Chapter 8 Money, Banking, Saving, and Investing

Moneymoneymoneymoney! Money!

3 Major Functions of Money Medium of Exchange: used for trade, makes trade easy Standard of Value: gives consistent value of goods Stability in Value: holding value over time. Purchasing power: what you get for your money

6 Characteristics of Money Money needs to exhibit the following 6 characteristics in order to carry out its 3 Major Functions

6 Characteristics of Money 1.Acceptability: Currency must be accepted 2.Scarcity: Currency cannot be made at any time. If this was the case, it would not have any value 3.Portability: Must be easy to carry. It should be convenient. 4.Durability: Must be able to last 5.Divisibility: Must be easily divided into smaller amounts 6.Uniformity: Must be similar

Think-Pair-Share! What are examples for each of the 6 Characteristics of Money?

What is an example that fits all the characteristics that could replace our current form of currency?

History of Money and Banking Gold, silver, salt, beads, shells: examples of forms of currency used in the past Commodity money: items of exchange used a medium of exchange, has its own value and is backed by something (gold or silver) Switch to gold/silver leads to formation of banks to store gold/silver--- receive banknote upon deposit of precious metals to exchange for those precious metals “on demand” Fiat Money: money that is backed by nothing. This is what we have today. U.S. Dollar backed by the full faith and credit of the U.S. Government

Different Types of Financial Institutions (Banks) Commercial banks Savings and loans Mutual savings Credit unions All focused on saving and securing money for people

Services Offered by Banks Cash checks, give loans, exchange foreign currency, financial advice, investments Receive deposits---checking, saving, time Each earns interest, but at different rates Deliver loans---commercial, consumer, mortgage Charge interest at different rates for borrowing money

How Banks Make a Profit Through Interest – Percentage is charged to lenders (5-9%) – Part of that percentage is given to the depositors (1- 2%) – The 3-7% in between is the profit made by banks to pay employees, fees, etc., Also profit from fees and other charges Banks do not lend out all deposits----keep 10% for withdrawals, lend out 90% for loans

The Federal Reserve The “FED”

What is the “FED”? The “FED” is the central banking system of the U.S. Main Goal: Aid the economy to gain 3 things: 1.Stable prices 2.Full employment 3.Economic growth How does the “FED” achieve that goal? – Affecting/changing monetary policy – Promoting and regulating banking to stabilize markets

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 by the purchaser – This is how the “FED” manages the money supply Makes loans to banks all around U.S. – Can change the discount rate charged for these loans – Affects what banks pay to the government for funds – Can also alter the percentage that banks need to hold Affects how much banks can loan out to people

Structure of the “FED” H Board of Governors Federal Open Market Committee 12 Regional Locations Board of Governors: Leads the Federal Reserve. Chosen by Prez, approved by Congress Federal Open Market Committee: Makes monetary decisions in regards to adjusting interest rates and cash flow. Members consist of the 12 presidents of the 12 regional locations as well as members of the Board of Governors 12 Regional Locations: Act as extensions of the Federal Reserve, and do most of the work for the “FED”. Service financial institutions in its region. Money originates from these locations. This can be found on the bills

Let’s Play Pretend! Today each of you will pretend to be Ben Bernanke!

Savings and Investments!

Creating a Budge Creating a budget helps you to manage your spending When creating a budget, you should keep track of your earnings as well as your spending (income and expenses) A lot of people forget to include savings in their budgets

Example of a budget

Benefits of Personal Savings There are numerous reasons to save money Catastrophic events/emergencies College Retirement Rainy day 3 Main Sources for Retirement Social Security Company pensions Personal Savings It’s important to invest some of your savings. This requires principle which is the amount of money actually invested. Money that is invested will grow due to interest

Interest Two Types of Interest Simple: interest that is paid annually on the principle Compound: interest that is paid periodically on the principle as well as the interest earned » Better when earning » Worse when paying

Compounded interest example

Time Value of Money Value of money decreases over time. $100 today will be more valuable than $100 5 years from now. Affected by inflation and interest If you win the lottery, take the money now Rule of 72: how to find out how long it would take for your $ to double. 72/interest= time it takes for money to double 72/ 6 (% interest)= 12 years for money to double

Other Types of Investments Stocks and the Stock Market: usually highest yields of investment Stocks: partial ownership of a company Dividends: portion of company’s earnings distributed to share holders. Can be compounded to buy more stock. Real Estate: value of land goes up with time due to limited resources Retirement Plans: mix investments to create balance and security. If it’s run by a professional, that is much safer

Other Types of Investments (cont’d) Government Backed Savings Bonds: Company or government loan FROM you to them. They pay a fixed interest rate on money borrowed. Municipal bonds: loans from state or local governments Corporate bonds: loans from a company, much riskier but higher return Mutual Fund: collection of different securities (bonds, stocks). Allows for diversification, meaning you would have a mix of different securities. Asset Allocation: dividing assets into different investments for protection

Things to Consider When Investing Risk: potential of losing investment Reward: potential gain from investment Convenience: how easy it is to invest or receive money from the investment Liquidity: how easy it would be to change investment into cash