make a profit

SERVICES OF

FINANCIAL INSTITUTIONS

SAVINGS

your $ is safe and earns interest

your $ is protected by the

FDIC (Federal Deposit Insurance Corporation) - if the bank fails, your $ is protected up to $250,000

CHECKING

LOANS

borrowing money from the bank/other institution with the promise to repay plus interest.

Types of

Financial Institutions

**Financial Institutions and Interest**

Commercial Bank

safe place to store $, direct deposit, checking/debit, and loans (credit card, home, etc)

ex: Charter, CB&T

Savings and Loan

provides savings, and mortgage loans only to individuals

*most common

Credit Union

provides services of a bank, but only to members (who control the credit union)

can provide better rates

ex: Georgia Federal Credit Union (for government employees)

Deposits from people

interest charged for borrowing (loans)

fees for services

$ out of the bank

Interest earned on savings (.03%)

Money loaned to people

(who have to pay interest)

Operation costs

(utilities, wages, etc)

BANK

Has to keep a certain percentage on hand ...

REQUIRED RESERVE RATIO (RRR)

$ into bank

Banks main source of profit...

Interest

bank charges more to borrow (loans) than it pays you to save

interest earned: money from bank to people for saving

interest charged: money from people to bank for loans

Which type of savings should I get?

the APY (Annual Percentage Yield) is the yearly rate of return you will earn on saving

You need to decide if you want to earn the highest APY or you want the most access to your $ (liquidity)

Types of Savings

Standard savings: offers liquidity in exchange for lower (APY) interest rate

(you can get your $ but don't earn much)

Certificate of Deposit (CD): offers a higher (APY) interest rate in exchange for less liquidity

(you earn more $ but can't access until contract time is up)

Money Market Savings: offers a higher (APY) interest rate and more liquidity in exchange for keeping a minimum balance ($1000-$2500)

account that allows you to write checks or use debit card to withdrawal $

usually do not earn interest

debit card: an electronic version of a check. you MUST have money in your account to use (different from credit card!)

ex: credit cards, car loans, student loans (subsidized and unsubsidized), home (mortgage)

interest is usually compound!

short term loans given with promise to pay back by next paycheck.

interest charged can be up to 400%

ex: you borrow $600 so you can get the iPhone 6. When you pay the loan back in 15-30 days -- $600 x 400% = $2400

Title loans work the same way

INTEREST

interest charged: the price you pay for borrowing money

~ when? credit, loan for

home, car, college,

personal needs

interest earned: the money banks pay you for saving (standard, CD, or money market)

TYPES OF INTEREST

SIMPLE INTEREST

interest paid only on principal (money borrowed)

formula: I = PRT

I=Interest

P=Principal

R=Rate (%)

T=Time (years)

when is simple interest used? standard savings

PRACTICE

I=PRT

I=? P=500 R=.03% (.0003) T=3

I=(500)(.0003)(3)

I=.45

so now Bobby has to add the interest to his principal to find out how much he has in savings...

500+.45 = 500.45

Bobby puts his $500 into a standard savings account that earns .03% a year. He keeps his money in the account for 3 years. How much has Bobby earned?

COMPOUND INTEREST

interest on principal + previous interest

formula: I=P+(PxR)

P=Principal

(each year P changes from previous year)

R=Rate

PRACTICE

If Jenny deposits $500 in a CD paying 5% compound interest for 3 years, how much does she earn?

500 + (500 x .05) = 525

525 + (525 x .05) = 551.25

551.25 + (551.25 x .05) = 578.81

year 1

year 2

year 3

when is compound interest used? CD, loans, credit cards

compound = $578.81

simple = $500.45

initial = $500

RULE OF 72

a quick way to estimate the amount of time it will take for your money to double when put in savings at a certain % rate.

Formula: 72/R

R= % rate

percentage years to double

1

2

3

4

5

6

72/1 = 72 years

72/2 = 36 years

72/3 = 24 years

72/4 = 18 years

72/5 = 14.4 years

72/6 = 12 years

for our compound interest problem...

$500 at a 5% rate. How long would it take to double?

Simple Interest problem ...

$500 at .03% rate. How long would it take to double?

PRACTICE

*have to calculate for each new year