Transcript How Do Americans Invest Their Savings?

November 10th
Today is: The 240th Birthday of the United States Marine Corps
Goals for today:
• Be able to describe the role of the Federal Reserve Bank (The Fed)
• Understand the importance of saving and investing for the future
Agenda
• CBM
• Flipchart & Video on the Fed w/ Questions
• Flipchart – Savings and Investing
The Federal Reserve
Federal Reserve Bank – controls
money supply
• Central bank of the US
– Doesn’t serve individual customers
– Doesn’t make a profit
• Goal – keeping banking system stable &
healthy
– Holding reserves – bank for banks
– Provides cash & loans to banks
– Clears checks – communication between banks
– Links banks electronically
• The Fed is to the nation’s bank, as an assistant
principal is to a high school
• The Fed is to the nation’s bank, as a state
trooper is to commuters
• The Fed is to the nation’s banks, as a
playground monitor is to school children
• The Fed enforces the rules!!!
What Would Our Economy Look Like
Without the Fed???
• During the 19th Century (1800s) there was no
central bank
• Currency was issued by individual banks –
currency lost its purchasing power
• Difficult environment to live and work in
Federal Reserve System
Visual 6
• http://www.chicagofed.org/webpages/utilities
/about_us/what_we_do.cfm
• Answer questions while watching video
Saving and Investing
Economics
Sections 8.4 and 8.5
How much do we save?
• Personal savings rate – the proportion of a
household’s income that its members save each year.
This rate has been steadily decreasing, from 10% in
the 1980s to less than 1% now!
Effects of Saving
Saving helps the economy grow –
personal savings provide funds
that banks can lend to businesses
for expansion
Business loans generate
growth, new factories,
outputs, goods and services,
jobs, etc.
Purposes of Saving
1. Savings for future goals (car, home,
education)
2. Savings for retirement – social security,
company pension (401k), and personal
savings
What is Investing?
• Investing is using money you have saved to
earn even more money
Investing Offers Rewards –
And Poses Risks
• What do people invest their money in?
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Rare coins
Real estate
College education
Securities – investments that give holders the right
to receive some form of return
• Most common Securities = stocks and bonds
• Higher potential reward = Higher risk of
losses
The Power of Compounding
• Compounding – ability of an investment to
generate earnings that can be reinvested to
earn more
• Compound vs. Simple Interest
– Compound pays interest not only on initial deposit
but all interest earned
Example of Compound Interest
• $1,000 deposited in savings account earning
6% compound interest annually
• 1st year: interest = $60 ($1,000 x .06)
• 2nd year: interest = $63.60 ($1060 x .06)
• Total after 2 years = $1,123.60
• Simple interest after 2 years = $1,120
Doubling Your Money
• Using rule of 72 – it would
take 12 years to double your
initial $1,000 deposit at 6%
interest
• In another 12 years you
would have $4,000
• If you started at age 20, by
time you reached 68 – you
would have $16,000
• Simple interest – you would have earned $60/year for 48
years for a total of $3,880
• Reinvesting year after year with compound interest can
grow your investments surprisingly fast
Bonds
– Treasury Bonds – issued when the Federal
government needs to borrow money
– Municipal Bonds -- state & local governments
issue to pay for public projects – schools, roads
etc…
– Corporate Bonds – corporations issue to raise
money to do business
Risk
• Bonds: a loan in which the borrower promises
to pay the lender a fixed rate of interest over a
specific time period
Stocks
• Stock represents ownership
in a company
• Historically the highest returns
• Companies are not borrowing money – they are
selling ownership
• Shareholders – people who own stock
• Dividend – portion of companies profits issued to
shareholders
Comparing Risks and Rewards
Bull vs. Bear Markets
• Prices march steadily upward = Bull Market
• Prices drop steadily = Bear Market
• Since 1899, Bull Markets have outnumbered Bear
Markets
• Investing in stocks in a long-term prospect!
Market Index
Measures changes in the
value of a group of stocks,
bonds, or other investments
Most quoted – Dow Jones
Industrial Average (1896)
S&P – Standard & Poor
tracks 500 large firms (1957)
Mutual Funds
• Mutual Fund – a collection of securities
chosen and managed by a group of
professional managers
• Diversification -- investing in a variety of
assets, reduces risk
Young Investor
Mature Investor
Stocks
Bonds
Stocks
Bonds
Cash
How Does the Stock Market Work?
• http://www.youtube.com/watch?v=GnJCOof2HJk&saf
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