Financial Institutions

Financial Institutions

SSEPF2 Explain that banks and other financial institutions are businesses that channel funds from savers to investors. 

Poll

Do you think that Michael Jackson "made it?"

• Yes

• No

• Who's Michael Jackson?

https://safeshare.tv/x/tbOGxf1JxSs

Open Ended

After learning about his debt, would you say that he was financially responsible?

Why this matters...

Understanding financial institutions is one part of the bigger picture of learning about how to take care of and manage your money

Why do financial institutions exist? In short, to make money.

How do they make money?

interest charged > interest earned

Banks and other finanical institutions loan the money that we give them to other people at a higher rate other people

Open Ended

In one sentence, how do Financial institutions make money?

Financial Institutions

• Bank- provides a safe means to store earnings. Typically, banks also offer direct deposit (where a person’s paycheck goes directly into his or her account), check-writing services, debit and credit cards, loans (personal, home equity, business),and other services. 

• Credit Union- similar to a bank; the difference is that a credit union only provides these services to its members. Members own and control the institution. Credit unions often offer higher interest rates on deposits and lower interest rates on loans than banks.

Financial Institutions

• Payday Loan Company- a payday loan company gives out small loans in return for a portion of the upcoming paycheck. Payday loan companies generally charge much higher interest on loans than other institutions. 

• Title Pawn Lender- provide short-term loans to individuals. Usually, those accessing loans through title pawn lenders lack access to other types of short-term loans like credit cards. Loans are based on an individual’s collateral. Lenders can sell the collateral to cover the value of an outstanding loan if the borrower cannot repay. Fees usually much higher than a bank

Multiple Select

What financial institution requires collateral to take out a loan?

• Payday loan company

• Bank

• Title Pawn Lender

• Credit Union

Risk vs Return

The higher the potential return offered by a savings or investment opportunity, the more risky the savings or investment usually are. WIth lower risk is lower return.

Risk- The likelihood that you lose your investment

Return- The money earned off of the investment

Types of Investments

• Savings Accounts- Savings accounts are bank accounts in which people put savings to which they need easy access. The Federal Deposit Insurance Corporation (FDIC) most types of bank deposits up to $250,000. Money held in a very low interest savings account is likely to erode in value over time. Most bank pay less than 1% interest on savings. 

• Certificates of Deposit- (CDs) are products offered by banks. Buying a CD means you will earn a higher rate of return than on a regular savings account. The higher rate of return results from the saver agreeing to keep the funds in the CD for a specified period, usually between 1 months to 10 years. The longer the period, the higher the interest rate. People who save in CDs and need to withdraw their funds early will pay a fee for early withdrawal. 

Types of Investment

• U.S. Treasury Bonds – You loan the U.S. government money. The government pays you a guaranteed rate of return. Since the U.S. government repays its debts, the rate of return is low. Bonds are safe but also carry an inflation risk if interest paid is not higher than the inflation rate. 

• Stock– One of the more risky ways to invest. When purchasing stock in large companies your investment could be safer, but your rate of return is likely to be lower. If you invest in new companies or companies with a new product, the potential return is high if the company succeeds, so is the risk

• Mutual Funds- Provide more protection against loss because the investment is spread across many different companies rather than just one company. You may also select funds that reflect specific levels of risk or your values. Long term investing tends to give a greater return than short-term investing. Over a 20-year period, the stock market returns on average 7-8%. However, when holding stocks for only 5 to 10 years, the average rate of return drops to 1- 2%.

Retirement Accounts

• 401K- This is provided through an employer which will sometimes offer a percentage of matching funds.

• Individual Retirement Accounts (IRA)- Roth IRAs allow contributors to pay taxes today and withdraw the funds they contributed tax-free in the future. The contributor will still have to pay taxes on any “gaines” they withdraw from their account in retirement. A traditional IRA allows contributors to put money away before taxes are paid. The taxes are paid on the money when it is withdrawn during retirement.

Multiple Select

If I wanted to start saving for retirement, but my job did not provide this investment, which of the following should I invest in?

• savings account

• IRA

• 401k

• Certificate of Deposit

Open Ended

It is important to start saving money for your future as soon as you can. define one of the following: stock investment, cetificate of deposit, or U.S. treasury bond. (be sure to include the risk and reward in your definition)