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Money, Banking, Saving and Investing

Money, Banking, Saving and Investing. Money:  http:// www.econedlink.org/interactives/index.php?iid=189&type=educator the Fed:  http://www.stlouisfed.org/education_resources/in-plain-english-video/. What Makes Money Important?. Has 3 major functions

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Money, Banking, Saving and Investing

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  1. Money, Banking, Saving and Investing

  2. Money: http://www.econedlink.org/interactives/index.php?iid=189&type=educatorMoney: http://www.econedlink.org/interactives/index.php?iid=189&type=educator the Fed: http://www.stlouisfed.org/education_resources/in-plain-english-video/

  3. What Makes Money Important? • Has 3 major functions • Medium of Exchange – used for trade of goods • Standard of Value – gives consistent worth of goods • Stability in Value - $5 now, worth $5 in future • Refers to purchasing power-- what you can get for your money.

  4. What Makes Money Important? • Six Characteristics of Money • Acceptability – people must accept the currency • Scarcity – has to be scarce enough to be valued • Portability – easy to carry • Durability – able to last • Divisibility – able to make change (smaller bills) • Uniformity – all must be similar

  5. History of Money and Banking • Used to be many different things – gold/silver • Called commodity money – has its own value • Switched to gold/silver bars • People start banks to store bars – receive banknotes • Commodity Money v. Fiat Money • Commodity money- backed by something else (gold) • Value depended on its base product • Fiat money- based on nothing (what we have today) • Government accepts its value and can be used to pay debts

  6. History of Money & Banking • http://www.bing.com/videos/search?q=YouTube+History+Channel+Documentary+money+and+banking&qs=n&form=QBVR&pq=youtube+history+channel+documentary+money+and+banking&sc=0-35&sp=-1&sk=#view=detail&mid=8F16861E1C10788532E78F16861E1C10788532E7

  7. How Do Financial Institutions (Banks) Work? • Many different kinds of banks • Commercial banks, savings and loans, mutual savings banks, and credit unions • All focused on saving and securing money for people • Bank Services • Cash checks, give loans, exchange foreign currency, financial advice, investing, etc. • Receiving Deposits – checking, saving, time • Each gain interest at different rates • Delivers Loans – commercial, consumer, mortgage • Charge interest at different rates for borrowing money

  8. How Banks Profit • Banks profit through interest • Charge a percentage to lenders (5-9%) • Give part of percentage to depositors (1-2%) • The 3-7% in between gives the banks profits • Used to pay employees, fees, etc. • Also profit from fees and other charges • Banks only allowed to lend 90% of deposits • Must keep at least 10% in house for withdrawals

  9. The Federal Reserve – A Bank for Banks • Does not focus on a profit • Focus on keep banking system stable and healthy. • Main jobs include linking banks electronically, clearing checks and lending to banks when their funds are low.

  10. Video on the Fed • http://www.bing.com/videos/search?q=Federal+Reserve+System+Banks+charles+osgood&qs=n&form=QBVR&pq=federal+reserve+system+banks+charles+osgood&sc=0-0&sp=-1&sk=#view=detail&mid=6EDD1607AC74EFEF69A56EDD1607AC74EFEF69A5

  11. The Federal Reserve – A Bank for Banks • Biggest job is managing the entire money system of the country • Can add more money into economy through banks (increase loan ability), • Can take money out of economy (makes money more scarce, which makes it more valuable; people do not spend and save instead

  12. The Federal Reserve – “The FED” • What is “the Fed?” • The central banking system of the US • Goals of “the Fed” • Aiding the economy to gain 3 things • Stable prices • Full employment • Economic growth • How does “the Fed” achieve their goal? • By affecting/changing monetary policy • Promotes and regulates banking to stabilize markets • Creates/destroys money and other services

  13. How “the Fed” Functions • Most common tool – buying and selling government securities • Bonds sold by the government to the people in return for interest paid to the purchaser • Also makes loans to all banks around the US • Can change the discount rate charged for these loans • Affects what banks pay to the government for funds • Can also alter the % banks need to hold • Allows them to lend more or less to people

  14. How “the Fed” is Structured? • Federal Reserve has 12 Regional locations • Found on money to tell where it originated • Federal Reserve led by a Board of Governors • Chosen by President, approved by Congress

  15. How “the Fed” is Structured? • Monetary decisions made by Federal Open Market Committee • Make the daily decisions of how or what should be adjusted in terms of interest rates and cash flow • Members are 12 presidents of regional locations and members of the Board of Governors

  16. Can you be the Fed Chairman? http://sffed-education.org/chairman/

  17. The Power of Personal Savings • People do not save like they used to – less than 1% - used to be close to 10% of paycheck • Saving helps economy grow • Reasons for savings can be numerous • Rainy day • Catastrophic event • Retirement • College

  18. The Power of Personal Savings • Requires principle – money invested • Money invested will grow due to interest • Two types of interest • Simple – paid annually on your principle • Compound – paid periodically on principle • Compound interest is ALWAYS better when earning • Compound interest is WORSE when paying

  19. The Power of Personal Savings • Savings for Retirement -- three main sources of money – Social Security - Company pension plans - Personal savings • SS drying up, pension plans only for long term workers usually, more people not saving

  20. Creating a Budget • Creating a budget helps to control where your money goes • Must track both spending and earnings • Gather info on spending habits to get best estimates • Most people forget to include savings in their budgets

  21. Why is Investing Important? • Investing can make you money but can also be a risk – not guaranteed to be there later • Securities – stocks and bonds bought from companies or municipalities • Goal is to gain profit from some sort of interest • Usually the higher the risk, the higher the reward

  22. Why is Investing Important? • Compounding helps investing • Compounding is when investments gain interest that can be reinvested • Compound interest – interest paid on the principal (original $) and the interest • Rate of return – gain or loss in value over a time period

  23. Compound Investment Example

  24. Other Types of Investments • Stocks and the Stock Market - usually present the highest yields on investment • Stocks – partial ownership in a company; hope it improves for stock price • Can pay dividends – % on a stock, can be compounded by buying more stock

  25. Other Types of Investments • Bull and bear Markets • – bull=rising • - bear=down market • Buying stocks on the market • Usually bought through a brokerage film or stock brokers on stock markets • NYSE, NASDAQ, etc.

  26. Other Types of Investments • Real Estate – land has value • Value usually rises due to its limited resource • Retirement Plans – mix many investments together to give balance and security • Run by people who do this for a living = safer for you

  27. Other Types of Investments • Government backed savings • Bonds – company or government loan from you to them and they pay a fixed interest rate • Municipal bonds – those from state and local governments • Corporate bonds – from different companies

  28. Other Types of Investments • Mutual Funds – collection of different securities (stocks and bonds) • Diversification – having a mix of different securities • Asset Allocation – dividing assets to protect against possible downturns • If one goes down, others can balance it

  29. What is the Time Value of Money? • Money has a value, but is MORE valuable NOW than it is in the FUTURE • This is why bread used to cost a dollar!! • Affected by inflation (decreasing value) and the possible interest that could be gained on that money • Example - $100 today = $105 next year (due to interest) • SO, if you win the lottery, TAKE THE $$ NOW • Investing’s Rule of 72 – time it takes $ to double • Rule states 72 / interest = time to double • 72/6 (interest %) = 12 years (with no other $ added)

  30. Things to Consider when Investing • Risk – potential to lose your investment • Reward – potential gain on investment • Convenience – how easy to purchase/receive your money back • Liquidity – how easy can it change back to cash

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