Money Banking Saving and Investing Money http www

Money, Banking, Saving and Investing

Money: http: //www. econedlink. org/interactiv es/index. php? iid=189&type=educator the Fed: http: //www. stlouisfed. org/education_res ources/in-plain-english-video/

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.

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

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

History of Money & Banking • http: //www. bing. com/videos/search? q=You. T ube+History+Channel+Documentary+money+ and+banking&qs=n&form=QBVR&pq=youtub e+history+channel+documentary+money+and +banking&sc=0 -35&sp=1&sk=#view=detail&mid=8 F 16861 E 1 C 107885 32 E 78 F 16861 E 1 C 10788532 E 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

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

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.

Video on the Fed • http: //www. bing. com/videos/search? q=Feder al+Reserve+System+Banks+charles+osgood&q s=n&form=QBVR&pq=federal+reserve+system +banks+charles+osgood&sc=0 -0&sp=1&sk=#view=detail&mid=6 EDD 1607 AC 74 EFEF 69 A 5

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

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

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

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

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

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

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

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

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

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 Weekly Spending 10 35 25 15 Food Cell Phone Gas Savings

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

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

Compound Investment Example 2200. 00 2000. 00 1800. 00 1600. 00 1400. 00 1200. 00 1000. 00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

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

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.

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

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

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

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)

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