1. Saving and Investing 101 (The Basics)

2. Why Saving is Good for the Economy And individuals

3. Overview of the Financial System (Circular Flow of Funds) Savers invest through financial institutions to: Lessen their risk (i.e. some FDIC insured, diversify, let the pros manage money) Receive information (no surprises!) Be able to access funds they have saved/invested

4. Two Types of Financial Intermediaries Depository Financial Institutions = liquid (liquidity=able to access money saved/invested relatively quickly and cheaply) Nonbank Financial Institutions = not liquid (accessing funds deposited requires additional time and fees)

5. Depository Financial Institutions: Benefits: Money is generally liquid (cheap and easy to access) Federal Deposit Insurance Corporation (FDIC) may insured deposit for $250,000 per insured bank Costs: Generally low interest rates Return on investment may not keep up with rising prices (inflation) Take in deposits from savers and lend out funds to businesses and individuals

6. Nonbank Financial Institutions Nondepository institutions that channel savings to borrowers Examples: Finance companies: -- make loans to consumers and small businesses --charge borrowers higher fees and interest rates to cover losses from unpaid loans Pension funds: --investments in funds provide income to retired people --saved money invested in a variety of stocks, bonds, and other financial assets Life Insurance Companies: --provide financial protection to a family if someone dies --invests premiums collected each month and makes loans with them Mutual Funds: --combine savings of many individuals and invest in a variety of stocks, bonds, and other financial assets Benefit: Higher interest rate Diversified investments Costs:More risky Less liquidity

7. Risk and Return Return= how much money you make off an investment Risk= likelihood of earning the return you were hoping for

8. Bonds= loans to a government or corporation that must be repaid, with interest Bond calculation example: Coupon rate=interest rate of return : 2% Maturity=length of time of investment: 5 years Par Value=amount invested: $1000 0.02 x 5 x 1000 = $100 in interest earned (plus $1000 returned

9. Types of Bonds/Other Financial Assets Low risk and/or high liquidity = lower return High risk and/or low liquidity = higher return (potentially, not guaranteed!)

10. The “Bottom Line”… Suggestion #1: Portfolio Diversification! Save and invest your money in a variety of ways --Various degrees of liquidity!! --Various degrees of risk!! Suggestion #2: Know thyself and thy investments! --Consider what your financial goals are and how long you have to reach them --Conservative or aggressive? YOU decide!! --Always consider the benefits and costs of investments --Know exactly what you are investing in! (research, ask for help) Suggestion #3: Start young; be consistent --the earlier you start to save and invest, the more your investments will grow! --generally, the amount you invest is not as important as investing on a regular basis