Money http wwweconedlinkorginteractivesindexphpiid189amptypeeducator the Fed httpwwwstlouisfedorgeducationresourcesinplainenglishvideo What Makes Money Important ID: 747154
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Slide1
Money, Banking, Saving and InvestingSlide2
Money: http://www.econedlink.org/interactives/index.php?iid=189&type=educator
the Fed: http://www.stlouisfed.org/education_resources/in-plain-english-video/Slide3
What Makes Money Important?
Has 3 major functions
Medium of Exchange – used for trade of goodsStandard 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.Slide4
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 similarSlide5
History of Money and Banking
Used to be many different things – gold/silverCalled
commodity money – has its own valueSwitched 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 debtsSlide6
History of Money & Bankinghttp://www.bing.com/videos/search?q=YouTube+History+Channel+Documentary+money+and+banking&qs=n&form=QBVR&pq=youtube+history+channel+documentary+money+and+banking&sc=0-35&sp=-1&sk=#view=detail&mid=
8F16861E1C10788532E78F16861E1C10788532E7Slide7
How Do Financial Institutions (Banks) Work?
Many different kinds of banks
C
ommercial 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 moneySlide8
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 chargesBanks only allowed to lend 90% of depositsMust keep at least 10% in house for withdrawalsSlide9
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.Slide10
Video on the Fed
http://www.bing.com/videos/search?q=Federal+Reserve+System+Banks+charles+osgood&qs=n&form=QBVR&pq=federal+reserve+system+banks+charles+osgood&sc=0-0&sp=-1&sk=#view=detail&mid=6EDD1607AC74EFEF69A56EDD1607AC74EFEF69A5Slide11
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 insteadSlide12
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 growthHow does “the Fed” achieve their goal?
By affecting/changing monetary policy
Promotes and regulates banking to stabilize markets
Creates/destroys money and other servicesSlide13
How “the Fed” Functions
Most common tool – buying and selling government securitiesBonds sold by the government to the people in return for interest paid to the purchaser
Also makes loans to all banks around the USCan 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 Slide14
How “the Fed” is Structured?
Federal Reserve has 12 Regional locationsFound on money to tell where it originated
Federal Reserve led by a Board of Governors
Chosen by President, approved by CongressSlide15
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 GovernorsSlide16Slide17
Can you be the Fed Chairman?
http://sffed-education.org/chairman/ Slide18
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
C
ollegeSlide19
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 payingSlide20
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 savingSlide21
Creating a Budget
Creating a budget helps to control where your money goesMust track both spending and earnings
Gather info on spending habits to get best estimatesMost people forget to include savings in their budgetsSlide22
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 rewardSlide23
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 periodSlide24
Compound Investment ExampleSlide25
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 priceCan pay dividends – % on a stock, can be compounded by buying more stockSlide26
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.Slide27
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 youSlide28
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 companiesSlide29
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 downturnsIf one goes down, others can balance itSlide30
What is the T
ime 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)Slide31
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