Unit 2Understanding Finance

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Learning Outcomes

At the end of this unit, students should be able to:

Understand the history of money

Investigate examples of opportunity cost

Understand the term “saving” and how it works in credit unions

Learning Outcomes (continued)

At the end of this unit, students should be able to:

Define compound interest and show how to calculate it

Understand the term “DIRT” and show how to calculate it

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What is Barter?

Before money, how did individuals exchange goods or services?

BARTER“Barter is a medium in which goods

or services are directly exchanged for other goods and/or services,

without the use of money…”

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Examples of Barter

Long ago farmers used livestock for barter, then crops

Nowadays we have moved onto electronic money (paying for goods over the internet)

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What is Money?

“Money is anything that is generally accepted as payment for goods and services and repayment of debts…”

What forms are available? Can you think of a few examples…

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Opportunity Cost”Opportunity cost is the economic cost of using a resource for a specific activity is equal to the income foregone by not using it for an alternative activity”

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Opportunity Cost

For example the opportunity cost of using an acre of land in your faming operation is the income foregone by not renting it to a neighbouring farmer.

Can you think of any more examples?

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What are Savings?

“Savings are the process of setting aside money until a future date instead of spending it today. The goal of saving is provide funds for emergencies, short term goals and investments”

OR“A fund of money put as a reserve for the future”

Do you have a savings ( share) account in your credit union?

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Uses of Money

Students understand 4 main uses on money from communion to birthday presents:

1. Saving (10%)2. Giving (10%)3. Investing (10%)4. Spending (70%)

Example: allowance €/£ 10 per week but put €/£1 in savings for Christmas, holidays, birthdays, college, debs etc.

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Savings: Why save in the Credit Union?

You become a member and have a vote

Your savings are insured

No transaction fees

Your Credit Union declares a dividend at AGM and each share you hold you are entitled to dividend i.e. €1=1 share

You can access savings as long as the shares are not held as security against a loan

All members have a common bond, your local community or place or type of work

Savings in Credit Unions are called SHARES

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Savings: Why save in the Credit Union?

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1. Contact your local Credit Union and open a share account

2. The Credit Union pays you a dividend on the money/shares in your account

3. The Credit Union loans that money out to other people, but charges a slightly higher interest rate on the loan

How do savings work?

How do savings work?

A depositor / investor will look at the options on how interest is calculated and credited?

He / she will assess the A.E.R.( Annualised Equivalent Rate of Return)

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Compound Interest

This is the interest added to the principal so you get interest on interest.

The COMPOUND ANNUAL RATE ( c.a.r.) is the rate you get when calculating your interest. Example: how much will you receive if you invest €/£500 @ 4% per annum for two years?(see worksheet for solution and additional questions including D.I.R.T.)

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Deposit Interest Retention Tax (DIRT)

Deposit Interest Retention TaxThis is a tax paid on the interest you receive on your savings. It is calculated as a % of the interest you received e.g. 30%

Gross Interest €/£ 200DIRT 30% € /£ 60Net interest received €/ £ 140

Savings and lending for CU

When you save you become a member with your shares or savings

You get a share of any profit the Credit Union makes

You may pay DIRT on interest received

If a member dies, insurance will add to the values of shares

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Savings and lending for CU

Loans up to ‘x’ times the value of shares held (savings)

If a member dies, insurance usually pays off the remaining loan

Interest rate charged may be lower than banks as its charged on the reducing balance

Interest earned is called a dividend and decided at AGM

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