Lesson 8: Money,Banking, Saving, Investing

Consumer loans/personal

Individual borrowers take out consumer loans [money borrowed by an individual to make major purchases] to make major purchases such as a new car or boat -paid back in time installments -payments -Before making a consumer loan, the bank looks at the individual's credit history -credit card

1. Medium of exchange

It enables us to carry out trade and commerce easily, much more easily than through barter. For example, rather than trying to find someone willing to take, say, a dozen pairs of flip-flops in trade for a new backpack, you can just hand a store clerk a quantity of dollars—the established medium of exchange in the United States. U.S. dollars are this country's legal tender—they must be accepted as money for purchases and as payment for a debt.

Durability

It must be able to withstand the physical wear and tear of being continually transferred from person to person. Salt can last a long time, but only if kept dry.Salt fails the durability test.

M2 money

M1 plus savings accounts, money market accounts, and other near monies...not easily taken out of bank... - people's savings are not as liquid as cash

2. Standard of value.

Money allows us to measure and compare the value of all kinds of goods and services using one scale...compare prices. -For example, imagine seeing advertisements from two stores. One advertises a backpack for sale for nine pairs of flip-flops. The other has the same backpack advertised for five T-shirts. Without a common standard of value, how would you know which backpack costs more?

Portability.

People must be able to carry it with them easily. Salt is portable—to some extent. But imagine lugging several large bags of salt with you to the mall. By today's standards, salt fails the portability test.

a coincidence of wants

People wanted what he had, and he wanted what they had

mutual funds examples

Stock funds typically emphasize growth and income from rising stock prices and dividends. Bond funds offer income at a lower risk than stock funds. Money market mutual funds behave much like bank savings accounts.

Personal savings

These include a variety of financial assets that are not employer-sponsored.

social security

This is a government program that provides cash payments to retired workers

If you wanted to save money at your bank for a purchase you plan to make one year from now, which type of deposit would you make? Why?

Time deposit, because it tie up cash for a long period of time

mutual fund:

a collection of securities chosen and managed by a group of professional fund managers -Every mutual fund is designed to achieve certain financial goals

financial institution:

a firm that deals mainly with money, as opposed to goods and services; example include banks and stock brokerages -several kinds of banks, including commercial banks, savings and loans, mutual savings banks, and credit unions

junk bond:

a low-quality corporate bond that earns a relatively high rate of interest based on its higher risk

asset allocation

a method of dividing investment assets among different types of investments, such as stocks, bonds, and cash - an approach to diversification -The goal is to reduce the risk of investing while still earning good returns. Stocks, bonds, and cash are the three main asset categories. Cash here refers to assets that have fairly high liquidity, including savings deposits, CDs, and money market mutual funds. -personal (They depend on an investor's age, risk tolerance, and financial goals.)

diversification:

a method of lowering risk by investing in a wide variety of financial assets - Diversification simply means investing in a wide variety of financial assets. Investing in many stocks or bonds reduces the risk that a poor performance by any one asset will wipe out your savings.

interest:

a periodic payment for the use of borrowed funds; interest is paid on a loan

dividend:

a portion of a firm's profits paid to owners of the firm's stock - Investors usually receive dividends in the form of a dollar amount for each share owned -The more shares an investor holds, the more dividends he or she receives.

Money Has Six Main Characteristics

acceptability, scarcity, portability, durability, divisibility, uniformity -Money has value because we believe it does. When that faith declines, so does the value of the money -Medium of exchange in the form of currency

debit card

allows you to access the money in your bank account -not money

Uniformity

dollar is a dollar anywhere in world...uniform and same Like dollar bills, all salt is pretty much the same. Historically, salt had most of the characteristics of a useful medium of exchange.

banknotes

early form of paper currency, issued by banks to clients who made deposits of gold/silver, could be exchanged

mortgage process

equity= what value of shares they own, vs. debt of bank 1. contract between the potential homeowner and bank 2. potential homeowner makes a downpayment (at least 20% of the total house price) 3. the banks provides a mortgage loan (other 80% worth of the house) 4. potential homeowner (PH) pays mortgage loan over period of time 5. house serves as collateral for bank 6. PH now owns the house (100% paid for) STAKEHOLDERS: PH, bank... KEY THINGS (contract, down payments, collateral, fixed rate)

commodity money=

good that has value in trade, used as a medium of exchange, salt and rice and bartering in general

liquidity

how fast something can be converted to currency

compound interest:

interest paid not only on the original amount deposited in an account but also on all interest earned by those savings

securities:

investments, such as stocks, bonds, and mutual funds, that give their holders the right to receive some sort of return/ profit -These are investments that give their holders the right to receive some sort of return or profit.

3.Store of value.

it holds its value over time compared to other commodities. A banana would be a poor store of value because it spoils quickly. A rotten banana has lost much or all of its original value. Money, however, holds its value over time

compounding:

the ability of an investment to generate earnings that can be reinvested to produce still more earnings

stock market:

the market in which stocks and bonds are bought and sold

M1 money

the most immediate form of money. It includes currency, demand deposits, and traveler's checks, deposit checks...circulating money, includes cash and assets that can be converted to cash and taken out of bank

compounding

the process of accumulating interest on an investment over time to earn more interest -interest paid not only on principal, but also on all accumulated interest...

personal saving rate:

the proportion of a household's income that its members save each year

rate of return:

the ratio of the money gained or lost by an investment relative to the amount invested; often expressed as the percentage gained or lost in a year

credit history:

the record of a person's borrowing and repayment of loans

purchasing power:

the value of a unit of money in terms of what it can buy -The $5 you have in your pocket today will buy $5 worth of goods or services now and for some time into the future. This stability allows you to hold on to your money, knowing you can spend it just as well tomorrow as today

money supply

total amount of money in economy

loan

transaction, lender gives money to borrower (who agrees to repay money in future)

investing:

using money with the intention of making a financial gain

commodity backed

"representative money"...early form of paper money -gold and silver

Checkable deposits.

-A checkable deposit is an amount of money placed in a checking account. Checkable deposits are highly liquid. That is, they can easily and quickly be converted into cash. You can withdraw money deposited in a checking account on demand, any time you wish. This withdrawal once called for writing a check, but today most checking accounts can be accessed electronically using the Internet, a debit card, or an ATM. -earns little to no interest -provide safety and liquidity, but not much in the way of earnings

Savings deposits

-Money deposited in a savings account earns more interest than checkable deposits, although the return is still low. -Funds can be held for any length of time, and the entire deposited amount can be withdrawn on demand. -only slightly less liquid than checkable deposits. -(Savers usually make withdrawals from savings accounts by using ATMs or by presenting withdrawal slips to bank tellers.)

Time deposits

-Savers who want higher returns can put their money into certificates of deposit (CDs). -higher returns, lower liquidity. -CDs, also known as time deposits, tie up cash for a set period of time - If you take your money out of a CD before the end date, you will pay a penalty that amounts to a percentage of the interest you would have earned. -The risk, or chance of losing money, is very low with any bank deposit, thanks to the Federal Deposit Insurance Corporation. Congress established this federal agency in 1933 to help stabilize the banking system during the Great Depression. Today, nearly all bank deposits are insured by the FDIC for up to $250,000 per depositor. Should a bank fail, the FDIC guarantees that depositors will get their money back up to that amount.

Company retirement plan

-This is a plan to which the employer makes contributions for the future benefit of its employees. -The most common today is the 401(k) plan -This plan gets its name from section 401(k) of the Internal Revenue Code and by this plan employees have money automatically taken out of their paychecks and put into retirement investment accounts.

How Banks Make a Profit

-banks profit by charging more interest on loans than they pay on deposits. For borrowers, interest represents the cost of using someone else's money. For savers, interest represents payment for letting someone else use their money. -[fractional reserve banking: a system in which banks keep a portion of deposits in reserve and make loans with the rest]

federal reserve system

-central bank of US -doessnt serve individuals/make profit isnt goal -responsible for the nation's monetary policy by regulating the supply of money and interest rates -provide cash and loans, clearing checks, electronically linking banks -also manages the banking system to ensure that banks operate according to sound financial principles. - control the nation's money supply. It does this in part by setting reserve requirements, the minimum fraction of deposits that banks must keep in their own vaults or at the Federal Reserve. -paper currency/dollars -All commercial banks, whether Fed members or not, enjoy the same privileges when it comes to borrowing from the Fed and must follow the Fed's regulations. And when the Fed takes steps to adjust the money supply, all banks feel the effects

fiat money

-government decrees that money has value -paper money issued without the backing of gold or silver

stocks

-high risk and return -investors buy shares, each a unit of ownership of company -shareholders receive portion of the company's profit in the form of dividend payments or increased stock value, stocks lose value if company loses money

mortgage

-loan taken to finance a home -house is the collateral, bank can take it if not payed back

mutual funds

-moderate risk and return -mutual funds are collection of stocks and bonds that are professionally managed, -help investors diversify

corporate bonds

-moderate risk, moderate to high return -investors loan money to a company by buying a bond and are paid back with interest after a fixed period of time -these bonds carry increased risk because companies can, and do, go out of business

savings account deposits

-near-money -not used directly to buy things

government bonds

-risk low, return low -investors loan the government money by buying a bond and are paid back with interest after a fixed period of time

bank's functions

-they receive deposits from savers and make loans to borrower 1. financial intermediary: a business, such as a bank, that brings together savers (sellers) and borrowers (buyers) in financial markets 2. cash checks, issue credit cards, change foreign currency into dollars and vice versa, and provide safe-deposit boxes for storing valuables. 3. Banks also offer the convenience of electronic banking through ATMs, debit cards, direct deposit of paychecks, and automatic payment of bills. 4. provide services on the Internet so that customers can monitor their accounts, pay bills, and transfer money from one account to another.

different types of investments...

1. FDIC-Insured Savings and Government Bonds: The Safest Investments ( the government can print money or raise taxes if needed to pay back the loan at maturity) 2. Corporate Bonds: Moderate Risk for More Return (a bond issued by a corporation to raise money for its operations... are riskier to invest in than government bonds. corporations can go out of business... Because of this higher risk, investors expect a higher rate of return on corporate bonds than on government bonds) 3. Stocks: Historically the Highest Returns (an investment that represents ownership in a business...selling ownership rights...The investors who buy the company's stock become its shareholders. These shareholders own the company...stocks lose value if company loses money)

1. Rank the three types of deposits that savers make at banks from "most liquid" to "least liquid." 2. Rank the three types of deposits that savers make at banks from the "highest return" to "lowest return."

1. checkable deposits, savings deposits, time deposits 2. time deposits, savings deposits, checkable deposits

savings can...

1. help economy grow (savings in bank used to issue lans to businesses, savings provide funds that banks can lend to businesses for expansion, more goods produced and sold, more jobs) 2. can help you reach important goals (setting aside money/portion of incone now to cover later expenses in future...consume less now to consume more in future) 3. can help you weather hard times (survive hard times, easily accessible savings pile, emergency money) 4. help find your retirement...

3 common methods of saving money

1. social security (government program, provides cash payments to retired workers...government helps you save, takes part of income to put in social security....funded by taxes paid by workers... unemployment insurance. services provided by government) 2. company retirement plans (pension plan= retirement plan, employer contributes...401K plan...plan to which employer makes contribution for future benefits of employers...from IRS, employees have money automatically taken from paychecks into retirement investment accts.) 3. personal savings (plans not employer sponsored...variety of financial assets...IRAs are private retirement accounts sponsored by the government)

Mortgage loans

Banks also offer longer-term loans... -money borrowed to buy a house, an office building, land, or other real estate -As with any loan, a mortgage is part principal [the amount of money borrowed, or the amount of money still owed on a loan, apart from the interest] - You might be surprised at the total cost of paying off a home mortgage. A house purchased for $220,000 with a traditional 30-year mortgage at a fixed interest rate of 5 percent per year, and paid in monthly installments, could end up costing the buyer more than $400,000 by the time the loan is paid off.

Commercial loans loans=collateral

Businesses often take out commercial loans [money borrowed by a business to pay expenses] - buy machinery, equipment, and materials or to pay labor costs. -banks consider the firm's financial condition and borrowing history as well as the general state of the economy.

acceptability

In order for you to buy something, the seller must be willing to accept what you offer as payment. In the same way, when you sell your services (labor) you must be willing to accept what your employer offers as payment/wages in exchange.

bond:

an investment (that represents a loan to a government or corporation) guarantees the lender a fixed rate of interest over the term of the loan, with repayment of the principal at the end of the term

stock:

an investment that represents ownership in a business

shareholder:

an investor who buys shares of a company's stock

assets

anything owned to which a market can be assigned..anything with economic value -liquid assets: items of value, can be used as cash/converted to cash -traveler's checks: money deposited in bank checking accounts...checkable deposits...travelers buy checks from banks, used like cash for goods and services

credit

arrangement, allows person to buy something with borrowed money, pay for it over time....purchase with credit card creates loan -not money

Money Has Three Basic Functions

as a medium of exchange, as a standard of value, and as a store of value

currency

bills and coins circulating in economy -Currency, however, is only part of a nation's money supply [money supply: the total amount of money in the economy]

installment loan:

borrowed money that is typically paid back in equal monthly payments

bank

business receives deposits, makes loans

Banks offer three kinds of deposits:

checkable deposits, savings deposits, and time deposits. Each bank has its own rules about when savers can withdraw deposited money. As a result, accounts vary in their liquidity

Bank loans come in three forms:

commercial loans, consumer loans, and mortgage loans.

history of money

commodity--commodity-backed---fiat

legal tender:

currency that must be accepted as money for purchases and as payment for debts

Divisibility

money must be easy to divide into smaller amounts. To understand why, imagine an economy that uses glass bowls as its medium of exchange. Buyers in that economy would be unable to buy anything worth less than one bowl, because the seller would be unable to provide change. Shards of broken glass would be too hazardous to use as change for something worth just half of a bowl. A bag of salt, on the other hand, can be split into ever-smaller amounts. This ease of divisibility once made salt a useful medium of exchange.

Scarcity.

needs to be scarce enough to be valued by buyers and sellers. Throughout history, many cultures have used gold or silver as a medium of exchange. The relative scarcity of these metals adds to their value. If gold and silver were as common as sand, these metals would cease to be used as money. In ancient times, salt was scarce in many parts of the world. Yet the demand for salt was great. People seasoned and preserved foods with salt and used it in religious ceremonies. Scarcity, coupled with high demand, made salt a valued commodity.

check

not money...signed form instructions bank to pay money to person named to it...deposits they access= money -not money

budget

plan 4 spending and saving based on income and estimated expenses...keeping track of expenditures for a month...monthly income-monthly expenses= monthly savings monthly savings/monthly income=personal savings rate (%)

How Do Americans Invest Their Savings

save money in financial securities- stocks, bonds, mutual funds

saving:

setting aside a portion of income for use in the future