Economics Guided Notes Unit Six Day #1 Personal Finance Banking

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Walter Evans
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1 Name: Date: Block # Economics Guided Notes Unit Six Day #1 Personal Finance Banking Directions Activity listen and view today s PowerPoint lesson. As you view each slide, write in any missing words or phrases. Today s Learning Standard Focus #1 Spending, Saving, and Investing The student will apply to personal spending and saving decisions Explain that people respond to positive and negative in predictable ways Use a rational decision making model to select one option over another Create a savings or financial investment plan for a future goal The student will explain that and other financial institutions are businesses that channel funds from to Compare services offered by different financial institutions Explain reasons for the spread between interest charged and interest earned Give examples of the direct relationship between risk and return Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds Rational Decisions You ve already learned how people can make rational decisions by weighing the and of a purchase Well, economists assume that, given enough, most people are and! In fact, many people even understand delaying a small benefit now to earn a larger benefit later Can you think of an example? Saving and spending depends on more than just our, or the things we must have to survive! It also depends on our, or the things we would like to have to make our lives more comfortable Needs and Wants In our economy, we are bombarded everyday by advertising and incentives to buy stuff NOW! But, people must decide if buying something prevents them from buying If this is the case, they may want to money in order to spend it this is called This thought process revolves around and We need to identify the things we must have NOW and the things that we want to have LATER

2 Savings are money placed securely in a or other financial institution, so that the funds will be available for later use Savings earn a small amount of, or money, banks pay for the of your savings (think about it: what are banks going to use YOUR money for??) are another type of savings! They are money that you put into a with the (but NOT the guarantee!) of If the business earns a profit in the future, then your investment gives you of some of that! But if the business fails or doesn t earn a profit, you don t earn anything on your investment! Risk and Return Investment and savings options are based on the concepts of and Risk is the potential for an investment to money Investing in a business comes with the of losing money because that business may earn a in the future! is the anticipated that you hope to make through an investment Even though you might experience risk in an investment, you hope that the will People hope to find options where the return can achieve their but also outweighs their! Let's Look at an Example Jeff earns money every summer by mowing lawns. He would like to save up enough money to buy a car by the time he can drive (3 years). However, his parents have told him that, now that he s earning money, he also has to spend his own money on things like video games and movies with friends. So, how can we help Jeff save up his money and still have enough to spend on the things he wants right now? Let s start by setting out a! A Financial Plan When making a financial plan, you need to identify a few things: goals goals A for achieving these goals! (which goals/actions are more important?) A The best way of doing this is by creating a and outlining your goals!

3 Financial Institutions for Savings There are many for people who want to deposit their money as savings! They could use a : a corporation that stores deposits and makes loans in order to earn a profit They could use a association: similar to a bank, but it gets most of its deposits from, rather than businesses, and lends most of its money to Or, they could also use a : a financial institution that is owned and controlled by its, usually people who work in the same company or corporation Savings Options Within these financial institutions, there are also for saving your money! In a bank, you earn on your money so, your money while it is technically being by the bank to make loans to others You can earn even more interest from a bank by taking out a (or a CD), which is a deposit that you promise not to touch for a certain amount of in exchange for a interest rate But, how can a bank pay you money just for depositing it with them? Well, banks earn money by granting and the that must on their loan is than the interest that the bank pays you on your investment Banks and Loans Remember from unit three Banks must hold a certain amount of in their vaults what is this called? But, what they do with the other money YOU deposit is up to them!

For example You deposit in the bank and the bank records on your account that you now have $100 The bank only has to keep of that money as, so it decides to Sally the other The interest they charge

4 For example You deposit in the bank and the bank records on your account that you now have $100 The bank only has to keep of that money as, so it decides to Sally the other The interest they charge Sally (say, ) will pay for the interest that they promise to pay you on your account (say, ) So, everybody wins!! Demand Deposits Bank accounts are also known as (or ), because people can come back and demand the money out of their account But if that money is being loaned out to someone else, then how can you withdraw it from the bank?? Think about it: The bank oversees of a day so, the 10% reserves from other people s accounts cover whatever it is you want to withdraw! But, what happens if EVERYONE wants to withdraw ALL of their money at the same time?!? Bank Failures Banks (like they did during the Great Depression), when they run out of money Sometimes, that money is rightfully yours! But, if there s no money there s no money! So, even a SAFE investment like a checking account has some small level of, which is why the government set up the ( ) after the Great Depression The FDIC insures bank accounts up to per depositor! So, even if your bank goes bankrupt, as long as your account is under $250,000, your money is! This program put bank in American consumers who were nervous about depositing money in banks

5 Riskier Investments Deposits are usually considered investments they are just a way of saving money for later because your money is, on the other hand, carry with them a of In general, the potential for, the there is of losing your original investment Your investment can take forms: money to a business or the government for a set amount of time in exchange for interest Buying a of a business in hopes of sharing in the profit that the business earns Types of Investments The three most important types of investments are bonds,, and : you are money to a corporation, the federal government, a state or city, or an organization involved in public works As time passes, the bond issuer pays you some and then repays the full price of the bond when it (usually several years later) The bond issuer then uses this money to its projects Bonds usually than savings accounts or CDs and they are considered a investment because the issuers are evaluated in advance based on their ability to repay the loan The investments with the highest potential are also the stocks When you buy, you are buying shares of in a corporation In return for this investment, you earn, or your share of the company s profits You can your stock at any time and keep any you earn if the value of your stock increased This earning is called However, you could money! If there s no profit, you don t earn a dividend and wouldn t want to sell your shares If the company goes bankrupt, you lose your investment To some of the involved with stocks, investors may choose mutual funds A pools money from many investors and uses it to buy a of stocks and bonds This is called a The portfolio offers a by including some low-risk, low-return stocks as well as high-risk, high-return stocks This way, investors can never lose ALL of their money, but they still have the chance to earn

6 Checkpoint Questions Which of the following is NOT an important part of rational economic decision making? a. Analyzing needs and wants b. Considering short-term goals c. Considering long-term goals d. Focusing on instant gratification If a bank pays 3% interest on savings accounts, how much interest will it charge for loans? a. 3% b. Less than 3% c. More than 3% d. The discount rate

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