Chapter 9: Sources of Capital Describe the benefits people gain by saving money. How do savings accounts differ from time deposits? How do economists measure savings?

Why do you save money? Major purchases Annual or semiannual bills Unexpected expenses Major long-term expenses. Amass wealth

What are the benefits of putting your money in a bank? Security Interest Money cannot be lost.

Types of Savings Accounts Regular Savings Account OB: require only a small deposit. OB: LIQUIDITY: can be converted to cash with little or no loss in interest payments. OC: Most banks charge fees if balance too low.

Types of Savings Accounts Money Market Deposit Accounts: OB: Generally higher interest rates offered. Depends on t-bill interest rates. OB/OC: Fairly easy to withdraw. OC: Interest rate might be lower than regular savings.

Time Deposits CDs (Certificates of Deposit) – required to leave money in account for a specific amount of time. Maturity – When you can have your money back.

Time Deposits USUALLY the longer in, the more interest earned. Depends on interest rates! Interest rate is established when the CD is purchased. Require minimum deposit.

Savings Bonds Purchasers assume little risk. The bonds are guaranteed by the US Government. Buy the bond at a “bargain” and redeem it on the date for the full value on the bond. Buy it for $25 and get $50 when you cash it.

Savings Bonds Kind of a loan to the government. Pays for government programs. Civic improvements. Pays for the debt.

Measuring Savings Economists measure savings to determine health of the economy. The SAVINGS RATE is the percentage of people’s disposable income that is not spent. Tells about wages Tells about economic slowdowns

QUESTION Interest rates are very low right now. What would be better, a savings account or a CD?

9.2 Investing Investment – people exchange their money for something of value with the expectation of earning a profit in the future.

Investment Remember that there is RISK.

Financial Planning BUDGET: What are the fixed expenses and the flexible expenses. How much are you willing and able to save?

Financial Planning An investment plan should have diversification. A variety of investments.

Types of Investment Retirement Plan (401k). - Employer offers a pension or a savings plan. IRA: Self-employed, you establish a program to save. Estate Plan: Life insurance, house – having a will to transfer funds and property. Can be big bucks to the taxman!

Two Types of Investment Financial investment – exchanging property ownership and payment to make a profit. Real investment – using money to create new capital goods.

Easy Way to Remember! Financial investment – collect items you expect to increase in value.

REAL Investment Use money to create a new capital good. Build an apartment complex. Money spent on the building is a REAL investment.

Real Investment and Economic Growth Capital accumulation promotes economic growth. Katie builds her own business. She will hire construction workers, interior decorators, buy stock, hire employees, etc. HELPING THE ECONOMY. That helps the infrastructure!

Real Investment and Technological Change Real investment enables companies to develop or purchase new technology. Push-pull effect. New tech pushes new business, but new business pulls technology up to their needs.

Real Investment and Entrepreneurship Venture Capitalists: REMEMBER Mark Marcula in PIRATES OF SILICON VALLEY? Financed Apple. Finds promising new businesses and invests. Also government has options like Small Business Administration with low interest loans.

Questions to Ponder What are the goals of a personal financial plan? How do financial investment and real investment differ? How does real investment affect economic growth?

Stocks, Bonds and Futures Why do people invest in the Stock Market? Gain a profit Limit risk on investments Become part owner in a corporation.

Stock Terms: Blue Chip Stocks: SAFE stocks. Products people will always need. Companies that have history. Tend to always offer profits. Stock Splits: AOL - $200 per share. 10 shares. $2000. 40 shares of AOL for $50. $2000.