Banking, Borrowing, Saving, Investing & Insuring

Essential Standards The student will explain that banks and other financial institutions are businesses that channel funds from savers to investors. The student will compare services offered by different financial institutions. The student will explain reasons for the spread between interest charged and interest earned. The student will explain the difference between simple and compound interest rates.

What is a Bank? A bank is an institution for… A bank is an institution for… 1. Receiving money… 2. Saving money…. 3. Lending money.

Saving Money Banks offer a variety of ways to save money. The four most common are: 1. Savings accounts… 2. Checking accounts… 3. Money market accounts… 4. Certificates of deposit.

Savings and Checking Accounts Are the most common types of accounts. Are the most common types of accounts. They are especially useful for people who need to make frequent withdrawals. They are especially useful for people who need to make frequent withdrawals. Both pay a very small amount of interest— usually less than 1%. Both pay a very small amount of interest— usually less than 1%. And are not suitable if you want your money to make money. And are not suitable if you want your money to make money.

Money Market Accounts Money markets allow you to save and write a small number of checks… Money markets allow you to save and write a small number of checks… The interest rates are higher than savings accounts… The interest rates are higher than savings accounts… And interest rates can move up or down. And interest rates can move up or down. Money market accounts are paying around 4.5% interest. Money market accounts are paying around 4.5% interest.

Certificates of Deposit CDs offer a guaranteed rate of interest… Which is always higher than the rates of a savings account. However, funds placed in a CD cannot be removed until the end of a certain period of time… Usually one or two years—early withdrawal incurs a penalty. CDs are paying about 5.2% interest right now.

In terms of $$$ Say you had $2,000 to save… If you kept it in a standard savings account at.60% interest for five years… You would make… $60.72 If you kept it in a money market account at 4.5%... You would make… $ If you kept it in a CD at 5.2%... You would make… $576.97

Simple & Compound Interest Interest—the price to “buy” money… Principle—the amount borrowed… Simple interest— interest paid only on the principle… If you deposit $100 in a savings account at 5% simple interest, you will make $5/year. Compound interest— interest paid on both the principle AND the accumulated interest… So in your second year, you will receive interest on $105… $5.25. And in year three, interest on $110.25… $5.52.

Borrowing Consumers may borrow from a BANK, a private LENDER, or use a CREDIT card. If you borrow money, you must pay back the PRINCIPAL (the amount borrowed)… Plus the INTEREST… You can say that the “price” of “buying” money is called INTEREST.

Mortgages Most banks also offer mortgages— Most banks also offer mortgages— A type of loan used to buy … Real estate. A type of loan used to buy … Real estate. If the home you want to buy costs $200,000… If the home you want to buy costs $200,000… You would typically put down 20% in cash--$ 40,000… And borrow the rest… You would typically put down 20% in cash--$ 40,000… And borrow the rest… Usually over a period of 30 years. Usually over a period of 30 years. A good rule of thumb: your mortgage payment should NOT exceed 28% of your monthly income. A good rule of thumb: your mortgage payment should NOT exceed 28% of your monthly income.

Adjustable Rate Mortgages Lately, banks have attracted borrowers with low-rate, adjustable mortgages… Some as low as 2%... But after a period of time, that 2% can “adjust” to the market… And it always adjusts UP. Making an affordable house payment completely unaffordable. Salary: $50,000/year, or $ /month… House: $400,000 Original rate: 2.5% Payment: $ /month (37% of monthly income)… Adjusted rate: 7.9% New payment: $ /month (65% of monthly income).

Fixed Rate Mortgages Fixed-rates are much better deals… My interest rate is 5.5%- -but it can never change… And a $1100 house payment in 2005 (26% of my 2005 income) Will be a $1100 house payment in 2025… But only 11% of my projected 2025 income.

Essential Standards The student will evaluate the costs and benefits of using credit. The student will list factors that affect credit worthiness. The student will compare interest rates on loans and credit cards from different institutions.

Credit Cards ► When you use a credit card, you borrow money at the point of purchase… ► At the end of the month, you receive a bill… ► If you pay the bill in full, you use the service for free… ► If you do not pay in full, you will be charged interest.

Credit Scores Before deciding on your application, lenders will consult a CREDIT BUREAU… A SERVICE that specializes in collecting FINANCIAL INFORMATION about consumers). All potential borrowers are issued a “credit score”… If your score is low, you are considered a “high risk” borrower… Which limits the amount of money you may borrow… And usually leads to higher interest rates (making money more expensive).

Advantages of Credit Cards 1. They are convenient… 2. They offer an easy way to track expenses… 3. They often offer rewards for purchases (airline tickets, cash back, etc.)… 4. They are safer than cash—if they are stolen, your liability is usually limited… 5. Most are accepted around the world.

Disadvantages of Credit Cards… 1. They encourage people to buy things they cannot afford… 2. They mask the “pain” of paying cash… 3. Companies often prey on young people… 4. They charge much higher interest rates than if you borrowed money from a bank.

A.P.R. A.P.R. is the ANNUAL PERCENTAGE RATE, or the total cost of CREDIT expressed as a YEARLY percentage. A.P.R. is the ANNUAL PERCENTAGE RATE, or the total cost of CREDIT expressed as a YEARLY percentage. The average credit card has an APR of 24% The average credit card has an APR of 24% If your credit card is carrying a “balance” of $5,000, what is the yearly interest? If your credit card is carrying a “balance” of $5,000, what is the yearly interest? $1,200. $1,200.

Essential Standards The student will give examples of the inverse relationship between risk and return. The student will evaluate a variety of savings and investment options, including stocks, bonds and mutual funds.

Investing Investment occurs when people exchange their money for something they EXPECT to increase in value over time. Stock investment is one of the most common types of investment. Stocks are shares of OWNERSHIP in a company. Stock owners want to buy the stock at a LOW price and sell it at a HIGH price. The difference between a low purchase price and the higher selling price is called the “CAPITAL GAIN.” If a stock is sold at a lower price than it was purchased, it incurs a “CAPITAL LOSS.”

Mutual Funds Are a type of professionally-managed, collective investment. Thousands of investors pool their money and invest in different stocks and bonds… Earnings are divided among the investors. They are good investments because they diversify— They spread investment around and reduce risk.

Liquidity ► If you think you need to convert your investments into immediate cash… ► Liquidity is important. ► Liquidity—the ease with which investment can be converted into cash. ► What type of investment offers the most liquidity? ► Savings accounts. ► The least? ► Mutual funds; Stocks; CD’s. ► Liquidity and interest and INVERSELY RELATED!

Essential Standards The student will describe how insurance and other risk-management strategies protect against financial loss. The student will list various types of insurance, such as automobile, health, life, disability and property. The student will explain the costs and benefits associated with different types of insurance.

Insurance Insurance is a bet between you and your insurance company… You bet that something bad will happen to you— Illness, a car accident, etc… And they company bets that this WON’T happen.

Insurance Costs To be insured you must pay a monthly premium— A regular sum of money. In return, the company promises to compensate you in the event of an accident. If you remain accident-free, the company makes money… If you have an accident, the company loses profit… And usually makes up for this loss by raising the premium.

Auto Insurance Most states REQUIRE a minimum amount of auto insurance (if you drive). Most states REQUIRE a minimum amount of auto insurance (if you drive). If you drive your friend’s car (with their permission), you are usually covered. If you drive your friend’s car (with their permission), you are usually covered. Collision—covers damage to your car regardless of fault… Collision—covers damage to your car regardless of fault… Comprehensive—pays for all types of damage, vandalism, theft and natural disasters… Comprehensive—pays for all types of damage, vandalism, theft and natural disasters… Liability—covers accidents that damage another person’s property.. Liability—covers accidents that damage another person’s property..

Deductibles Most policies include a deductible— An amount of money YOU must pay before your insurance kicks in. If you have a $1,000 deductible and have an accident… You must pay the first $1,000… And the company pays the rest.

Health Insurance ► Is NECESSARY to have, even if you’re healthy. ► It usually covers preventative care, hospitalization and prescriptions. ► Private plans can cost several hundred dollars a month… ► Emergency room visits can cost thousands of dollars… ► Unpaid medical bills is the number one cause of personal bankruptcy in the United States… ► Get a job that offers health care.

Property Insurance ► Homeowners insurance protects your home an its contents— ► In the event of a fire or natural disaster… ► It is also REQUIRED for you get a mortgage loan. ► Renter’s insurance protects your belongings if a disaster strikes your apartment. ► Most policies don’t cover flooding… ► Make sure you don’t buy a house in a flood zone without flood insurance.