Journal 49 Do you think you are more likely to use a bank or a credit union or both in your future? Why? What is a pro and con of your choice?

Financial Institutions

Banks have “customers”, CU’s have MEMBERS 3 Basic Types Banks Offer the widest variety of services Checking, Savings, Loans (many types), Credit Cards, Business Loans, Transfers, etc Owned by a private company Credit Union Owned by people who hold accounts there (the MEMBERS) Usually must be a member of another organization 1st (FCBOE, Delta, Firemen’s, Police) Typically more “personal” and more willing to make emergency or cheaper loans Banks have “customers”, CU’s have MEMBERS

3 Basic Types (Continued) Savings and Loans Companies that take on savings accounts JUST to make certain kinds of loans More rare now than in the 1980s Other types of institutions Online banks (Paypal, ING) Payday loan facilities Online transfer

How do banks make money? 2% - .75 = 1.25% profit Difference between INTEREST PAID vs. INTEREST EARNED EXAMPLE: Southern Federal Credit Union is currently paying about .75% annual interest on savings accounts When they make a loan they charge 2% 2% - .75 = 1.25% profit

How do banks make money? Other money makers include overdraft fees, annual or monthly fees, and products like checks Annual percentage Rate (APR) – the yearly cost of a loan

Speaking of interest… Simple vs. Compound Interest Simple interest: Interest paid on the principal only You deposit $100 at 10% interest per year. You will get $10 added to your account every year. Compound interest: Interest paid on the principal AND accumulated interest

Example Jack and Sarah both open savings accounts with a starting balance of $1000.00 on the same day. Jack's bank is paying him compound interest, Sarah's bank is paying simple interest. Both Jack and Sarah are receiving 8% annually.

3 Major Investments STOCKS MUTUAL FUNDS BONDS Pros: high return, easy to purchase Cons: HIGH RISK, requires research MUTUAL FUNDS Pooling money into a fund with others and having someone else invest for you Pros: Decent return, safer investment, requires less research Cons: Less return than stocks, less flexibility BONDS Loaning money to government or corporation Pros: Safe investment, specific terms Cons: Low rates of return

Risk/Return Spectrum BONDS STOCKS MUTUAL FUNDS SAVINGS ACCOUNT High Risk High Return Low Risk Low Return BONDS STOCKS MUTUAL FUNDS SAVINGS ACCOUNT Antiques /Collectibles Commodities (Gold, Silver) Real Estate