracted from gross pay (taxes, insurance premium, retirement contribution).
  • FICA — Social Security (6.2%) and Medicare (1.45%) taxes withheld from wages; employers pay a matching amount.
  • withholding — income tax an employer takes from each check and sends to the government; set by Form W-4.
  • budget — a plan for spending and saving income over a period, usually a month.
  • fixed expense — the same amount every month (rent, a car payment).
  • variable expense — changes month to month (groceries, gas, electricity).
  • surplus / deficit — income minus spending is positive (surplus) or negative (deficit).
  • principal — the original amount saved or borrowed.
  • interest — the price of using money; paid to savers, charged to borrowers.
  • simple interest — interest on the principal only (I = P × r × t).
  • compound interest — interest on the principal plus interest already earned.
  • APR (annual percentage rate) — the yearly cost of borrowing, including interest and some fees.
  • credit score — a number (FICO: 300–850) predicting how likely you are to repay debt.
  • credit utilization ratio — credit card balances ÷ credit limits ($900 ÷ $3,000 = 30%).
  • premium — the regular payment for an insurance policy ($150 a month).
  • deductible — what you pay before insurance starts paying ($500 per year).
  • coinsurance / copay — your share after the deductible: a percent (20%) or a flat fee ($25 per visit).
  • diversification — spreading savings across many investments to lower risk.

All Social Studies words in the glossary

1. Paychecks, taxes and budgets

In plain words: The money you earn is not the money you get. Taxes and other deductions come out first.

From gross to net. Your employer starts with gross pay — everything you earned. Then it subtracts deductions — amounts taken out. What is left is net pay, the money that reaches your bank account.

DeductionWhat it isTax?
Federal income taxProgressive tax: higher income ranges are taxed at higher ratesYes
Social Security (6.2%)Funds retirement, disability and survivor benefitsYes (FICA)
Medicare (1.45%)Funds health insurance for people 65 and olderYes (FICA)
State/local income taxMost, but not all, states have oneYes
Health insurance premiumYour share of employer health coverageNo
401(k) contributionYour own retirement savings, often matched by the employerNo

Example: Gross pay is $1,000. FICA = 6.2% + 1.45% = 7.65%. So $76.50 goes to Social Security and Medicare.

Diagram of a paycheck from gross pay to net pay. Gross pay of 1,000 dollars, minus deductions, equals net pay. The FICA part of the deductions is 7.65 percent: Social Security 6.2 percent is 62 dollars and Medicare 1.45 percent is 14.50 dollars, for 76.50 dollars. Other deductions such as federal and state income tax, health insurance and 401(k) vary by worker. From gross pay to net pay Gross pay $1,000 (all you earned) − Deductions Social Security 6.2% = $62.00 Medicare 1.45% = $14.50 FICA total 7.65% = $76.50 Plus (amounts vary): income taxes, health insurance, 401(k) = Net pay reaches your bank

Each spring, workers file a tax return (Form 1040). If too much was withheld during the year, they get a refund (money back). If too little was withheld, they owe.

Budgets. A budget is a spending plan. It compares net income with planned spending. Steps:

  1. List your net monthly income.
  2. List your fixed expenses.
  3. Estimate variable expenses from past bills.
  4. "Pay yourself first": plan your savings before you spend.
  5. Subtract spending from income.

A popular guideline is the 50/30/20 rule. It splits take-home pay like this:

  • about 50% for needs (such as rent and groceries);
  • 30% for wants (such as eating out);
  • 20% for savings and extra debt payments.

Example: Net pay is $3,000. Needs get $1,500, wants get $900, and savings get $600.

Pie chart of the 50/30/20 rule for 3,000 dollars of net pay: needs 50 percent, 1,500 dollars; wants 30 percent, 900 dollars; savings and extra debt payments 20 percent, 600 dollars. The 50/30/20 rule on $3,000 net pay 50% Needs: $1,500 rent, groceries 30% Wants: $900 eating out 20% Savings: $600 and extra debt payments

An emergency fund is money set aside for surprises. Aim for three to six months of essential expenses. Then a job loss or a surprise bill won't force you to borrow.

2. Interest: the cost of borrowing and the reward for saving

In plain words: Interest is the price of using someone else's money. Savers earn it. Borrowers pay it.

Simple interest is figured on the starting amount only:

I = P × r × t (principal × yearly rate as a decimal × years).

Example: $2,000 at 5% for 3 years → I = 2,000 × 0.05 × 3 = $300.

Compound interest is "interest on interest." Each period's interest is added to the balance. The next period's interest is figured on the bigger balance. Think of a snowball rolling downhill. It picks up more snow because it is already bigger. When interest compounds yearly, Balance = P × (1 + r)^t.

Example: $1,000 at 10% compounded yearly:

  • year 1 → $1,100;
  • year 2 → $1,210 (10% of $1,100 = $110, not $100);
  • year 3 → $1,331.

Simple interest would give only $1,300.

Line graph of 1,000 dollars at 10 percent per year for 10 years. Simple interest grows in a straight line: 1,100, 1,200, 1,300 after 3 years and 2,000 after 10 years. Compound interest curves upward: 1,100, 1,210, 1,331 after 3 years and about 2,594 after 10 years. The gap widens over time. $1,000 at 10%: simple vs. compound interest $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 $2,200 $2,400 $2,600 $2,800 0 1 2 3 4 5 6 7 8 9 10 Years Balance $2,594 $2,000 yr 3: $1,331 yr 3: $1,300 Compound: 1,000 × 1.1^t Simple: 1,000 + 100t

Compounding works for savers and against borrowers. A credit card balance at 24% APR grows fast when you pay only the minimum. The Rule of 72 is a quick estimate. Money doubles in about 72 ÷ (rate) years. At 6%, that is about 12 years.

Comparing loans. By law, lenders must state the APR (Truth in Lending Act). For a fixed-payment loan:

  • Total repaid = monthly payment × number of months
  • Total interest = total repaid − amount borrowed

Longer loans have smaller payments. But they usually cost much more in total. A higher APR raises the cost too.

Saving and investing.

  • Savings accounts and CDs are low-risk and insured by the FDIC. But they pay lower returns.
  • Stocks (part ownership of a company) and bonds (loans to a company or government) can earn more. But they carry risk.

Risk and return go together. A chance at higher returns comes with a higher chance of loss. Diversification lowers risk — don't put all your eggs in one basket. Investing for the long run lowers risk too.

Inflation matters as well. If savings earn 2% while prices rise 3%, your money buys less each year.

3. Credit and credit scores

In plain words: Credit is borrowing. Your credit score is like a report card on how well you repay.

Credit means buying now and paying later. There are two main kinds:

  • Installment credit has fixed payments for a set time (car loans, mortgages, student loans).
  • Revolving credit lets you borrow again and again, up to a limit (credit cards).

Your credit report lists your accounts and your payment record. Three national credit bureaus keep these reports: Equifax, Experian and TransUnion. Your credit score is calculated from that report. FICO publishes the general weight of each factor:

FactorShareHelps your scoreHurts your score
Payment history35%Paying on timeLate payments, collections
Amounts owed30%Low utilization (under ~30%)Maxed-out cards
Length of history15%Old accounts kept openClosing your oldest card
New credit10%Few applicationsMany applications at once
Credit mix10%Several kinds of credit—
Pie chart of the general weights FICO publishes for credit score factors: payment history 35 percent, amounts owed 30 percent, length of credit history 15 percent, new credit 10 percent, credit mix 10 percent. What goes into a FICO credit score 35% Payment history 30% Amounts owed 15% Length of history 10% New credit 10% Credit mix

Example: Two cards have limits of $2,000 and $3,000. Their balances are $500 and $1,000. Utilization = 1,500 ÷ 5,000 = 30%.

Why it matters: A higher score earns lower interest rates. On a large loan such as a mortgage, a better rate can save tens of thousands of dollars.

4. Insurance and consumer protection

In plain words: With insurance, many people chip in a little. Then no one person has to pay for a disaster alone.

Insurance pools risk. Many people pay premiums, so the few who suffer a loss can be paid. Common types are health, auto, renters/homeowners and life.

Reading a health plan:

  1. You pay the premium all year.
  2. When you get care, you pay the bills until you reach the deductible.
  3. After that, you pay coinsurance (a percent) or a copay (a flat fee).
  4. Your share stops at the out-of-pocket maximum, a cap on what you pay.

Example: A plan has a $1,000 deductible and 20% coinsurance. You get a $5,000 hospital bill. You pay $1,000 + 20% × $4,000 = $1,800. The insurer pays $3,200.

Bar dividing a 5,000 dollar hospital bill. You pay the 1,000 dollar deductible plus 20 percent of the remaining 4,000 dollars, which is 800 dollars, for 1,800 dollars total. The insurer pays 80 percent of 4,000 dollars, which is 3,200 dollars. Who pays a $5,000 hospital bill? Deductible you: $1,000 20% you: $800 Insurer pays 80% $3,200 You pay $1,800 $1,000 + 20% × $4,000 Insurer pays $3,200 80% × $4,000

A low-premium plan usually has a high deductible. It is cheaper in a healthy year. It is more expensive in a year with big bills.

Consumer protection timeline. These federal laws and agencies protect you as a buyer and borrower:

YearLaw or agencyWhat it does
1933FDICInsures bank deposits (now up to $250,000 per depositor, per bank, per ownership category)
1968Truth in Lending ActLenders must disclose the APR and total cost of credit
1970Fair Credit Reporting ActSee your credit report; dispute errors
1974Equal Credit Opportunity ActBans credit discrimination (race, sex, age and more)
1977Fair Debt Collection Practices ActBans harassment by debt collectors
2009Credit CARD ActLimits surprise rate hikes and some card fees
2010CFPB (Dodd-Frank Act)Federal agency that enforces consumer finance laws and takes complaints
Timeline of consumer protection laws: 1933 FDIC insures deposits; 1968 Truth in Lending Act; 1970 Fair Credit Reporting Act; 1974 Equal Credit Opportunity Act; 1977 Fair Debt Collection Practices Act; 2009 Credit CARD Act; 2010 CFPB created by the Dodd-Frank Act. Consumer protection timeline 1933 FDIC 1968 Truth in Lending 1970 Fair Credit Reporting 1974 Equal Credit Opportunity 1977 Fair Debt Collection 2009 Credit CARD Act 2010 CFPB
Formula

Calculations you will use

Memorize these (there is no formula sheet for them):

  • Percent of a whole: part ÷ whole × 100 (rent $900 ÷ net pay $3,000 = 30%)
  • Net pay: gross pay − all deductions
  • Simple interest: I = P × r × t
  • Compound balance (yearly): P × (1 + r)^t
  • Monthly interest on a card: balance × (APR ÷ 12)
  • Total cost of a loan: monthly payment × number of payments; interest = total − amount borrowed
  • Credit utilization: total balances ÷ total limits
  • Yearly insurance cost: 12 × premium + deductible + coinsurance % × (bills − deductible), when bills are above the deductible
  • Percent change: (new − old) ÷ old × 100
Worked example

Example 1: How much is left?

Stimulus: Luis takes home $2,400 a month. His expenses: rent $900, food $350, transportation $250, phone $80, other $300.

Question: What percent of his take-home pay could he save if he keeps everything else the same?

Think aloud:

  1. Total expenses: 900 + 350 + 250 + 80 + 300 = $1,880.
  2. Left over: 2,400 − 1,880 = $520.
  3. Percent of take-home pay: 520 ÷ 2,400 ≈ 0.217 ≈ 21.7%.
  4. Eliminate traps: 520 ÷ 1,880 ≈ 27.7% divides by expenses, not income; "$520" is a dollar amount, not a percent.
Stacked bar of Luis's 2,400 dollar monthly take-home pay: rent 900, food 350, transportation 250, phone 80, other 300, for 1,880 dollars of expenses. The 520 dollars left over is about 21.7 percent of take-home pay. Luis's $2,400 take-home pay Rent $900 Food $350 Transp. $250 Phone $80 Other $300 Left $520 Expenses: $1,880 $520 ≈ 21.7% 520 ÷ 2,400

He meets the 20% savings goal of the 50/30/20 rule.

Worked example

Example 2: Simple vs. compound interest

Stimulus: Two savings accounts each start with $4,000 at 5% per year for 2 years. Account X pays simple interest. Account Y compounds yearly.

Question: How much more is in Account Y after 2 years?

Think aloud:

  1. Account X: I = 4,000 × 0.05 × 2 = $400 → $4,400.
  2. Account Y: year 1: 4,000 × 1.05 = $4,200; year 2: 4,200 × 1.05 = $4,410.
  3. Difference: 4,410 − 4,400 = $10.
  4. Check the logic: the extra $10 is interest earned on year 1's $200 of interest (5% × 200 = $10). Over decades this small gap becomes huge, which is why graphs of compound growth curve upward.
Bar graph of two 4,000 dollar savings accounts at 5 percent for 2 years. Account X, simple interest: 4,000 plus 200 plus 200 equals 4,400 dollars. Account Y, compounded yearly: 4,000 plus 200 plus 210 equals 4,410 dollars. Y has 10 dollars more, the interest on year 1 interest. $4,000 at 5% for 2 years $3,800 $3,900 $4,000 $4,100 $4,200 $4,300 $4,400 $4,500 Balance (vertical axis starts at $3,800) $4,000 yr 1: +$200 yr 2: +$200 $4,400 Account X (simple) $4,000 yr 1: +$200 yr 2: +$210 $4,410 Account Y (compound) +$10
Worked example

Example 3: Which loan really costs less?

Stimulus:OfferMonthly paymentMonths
Dealer$39560
Bank$56036

Both loans are for the same $18,000 car.

Question: Which offer costs less in total, and by how much?

Think aloud:

  1. Dealer: 395 × 60 = $23,700.
  2. Bank: 560 × 36 = $20,160.
  3. Difference: 23,700 − 20,160 = $3,540—the bank loan is cheaper.
  4. Trap: the dealer's payment is lower, so a hurried reader picks it. The question asks about total cost.
Stacked bar graph of two loans for the same 18,000 dollar car. Dealer: 395 dollars for 60 months totals 23,700 dollars, which is 5,700 dollars of interest. Bank: 560 dollars for 36 months totals 20,160 dollars, which is 2,160 dollars of interest. The bank loan costs 3,540 dollars less. Total cost of two loans for an $18,000 car $0 $5,000 $10,000 $15,000 $20,000 $25,000 Total repaid Borrowed $18,000 Interest $5,700 $23,700 Dealer ($395 × 60) Borrowed $18,000 Interest $2,160 $20,160 Bank ($560 × 36) Bank loan costs $23,700 − $20,160 = $3,540 less
Worked example

Example 4: Applying a definition to a new case

Stimulus (short text): "Credit utilization—the share of your available revolving credit you are using—is part of the 'amounts owed' factor. Keeping utilization low helps your score."

Question: Priya owes $600 on a card with a $1,000 limit. She pays off the balance and keeps the card open. What is the most likely effect?

A. Her score drops because she has less debt. B. Her utilization falls from 60% to 0%, which should help her score. C. Her payment history improves to 100%. D. Her length of credit history increases.

Think aloud: 600 ÷ 1,000 = 60% before, 0 ÷ 1,000 = 0% after. Lower utilization helps (per the text) → B. A reverses the effect; C and D name factors the action does not change.

Common mistake

Common mistakes

  • Budgeting with gross pay. Wrong: "I earn $3,500, so I can spend $3,500." Right: plan with net pay; deductions may take 20–30% before you see the money.
  • Dividing by the wrong whole. Wrong: rent ÷ total expenses. Right: when asked for a share of income, divide by income.
  • Judging a loan by its monthly payment. Wrong: "$300 a month is cheaper than $500 a month." Right: multiply by the number of payments and compare total cost.
  • Using the yearly APR for one month. Wrong: $2,000 × 18% = $360 interest this month. Right: 18% ÷ 12 = 1.5% → $30 this month.
  • Thinking every deduction is a tax. Health premiums and 401(k) contributions are deductions, not taxes.
  • Closing old cards to "clean up" credit. This can raise utilization and shorten your credit history, so scores often go down.
Test strategy

GED test strategy

  • Read the question first, then go to the table or graph for only the numbers you need.
  • Label units and time periods. Is the pay stub weekly, biweekly or monthly? Is the rate yearly or monthly?
  • Write the steps on your erasable note board (part ÷ whole, payment × months, etc.) before touching the calculator.
  • Estimate first. 22% of $3,000 for a year is about $660, so a month is about $55. If your answer is $660 or $5.50, you slipped.
  • Watch for reversed answers (interest vs. principal; Plan A vs. Plan B). Wrong choices are often the right numbers in the wrong places.
  • For definition questions, find the sentence in the passage that defines the term and match the situation to it—not to your own experience.

Check yourself

Consumer economics
Dana's Monthly Budget

(1) Dana works full time as a medical assistant. After taxes and other deductions, her take-home (net) pay is $2,800 per month. She wrote the budget below to see where her money goes.

CategoryMonthly amountType
Rent$980Fixed
Utilities (electric, gas, water)$160Variable
Groceries$420Variable
Transportation (car payment, gas, insurance)$310Fixed/variable
Phone and internet$120Fixed
Credit card minimum payment$75Fixed
Entertainment and eating out$150Variable
Savings deposit$280Fixed
Total planned spending and saving$2,495

(2) A fixed expense stays the same every month. A variable expense changes from month to month. Dana's goal is to build an emergency fund equal to three months of her rent, utilities and groceries.

According to the budget, about what percent of Dana's take-home pay goes to rent?

Answer choices
Hint

Divide the rent by the take-home pay, then change the decimal to a percent.

Check yourself

Consumer economicsFill in
Dana's Monthly Budget

(1) Dana works full time as a medical assistant. After taxes and other deductions, her take-home (net) pay is $2,800 per month. She wrote the budget below to see where her money goes.

CategoryMonthly amountType
Rent$980Fixed
Utilities (electric, gas, water)$160Variable
Groceries$420Variable
Transportation (car payment, gas, insurance)$310Fixed/variable
Phone and internet$120Fixed
Credit card minimum payment$75Fixed
Entertainment and eating out$150Variable
Savings deposit$280Fixed
Total planned spending and saving$2,495

(2) A fixed expense stays the same every month. A variable expense changes from month to month. Dana's goal is to build an emergency fund equal to three months of her rent, utilities and groceries.

After all the planned spending and saving in her budget, how many dollars of Dana's take-home pay are left over each month?

$

Type your answer in the box. Fractions like 3/4 are fine.

Hint

Find the total of the budget (it is in the last row), then subtract it from take-home pay.

Summary

  • Net pay = gross pay − deductions; FICA (Social Security 6.2% + Medicare 1.45%) and income taxes are taxes, but insurance premiums and 401(k) contributions are not.
  • A budget compares net income with fixed and variable expenses; plan savings first and keep an emergency fund.
  • Simple interest = P × r × t; compound interest earns interest on interest and grows faster over time.
  • Compare loans by total cost (payment × months), not by monthly payment; APR ÷ 12 gives the monthly rate.
  • Payment history (35%) and amounts owed (30%) are the biggest parts of a FICO score.
  • Insurance costs = premiums + deductible + coinsurance; laws like the Truth in Lending Act, Fair Credit Reporting Act and the CFPB protect consumers.
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