Money, Banking, Saving
and Investing
Money: http://www.econedlink.org/interactive
s/index.php?iid=189&type=educator
the
Fed: http://www.stlouisfed.org/education_res
ources/in-plain-english-video/
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
your money.
What Makes Money Important?
• Six Characteristics of Money
– Acceptability – people must accept the currency
– Scarcity – has to be scarce enough to be valued
– 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
History of Money & Banking
• http://www.bing.com/videos/search?q=YouTu
be+History+Channel+Documentary+money+a
nd+banking&qs=n&form=QBVR&pq=youtube
+history+channel+documentary+money+and+
banking&sc=0-35&sp=1&sk=#view=detail&mid=8F16861E1C107885
32E78F16861E1C10788532E7
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 – A Bank for
Banks
• Does not focus on a
profit
– Focus on keep banking
system stable and
healthy.
• Main jobs include
linking banks
electronically, clearing
checks and lending to
banks when their funds
are low.
Video on the Fed
• http://www.bing.com/videos/search?q=Feder
al+Reserve+System+Banks+charles+osgood&q
s=n&form=QBVR&pq=federal+reserve+system
+banks+charles+osgood&sc=0-0&sp=1&sk=#view=detail&mid=6EDD1607AC74EFEF
69A56EDD1607AC74EFEF69A5
The Federal Reserve – A Bank for
Banks
• Biggest job is managing the entire money
system of the country
– Can add more money into economy through
banks (increase loan ability),
– Can take money out of economy (makes
money more scarce, which makes it more
valuable; people do not spend and save
instead
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
How “the Fed” is Structured?
• 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
Can you be the Fed Chairman?
• http://sffed-education.org/chairman/
The Power of Personal Savings
• People do not save like they used to – less
than 1% - used to be close to 10% of
paycheck
• Saving helps economy grow
• Reasons for savings can be numerous
–Rainy day
–Catastrophic event
–Retirement
–College
The Power of Personal Savings
• 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
The Power of Personal Savings
• Savings for Retirement -- three main
sources of money
– Social Security
- Company pension plans
- Personal savings
– SS drying up, pension plans only for long term
workers usually, more people not saving
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
Weekly Spending
10
35
25
Food
Cell Phone
15
Gas
Savings
Why is Investing Important?
• Investing can make you money but can
also be a risk – not guaranteed to be
there later
– Securities – stocks and bonds bought from
companies or municipalities
• Goal is to gain profit from some sort of interest
• Usually the higher the risk, the higher the
reward
Why is Investing Important?
• Compounding helps investing
– Compounding is when investments gain
interest that can be reinvested
– Compound interest – interest paid on the
principal (original $) and the interest
• Rate of return – gain or loss in value
over a time period
Compound Investment Example
2200.00
2000.00
1800.00
1600.00
1400.00
1200.00
1000.00
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15
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
Other Types of Investments
• Bull and bear Markets
– – bull=rising
– - bear=down market
• Buying stocks on the market
– Usually bought through a brokerage
film or stock brokers on stock markets
• NYSE, NASDAQ, etc.
Other Types of Investments
– 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
Other Types of Investments
• 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
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)
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