Checking, Saving, Investing, and Protecting your money Unit 3

Checking, Saving, Investing, and Protecting your money Unit 3

Banks Financial Institutions licensed to receive and utilize deposits There are 2 main types of Banks Retail/Commercial Banks- Financial Institutions offering services to the general public Investment Banks- Financial Institutions dealing primarily with large companies helping to secure capital and acting as a broker for investing clients

Credit Unions Another way of banking is through a Credit Union Credit Union- Member owned Financial Cooperatives which are operated by it s members and profits are shared amongst its owners Often results in cheaper rates for services

Pro s and Cons of Credit Unions Pro s Often have lower interest rates on loans and services May have lower minimum balances Typically have lower fees or no fees at all Many Credit Unions share ATM access with other Credit Union groups to create accessibility for their members Con s Often offer lesser rewards (ie: credit card rewards, APY from investments Having fewer resources than big banks means they may be slow to adopt new technologies and services Credit Unions often have fewer locations which limits your access to resources

FDIC and NCUA In most countries banks are regulated by the government in some way Our government oversees two independent government agencies to help protect peoples money FDIC -Established by the Glass-Steagall Act 1933 - Funded by the premiums banks pay to insure there depositor's Both backed by Government Insures depositors up to $250,000 per institution Both do no rely on tax payer money Neither insures investment products NCUA -Established in 1931 - Funded by its member credit Unions

Texas Ratio Another way in which people can protect their money is by keeping an eye on their bank/credit unions Texas Ratio Texas Ratio- A measure of a financial institutions credit. Created by dividing the institutions non-performing assets like real estate and bad loans vs. its tangible assets like cash reserves and capital Expressed as a percentage. The closer to 100% the more likely the bank is to fail

Federal Reserve The U.S. Central Bank System Responsible for Protecting $ Lending $ Inflating $ Deflating $ Destroying $ Making $ http://havefunwithhistory.com/movies/fedres erve.html This is all done in order to meet The Federal Reserves Primary Objective- To provide a stable, healthy, and growing economy

Checking A Checking account is a bank account which allows depositors to spend the money they have deposited using checks or debit cards These are transactional accounts which allow you to spend what you put into the account without limitations Banks or Credit Unions may offer different Checking account options including free checking, Checking with fees, Interest Earning Checking, or shared/business Checking.

Why should you open a checking account rather than just using cash? Safety for you money- Checks can be voided if stolen and debit cards cancelled, cash cannot Convenience- makes accessing your money easy and quick; ATM, Debit Cards, etc.. Proof of Payment- It creates a written record of your payments every time a check clears (takes money from your account) Easier Budgeting- By keeping track of each transaction in a register you are automatically tracking spending habits and can evaluate those later It may make it less enticing to spend your money

Debit Cards Debit Cards (or checking cards) are becoming increasingly popular Chances are you will automatically get one when you open a checking account Draws on money in your account, rather than on bank credit like a credit cards Allows you to access your money electronically Most debit cards allow you to use them like a credit card (usually have about $500 limit) Makes transactions quicker and easier than cash or checks Requires you to remember and protect your PIN (personal Identification number)

A check is a legally binding contract between you and someone else! Once you endorse (put you signature on) a check you are required to pay the person that amount! If you fail to do so You stand to lose money Bounced Checks- checks denied because of insufficient funds in the account Most businesses charge $25 return check fees Banks may offer overdraft protection- allows checks to clear the bank but charges individual accounts between $10-38 per transaction You may go to jail Check Fraud- using checking accounts to spend money you do not intend to pay Can result in fines and jail time up to 15 years!

Rules for Writing Checks Always write you checks in ink Fill out amount areas all the way to the end Don t endorse (sign) the back of your check until you are ready to cash it Keep blank checks safe and secure Check your bank statement regularly for unusual charges or overdrafts

Making Deposits Fill in personal Information List the Amounts to deposit Add up deposits Enter amount you want back Net deposit Deposits might also be made electronically Mobile Deposit- Use the banks app to send images of your checks in ATM Deposit- Insert checks into ATM and select the account you wish the money to apply to

Parts of the Check There are 5 parts to a check you need to know Person or Company s Name Name and Address of the Bank Check Number Routing Number Account Number

Checking There are 6 Spaces you need to fill in Date Name of the Person Getting Paid Dollar Amount in numbers Dollar Amount in words ---------------------- what the check was for Endorsement or Signature line

Savings Options Not all savings accounts are the same. Different banks offer different interest rates and various account options Before opening a savings account figure out how you ll be using it. Ask yourself: How long will I keep my money in the account. How often will I want to withdraw money. How much money will I have to keep in the account. All of these factors can have an impact on how much interest you can earn and which account is best for you.

How much should you save? Financial Experts suggest you save 10-20% of your income until you have 3-6 months expenses The concept of making sure your money goes to you is referred to as PYF Pay Yourself First Brainstorm ways you could make sure you pay yourself first while still paying your bills and taking care of other necessities

Savings Options A simple rule to keep in mind is that time is money. The longer you re willing to leave your money alone in an account the higher interest you re likely to earn. Similarly, banks tend to offer higher interest if you re willing to keep a minimum balance (the lowest amount of money you are allowed to have in the account). These can range from $5 to thousands of dollars.

Types of Savings Accounts While there are many different savings options available, they all fall into four main categories. Basic Bank Savings Accounts- offer the lowest interest rates usually less than 1%. They have few restrictions on access to your money, and they tend not to require minimum balances. Money Market Accounts are higher interest accounts, but typically require higher minimum balances and may even offer limited checking abilities, but your access to the money can be limited Online Savings Accounts are a lot like basic bank accounts, but they offer higher interest rates because they operate online and don t have the overhead costs that standard banks have. CDs (Certificates of Deposit) Often have the highest interest rates of any saving options but require you to leave your money alone for long periods of time (5 months- 10 years) Unlike regular bank accounts, you can t withdraw your money whenever you want not without paying a steep penalty. But they come with little risk and no fees.

Time Value of Money Your money will have more value later if saved or invested well now Money Larger Return Principal - original amount of money saved or invested Time Interest Rate- the amount of interest per amount of time Money Interest Rate

Interest Money paid regularly at a certain rate in exchange for money lent or to delay the repayment of a debt. 2 types of interest Simple Interest- added once per year and is based on the principal often shown as an APR or Annual Percentage Rate Compounding Interest- Added multiple times per year based on the total (principal+interest) typically shown as an APY or Annual Percentage Yield

Simple Interest Simple Interest Formula Principal x Interest Rate x Time = Interest Earned Example: $100 x.01 X 1yr = $1 Add the Principal to the Interested Earned to figure the Future Value Example: $100 + $1 = $101

Compound Interest Compounding Interest Formula P(1+R/N)^N(T)= A P= Principal R= Interest Rate (expressed as a decimal) N= The number of times it compounds in a year T= The time in years the money is invested A= Future Value/Cost Example: $100(1+.01/1)^1 (1) =$101

Individual Retirement Savings An IRA or individual retirement account is a savings method used to build wealth towards future retirement. There are many different types of retirement accounts Roth IRA- Limits contributions to $5,500 per year. Post Tax Traditional IRA- Limits contributions to 5,500 per year. Pre-Tax Employer provided Retirement Savings options 401(k)- Limits contributions to $18,500 per year. Pre-tax making it tax deductible 403(b) and 457 plans- Same as 401(k) but only available to certain groups Pension Plans Depending on how you choose to invest, retirement savings typically earn between 5-10% interest depending on market fluctuations. This is because most retirement accounts are invested in the stock market rather than saved in a bank

Rule of 72 This allows a person to easily calculate when the future value of an investment will double their principal investment 72 Interest Rate Number of years needed to double the principal investment To figure the rate it would take to double in a certain time frame 72/time

Saving and Investing Remember: The purpose of savings is to develop financial security Once an appropriate amount of liquid assets are reached You should refocus your financial goals from saving to investing

What is the difference between saving and investing? Saving Portion of current income not spent on consumption Used to pay for: Emergencies Large Future Purchases Investing Purchase of assets with the goal of increasing future income Used to pay for: Retirement Higher Education

Risk POTENTIAL RETURN RISK Risk- uncertainty regarding the outcome of a situation or event Investment Risk- possibility that an investment will fail to pay the expected return or fail to pay a return at all All investments carry some level of risk

Is there risk involved in savings methods? (ie: cd s, money markets, saving accounts)

Inflation Inflation Rise in the general level of prices Inflation Risk The danger that money won t be worth as much in the future as it is today To increase wealth the rate of return on investments must be higher than the rate of inflation

Financial Risk Pyramid The risk level for specific investment tools may vary Increasing potential for higher returns Increasing risk Checking Account Stocks Mutual Funds Savings Account Futures Commercial Paper Options Collectibles Bonds Money Market Deposit Account Real Estate Index Funds Certificate of Deposit Speculative Investment Tools Savings Bonds Investment Tools Savings Tools

Investment Options

Stocks Stock A purchasable share of ownership in a company Stockholder or shareholder Owner of the stock Usually a stockholder owns a very small part of a company

Return on Stocks Definition Dividends Share of profits distributed in cash to stockholders Market Price Current price that a buyer is willing to pay for stock What is received? Stockholder may or may not receive dividendsdepends on company profit If stock is sold for a market price higher than what was paid Stockholder will receive a return If stock is sold for a market price lower than what was paid Stockholder will lose money

Bonds Bonds are less risky than stocks but usually do not have the potential to earn as high of a return Definition Return Form of lending to a company or the government (city, state, or federal) Annual interest is paid to investor Once the maturity date is reached, the principal is repaid to the bondholder

Mutual Funds Mutual fund- when a company combines investment money from many different investors and then invests that money in a diversified portfolio (a mix of several different company s stocks and bonds) Make sure to research the fees charged by a mutual fund before investing Advantage Reduces investment risk Saves investors time Disadvantage Fees may be high

Investing in Real Estate Real Estate is property consisting of land and/or buildings Pro s - Protects against loss from inflation - Can deduct interest expenses from your taxes - Generally purchased using borrowed money - Do not usually fluctuate with the stock market Con s - Illiquid- meaning it is difficult to convert to cash - Usually requires a high minimum investment (10-20%) - High personal liability - High Transaction costs (commission, appraisals, closing costs)

Speculation High risk investing in which traders attempt to earn a return on the fluctuations of the market rather than interest or dividends (ie: options, collectibles, futures Buy low speculating it will increase in value quickly Sell high once the investment has reached a profit

The Stock Market where investors go to buy, or sell publicly trade stocks and bonds It is important to evaluate how the stock market is performing before investing your money A Bear Market is when the prices of investments in the stock market are dropping which encourages selling A Bull Market is one in which prices are rising which encourages buying

How to evaluate the Stock Market Dow Jones Industrial Average Averages the trading prices of 30 of the largest publicly traded companies (includes: McDonald s, Microsoft, Apple, Visa, and Walmart) Standard and Poor s 500 (S&P 500) Average trading prices of the top 500 publicly traded companies on the New York Stock Exchange (NYSE) and the NASDAQ NASDAQ Select Market Composite Measures 1200 stocks traded electronically on the NASDAQ stock exchange http://money.cnn.com/data/markets/

Indices and their calculations Price-weight and value-weight indices are two ways to value a collection of related companies. The computation of index prices and movements are quite different for the two types of indices. A stock index reflects the movement in a group of companies. Market Index A market index is a basket of stocks that represent a certain portion or sector of the stock market. Price Weight Index A price weight index assigns weight in an index in proportion to the stock price of the underlying companies. For example, a stock with a $100 share price will have 10 times the effect on the index as a company with a $10 share price. Value Weight Index In a value-weight index, each company's market capitalization determines its weight in an index, regardless of share price. Thus, a $100 billion company in a value-weight index carries 10 times the weight of a $10 billion company. Examples The Dow Jones Industrial Average is an example of a price-weight index, while the Nasdaq stock market index is a value-weight index. Trading Effects In a value-weight index, larger companies account for the bulk of moves in an index. In a priceweight index, small companies can have more effect.