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

–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=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

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=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

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 budgets35

15

25

10 Weekly Spending

FoodCell PhoneGasSavings

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

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 151000.00

1200.00

1400.00

1600.00

1800.00

2000.00

2200.00

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