1. Money, Banking, Saving, and Investing
Economics: Chapter 8
Money, Banking, Saving, and Investing

2. All about Money Functions of money Characteristics of money
Types of Money
US Money supply

3. Functions of Money Medium of Exchange Unit of Account Store of Value
Can use it in exchange for an item of value
Unit of Account
Used as a means to measure the value of goods and services
Store of Value
Maintains its value over time

4. Characteristics of money
Generally accepted
Divisibility
Portability
Durability
Uniformity
Scarce

5. Types of Money Commodity Money Commodity Backed Money Fiat Money
An item used as money that has value on its own, but is also used as money
Example: Cigarettes in prisons
Commodity Backed Money
Money that has value because it is representative of a commodity held in a nation’s treasury
Example: Gold Standard
Fiat Money
Money that has value because the government has decreed that what is used as money has value as a medium of exchange

6. US Money System
US Money Supply is monitored by the Federal Reserve System (our central bank)
Money supply is divided up into two categories:
M1 – includes currency and checkable deposits (demand depositis)
Most liquid
M2 – includes M1 and savings accounts and time deposits
Less liquid
Savings accounts are called “near money”

7. US Money System What about Credit Cards? What about Debit Cards?
Are they money?

8. The Banking System
Important part of our economy.
Why?

10. Financial Institutions
Must have a charter from state or federal government
Why must banks be regulated?
What do you remember about the Causes of the Great Depression?
What do you know about the reason we recently had a Great Recession?

11. Types of Banks Commercial Banks Savings and Loans Mutual Savings Banks
businesses
Savings and Loans
Mutual Savings Banks
Credit Unions
They used to be different, but now most have very similar functions

12. What are the functions of financial institutions?

13. Functions of financial institutions
Cash Checks
Issue Credit Cards
Exchange foreign currency for US money and vice versa
Safe-Deposit Boxes
E-Banking
Main function: financial intermediary

14. Financial Intermediary
Brings savers and borrowers together in a financial market
Savers deposit their money
Banks use their depositors money to make loans to borrowers

16. Liquidity Liquidity – how fast can an assets be converted into cash
Currency is the most liquid
Banks offer many types of deposit accounts to savers
Vary in liquidity
Some accounts require a certain period of time to pass before a saver can access their money

17. How do savings accounts benefit us?

18. Interest Rates: Think risk vs. reward
Rates are higher for savings accounts than for checking accounts (checkable deposits)
Rates are higher for time deposits than for a “regular
Interesting link
Think risk vs. reward
Higher the “risk” the higher the reward
What is the risk of putting your money in the bank?

19. FDIC insures deposits of up to $250,000
What is the cause of this law?
So rather than “risk”, it’s really about the tradeoffs that you make when you make your decision.

20. Loans Commercial Loans Consumer Loans Mortgages Purpose? Includes
Principal – amount actually borrowed
Interest – amount
Other fees: points, fees
15 Year or 30 Year?
Fixed or variable?
Example: $220,000 home, 30-Year fixed mortgage with a rate of 5 percent
Credit Rating: Be careful, Banks will do a credit history

21. “A credit report includes information on where you live, how you pay your bills, and whether you’ve been sued or have filed for bankruptcy. “

22. Banks create money How? They use fractional reserve banking
They are required to keep a certain percentage of each deposit in the bank (reserve requirement)
Now 10%
Then they loan out the rest
If I deposit $100 in the bank, how much can the bank loan out?
How much “additional” money did my savings create?

26. Role of the Federal Reserve
Holding Reserves
Banks must keep a fraction of all deposits in reserve
“Banker’s Bank”
Providing Cash and Loans
Fed lends money to banks (discount rate)
Clearing Checks
Transfers funds from one bank to another when someone writes a check
Linking Banks electronically
Controls nation’s money supply
This is called Monetary policy and it plays an important role in stabilizing our economic system
Too much money – inflation
Too little money – deflation

27. How do savers help the Economy?
Remember the most important role of a financial institution is acting as a financial intermediary between savers and borrowers.
Would banks be able to make loans without the funds that savers deposit?
What would happen to economic growth if people could not borrow money?

28. Things to think about
What is the interest that you will earn by depositing your money in the bank
How is the interest calculated?
Simple interest
Interest earn in principal only
Compound interest
Interest earned on both principal and interest previously earned

29. Things to think about..
What is the interest that you will have to pay for a loan?
Are there any other fees associated with obtaining the loan?
Remember: Banks are a business out to make profit. The largest source of income for banks is the interest charged on loans.

30. Planning for the future
Personal Savings Rate
% of our income that we keep in savings.
Had fallen in the last 30 years
But statistics indicate that it is now rising again
Nov rate was 4.9%

31. Savings Helps our Economy Grow
Banks loan out a fraction of depositors money
This benefits banks because they earn interest
But these loans also enable new businesses to start.
New businesses stimulate the economy when they purchase physical capital and hire new workers
There is a rippl effect throughout the whole economy. (multiplier effect)

32. Savings Helps You Reach Your Goals
What are you saving for?
Car
College
Independent Life

33. Savings Helps You When You Need Money for Emergencies
“Poop” Happens, right?
Rule of Thumb – Keep savings in the bank worth as much as you would need for a six-month period of time
“Rainy Day” fund

34. You need to save for your retirement
What are your retirement goals?
When do you want to retire?
What lifestyle do you want to have?
Where do you want to live?
Need to plan now for your retirement because if you wait too long, you may not have enough.
I plan to live past the age of 100!

35. Other events will make demands on your income
Need to plan now for your retirement because if you wait too long, you may not have enough.
I plan to live past the age of 100!
Other events will make demands on your income
College
Wedding
Travel
Car
Home
Kids –
Day Care cost me $13,000 per year when my boys were young!
Kids’ college fund

36. Social Security will not be much when you retire
It is a pay as you go system. What we contribute today pays for current retirees.
When I retire you will fund my social security.
So you better get really good jobs!!!!

37. Retirement – Three Legged Stool
Social Security
Age 65
FICA (This is your contribution. You will see it as a category on your paycheck)
Company Retirement Plans
401(k), Pension Plans
Personal savings and investment
Savings accounts, IRAs, Stocks and bonds

38. Company Retirement Plans
Company Pension Plan
Employer makes a contribution to your pension plan
401(k)
Named after the section of the IRS tax code where it is located
Money is not taxed now so you can adjust your contribution to get into a lower tax bracket and lower your federal income taxes

39. Personal Savings and Investments
Not employer sponsored
Variety of options
Most common – IRA (Individual Retirement Account)
Sponsored by federal government
Tax benefits are offered
Two types
Traditional IRA – Money put into account is not taxed until it is withdrawn
Roth IRA – Money is taxed before it is put into your account. It is not taxed when it is withdrawn.
Meet with an advisor trained in personal finance to help you make the right decision

40. Investing Your Savings
Make money with your money
What can you invest your money in?
Real Estate
Collections (like stamps, antiques, baseball cards, etc…)
Securities
Stocks
Bonds
Relationship between risk and reward.
High risk can be highly rewarded

41. The Power of Compounded Interest
Rule of 72. how long will it take to double your money when your interested is compounded. Divide 72 by the interest rate.
Compound Interest calculator

42. Bonds Relatively Low risk
Represents a loan. Owner of the bond is the lender. Seller of the bond is the borrower.
Bond are bought and sold in a bond market
Types:
Government Bonds
Municipal Bonds
Corporate bonds
Junk Bonds

43. Stock Market
Represents the highest risk
Beware the Bear!