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Learn about the functions of money, the services provided by banks, and the significance of saving and investing. Understand how acts of Congress have shaped the banking industry over the last century.
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Bell Ringer • What is one of the functions of money? • 1. money is a medium, or means of exchange. It enables us to trade with other people. • 2. Money is a standard of value. • 3. Money is a store of value. It holds its value over time. Its purchasing power will change over time, but not render it useless.
Living on a dollar • What do you think about micro loans? • How would you solve the issue in areas like the village in Guatemala?
Agenda • Terms to know • Four topics on Banks • Why is savings important • Investing • Reading and questions
Terms to know • Bank – A business whose main purpose is to receive deposits and make loans. • Assets – Anything owned to which a market value can be assigned. • Credit Card – A card authorizing the user to buy goods and services with funds borrowed from the bank, store, or other business that issued the card. • Debit Card – A card authorizing the user to access his or her own funds on deposit in a bank account. A debit card can be used to buy goods and services or to withdraw money directly from an account.
Terms to know • Saving – Setting aside a portion of income for use in the future. • Interest – A periodic payment for the use of borrowed funds. When calculated as a simple percentage of the amount borrowed, this payment is also known as simple interest. • Principal – The amount of money borrowed, or the amount of money still owed on a loan, apart from the interest. • Investing – Using money with the intention of making a financial gain. • Diversification – A method of lowering risk by investing in a wide variety of financial assets.
three topics on banks 1. What services do banks provide? 2. How do banks create money? 3. How have acts of Congress changed the banking industry over the last 100 years?
What services do banks provide? • 1. Banks cash checks, issue credit cards, and provide safe-deposit boxes for storing valuables. • 2. Electronic banking through ATMs, debit cards, direct deposit of paychecks, and automatic paying of bills. • 3. Intermediaries – Financial markets and Loans.
How do banks create money? • Banks don’t “create money” like the U.S. Treasury. • They create money (i.e., expand the money supply) through lending. • It is through loans, which change the amount of checkable deposits, that banks create money. • Key insight: Because we have a fractional reserve banking system, banks are only required to keep a fraction of their deposits in their vaults or on deposit with the Federal Reserve. The remaining deposits can be loaned out.
How have acts of Congress changed the banking industry over the last 100 years? • In 1913 Congress passes the Federal Reserve Act, which creates the Federal Reserve System. The Federal Reserve acts as a kind of central bank. • In 1933, Congress passes the Banking Act of 1933, aka known as the Glass-Steagall Act • This act forbids banks from engaging in both commercial banking and investment banking. • The Banking Act also created the Federal Deposit Insurance Corporation (FDIC) • Insures depositors up to 250,000
How have acts of Congress changed the banking industry over the last 100 years? • In 1999, Congress passed the Gramm-Leach-Bliley Act. This bill was passed during the dot.com boom. • repeals the GlassSteagall Act of 1933 • In 2010, after the financial crisis of 2007, Congress passed the Dodd-Frank Act • This act called for greater oversight of the financial services industry • It also sought to end the practice of providing bailouts for large financial firms that engaged in risky activities. • called for the establishment of a Consumer Protection Bureau and other bodies to protect consumers and investors.
How is Saving Important to the Economy and To You? • Personal Saving Rate – the proportion of a household’s income that its members save each year. • The average American household is setting aside almost none of its income for a rainy day. • Saving helps the economy grow. • Saving can help you reach important goals. • Saving can help you weather hard times. • Saving can help you fund your retirement. • Sources of retirement funds - Social Security; Company Retirement Plans; Personal savings
How is Saving Important to the Economy and To You? • Create a Budget with Saving in Mind • A budget is a plan for spending and saving, based on income and estimated expenses.
Investing • Investing offers rewards, and poses risks. • Compounding – refers to the ability of an investment to generate earning that can be reinvested to earn still more earnings. • Compound Interest – interest paid not only on the original amount deposited but also on the interest earned. • Rate of Return – a measure of the change in the value of an investment over time.
Investing • Doubling Your Money, The Rule of 72 – Divide the number 72 by the annual rate of return on the investment. The answer is the number of years it will take to double the original investment. • Safest Investments – A bond is a loan in which the borrower promises to pay the lender a fixed rate of interest over the term of the loan and then repay the principal at the end of the term or date of maturity. • Corporate bonds are more risky than Treasury (government) bonds. • Stocks – historically highest return, but there is much higher risk than bonds.
