SAVINGS AND INVESTMENT Saving stimulates economic growth by giving businesses access to funds, which can be invested to increase production, and, in turn, create more and better products and jobs. * Investment: redirecting resources to create profit in the future How does it work?

THE FINANCIAL SYSTEM Our financial system is designed to transfer money from savers to borrowers When you save money in a financial institution, you are essentially lending your money to an investor

FINANCIAL INTERMEDIARIES Financial intermediaries are the institutions that act as middle-men between savers and borrowers Because intermediaries diversify (diversification) – spreading money around into different investments – by loaning money out to multiple borrowers, they minimize risk to the lender Financial intermediaries include (but are not limited to): Banks Credit Unions Pension Funds Mutual Funds

BANKS VS. CREDIT UNIONS BANKS CREDIT UNIONS Profit-driven businesses whose main purpose is to make money for their shareholders Non-profit cooperatives designed to provide service to its members BANKS VS. CREDIT UNIONS

CREDIT UNIONS. read the article posted on my web page for more info CREDIT UNIONS * read the article posted on my web page for more info. on credit unions Credit Unions generally offer higher rates on deposits, lower rates on loans, and fewer/lower fees The Credit Union Membership Access Act in 1998 opened up membership in credit unions to just about everyone Just as bank deposits are insured by the federal government (FDIC) up to $250,000, credit union deposits are also insured to the same amount by the NCUA

CREDIT UNION ACROSTIC * you can ignore this slide Create an acrostic poem for the term ‘credit union’ Your poem needs to include the following information: 1. Credit Unions are financial intermediaries that transfer money between savers and borrowers 2. They offer higher interest on deposits, 3. lower interest on loans, 4. and fewer fees than commercial banks 5. They used to have limited membership, but are now open to everybody. 6. Deposits are insured by the government up to $250,000 All of the above information (1-6) needs to be included for full credit. Indicate where you included each of the above by writing and circling its corresponding number next to where you included it in your poem.

INTEREST, LIQUIDITY AND RETURN Interest: the price paid for borrowed money * Compound interest is interest earned on both principal and previously earned interest Liquidity: the ease with which you can turn your asset into cash Return: the amount received above and beyond the initial investment

RELATIONSHIPS: LIQUIDITY AND RETURN In general, the more liquidity an asset has, the lower the interest rate and the lower the return By the same token, the less liquidity, the higher the interest rate and the higher the return

RELATIONSHIPS: RISK AND RETURN Risk and return: the lower the risk, the lower the return and vice versa Bank/Credit Union accounts are relatively safe, therefore, return on these accounts is usually lower than other assets (stock market)

BASIC BANK/CREDIT UNION ACCOUNTS Savings: low risk, high liquidity, therefore low interest and low return CDs: low risk, very low liquidity*, therefore higher interest and return then savings * CDs are chosen for a fixed term (amount of time), during which you are not allowed to touch your money. The longer the term that is chosen, the higher the interest rate. Money Market Accounts: low risk, lower liquidity than savings*, but more than CDs, therefore higher interest than savings, but less than CDs * you must always keep a minimum amount in the account to earn the higher rate