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SAVINGS AND INVESTMENT. Saving stimulates economic growth by giving businesses access to funds, which can be invested to increase production, and, in turn, create more and better products and jobs. * Investment: redirecting resources to create profit in the future How does it work?.
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SAVINGS AND INVESTMENT • Saving stimulates economic growth by giving businesses access to funds, which can be invested to increase production, and, in turn, create more and better products and jobs. * Investment: redirecting resources to create profit in the future • How does it work?
THE FINANCIAL SYSTEM • Our financial system is designed to transfer money from savers to borrowers • When you save money in a financial institution, you are essentially lending your money to an investor
FINANCIAL INTERMEDIARIES • Financial intermediaries are the institutions that act as middle-men between savers and borrowers • Because intermediaries diversify (diversification) – spreading money around into different investments – by loaning money out to multiple borrowers, they minimize risk to the lender • Financial intermediaries include (but are not limited to): Banks Credit Unions Pension Funds Mutual Funds
BANKS CREDIT UNIONS Profit-driven businesses whose main purpose is to make money for their shareholders Non-profit cooperatives designed to provide service to its members BANKS VS. CREDIT UNIONS
CREDIT UNIONS • Credit Unions generally offer higher rates on deposits, lower rates on loans, and fewer/lower fees • The Credit Union Membership Access Act in 1998 opened up membership in credit unions to just about everyone • Just as bank deposits are insured by the federal government (FDIC) up to $250,000, credit union deposits are also insured to the same amount by the NCUA
CREDIT UNION ACROSTIC • Create an acrostic poem for the term ‘credit union’ • Your poem needs to include the following information: 1. Credit Unions are financial intermediaries that transfer money between savers and borrowers 2. They offer higher interest on deposits, 3. lower interest on loans, 4. and fewer fees than commercial banks 5. They used to have limited membership, but are now open to everybody. 6. Deposits are insured by the government up to $250,000 • All of the above information (1-6) needs to be included for full credit. Indicate where you included each of the above by writing and circling its corresponding number next to where you included it in your poem.
INTEREST, LIQUIDITY AND RETURN • Interest: the price paid for borrowed money * Compound interest is interest earned on both principal and previously earned interest • Liquidity: the ease with which you can turn your asset into cash • Return: the amount received above and beyond the initial investment
RELATIONSHIPS: LIQUIDITY AND RETURN • In general, the more liquidity an asset has, the lower the interest rate and the lower the return • By the same token, the less liquidity, the higher the interest rate and the higher the return
RELATIONSHIPS: RISK AND RETURN • Risk and return: the lower the risk, the lower the return and vice versa • Bank/Credit Union accounts are relatively safe, therefore, return on these accounts is usually lower than other assets (stock market)
BASIC BANK/CREDIT UNION ACCOUNTS • Savings: low risk, high liquidity, therefore low interest and low return • Money Market: low risk, lower liquidity than savings, therefore higher interest and return * you must always keep a certain amount in the account to earn the higher rate • CDs: low risk, very low liquidity, therefore higher interest and return then savings and money market accounts * CDs are chosen for a certain term (amount of time), during which you are not allowed to touch your money.
