Today’s Objectives

• Hand back and Review Tests• Test Corrections in Groups (Assigned already)• Begin Notes on Chapter 8 – Banking

• You will…– Understand your score and mistake from the test– Correct any mistakes to master the information– Begin to understand how banks work– Figure out how to Bank yourself

Chapter 8Money, Banking,

Saving and Investing

What Makes Money Important?

• Has 3 major functions– Medium of Exchange – used for trade of goods– Standard of Value – gives consistent worth of

goods– Stability in Value - $5 now, worth $5 in future• Refers to purchasing power – what you can get for $

What Makes Money Important?

• Six Characteristics of Money– Acceptability – people must accept the currency– Scarcity – it cannot just be made at any time– Portability – easy to carry– Durability – able to last– Divisibility – able to make change (smaller bills)– Uniformity – all must be similar

History of Money and Banking

• Used to be many different things – gold/silver• Called commodity money – has its own value

• Switched to gold/silver bars • People start banks to store bars – receive banknotes

• Commodity Money v. Fiat Money• Commodity money- backed by something else (gold)

– Value depended on its base product

• Fiat money- based on nothing (what we have today)– Government accepts its value and can be used to pay debts

How Do Financial Institutions (Banks) Work?

• Many different kinds of banks• Commercial banks, savings and loans, mutual savings

banks, and credit unions• All focused on saving and securing money for people

• Bank Services• Cash checks, give loans, exchange foreign currency,

financial advice, investing, etc.

– Receiving Deposits – checking, saving, time• Each gain interest at different rates

– Delivers Loans – commercial, consumer, mortgage• Charge interest at different rates for borrowing money

How Banks Profit

• Banks profit through interest– Charge a percentage to lenders (5-9%)– Give part of percentage to depositors (1-2%)– The 3-7% in between gives the banks profits• Used to pay employees, fees, etc.

• Also profit from fees and other charges• Banks only allowed to lend 90% of deposits– Must keep at least 10% in house for withdrawals

The Federal Reserve – “The FED”• What is “the Fed?”

– The central banking system of the US• Goals of “the Fed”– Aiding the economy to gain 3 things

• Stable prices• Full employment• Economic growth

• How does “the Fed” achieve their goal?– By affecting/changing monetary policy – Promotes and regulates banking to stabilize markets– Creates/destroys money and other services

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 to the purchaser• Also makes loans to all banks around the US– Can change the discount rate charged for these loans– Affects what banks pay to the government for funds– Can also alter the % banks need to hold

• Allows them to lend more or less to people

How “the Fed” is Structured?• Federal Reserve has 12 Regional

locations– Found on money to tell where it

originated• Federal Reserve led by a Board of

Governors– Chosen by President, approved by

Congress• Monetary decisions made by

Federal Open Market Committee– Make the daily decisions of how or

what should be adjusted in terms of interest rates and cash flow

– Members are 12 presidents of regional locations and members of the Board of Governors

Federal Reserve Video• http://www.stlouisfed.org/education_resources/

in-plain-english-video/

• http://sffed-education.org/chairman/

Creating a Budget

• Creating a budget helps to control where your money goes

• Must track both spending and earnings – Gather info on spending habits to get best estimates

• Most people forget to include savings in their budgets

The Power of Personal Savings

• Reasons for savings can be numerous• Rainy day, catastrophic event, retirement, college

• Requires principle – money invested• Money invested will grow due to interest

• Two types of interest• Simple – paid annually on your principle• Compound – paid periodically on principle• Compound interest is ALWAYS better when earning• Compound interest is WORSE when paying

What is the Time Value of Money?• Money has a value, but is MORE valuable NOW

than it is in the FUTURE• This is why bread used to cost a dollar!!

• Affected by inflation (decreasing value) and the possible interest that could be gained on that money

• Example - $100 today = $105 next year (due to interest)

• SO, if you win the lottery, TAKE THE $$ NOW• Investing’s Rule of 72 – time it takes $ to double• Rule states 72 / interest = time to double• 72/6 (interest %) = 12 years (with no other $ added

Compound Investment Example

Other Types of Investments• Stocks and the Stock Market - usually present

the highest yields on investment– Stocks – partial ownership in a company; hope it

improves for stock price– Can pay dividends – % on a stock, can be

compounded by buying more stock– Real Estate – land has value– Value usually rises due to its limited resource

– Retirement Plans – mix many investments together to give balance and security– Run by people who do this for a living = safer for you

Other Types of Investments• Government backed savings– Bonds – company or government loan from you to

them and they pay a fixed interest rate– Municipal bonds – those from state and local

governments– Corporate bonds – from different companies

• Mutual Funds – collection of different securities (stocks and bonds)– Diversification – having a mix of different securities

• Asset Allocation – dividing assets to protect against possible downturns– If one goes down, others can balance it

Things to Consider when Investing• Risk – potential to lose your investment• Reward – potential gain on investment• Convenience – how easy to purchase/receive your money back• Liquidity – how easy can it change back to cash