Banking and You!
Why do you put your money in a bank?
1) They store our money
2) They are safe
3) They are convenient
4) They pay interest
5) They are FDIC insured
What is FDIC?
FDIC – Federal Deposit Insurance Corporation
- Created in 1933.
- Insures individual deposits up to $250,000.
NOT FDIC INSURED!
What do banks do?
Banks and Financial Institutions are essential for managing the money supply.
-They save and store our money.
-They loan money to businesses, and individuals.
-They are also businesses/profit seeking firms.
Save Money
You can chose to save your money different ways:
1. Savings Account
2. Checking Account
3. Money Marketing Account
4. Certificate of Deposit (CD)
Saving and Checking Accounts
- These are the most common forms of savings.
- People withdraw from them most frequently.
- They accrue less interest than money markets or CDs.
Money Markets and CDs
- Special kinds of saving accounts.
- They pay higher interest rates.
Money Markets
- Interest rates can vary
(go up or down)
- Allows you to save
- You are able to write a limited number of checks
Certificate of Deposit (CDs)
- A guaranteed rate of interest
-Must remain in the account for
a specified amount of time
-Cannot be removed without
penalty
How to make money while you save money:
Save money- Pay % interest to depositor.
-simple interest = Interest paid only on principal.
-compound interest = Interest paid on both principal and accumulated interest.
Simple and Compound Interest
Simple Interest:
Compound Interest:
I = PRT
Invested at 5%
Interest
Compound
Simple Difference
Start 5,000 5,000 0
After Year 1 5,250 5,250 0
After Year 2 5,512.50 5,500 12.50
After Year 3 5,788.13 5,750 38.13
After Year 4 6,077.53 6,000 77.53
After Year 5 6,381.41 6,250 131.41
Compound Interest: Rule of 72
Rule of 72:
The rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72.
Example:
How long will it take to double your money at 8% interest?
Divide 8 into 72 = 9 years
Let’s Go to the Bank!
Suppose you are a customer depositing $10,000 in the bank. Looking at the information on your depositor’s slip, figure out the rate of return at 1, 10 & 20 years.
Let’s Go to the Bank!
Year 1
Year 10
Year 20
B of A at a rate of 2%
Chase at a rate of 1.5%
Bank of meAt a rate of 10%
$11,000
$20,000
$30,000
Making bank at the bank
How far did your 10K go?
B of A at a rate of 2%
Chase at a rate of 1.5%
Schools/Student’s First at a rate
of .5%
Year 1
Year 10
Year 20
$10,200 $ 10,150 $ 10,050
$12,000 $ 11,500 $ 10,500
$14,000 $ 13,000 $ 11,000
Fractional Banking
Most banks practice Fractional Reserve Banking.
Fractional Reserve Banking: The banks keep a fraction of your deposit and loans out the rest.
ex. businesses seek loans to grow, this money comes from other people’s deposits.
Fractional Reserve Banking
Deposit
“Money In”
$100.00
Loan
“Money Out”
$70.00
Banks keep 30% of your deposit in reserves and
invest the rest to make $
Other Ways Banks Make Money
- Fees: ATM, Checking, Savings, Credit Cards
- Interest charged to borrowers = They charge you interest for borrowing “their” money. Loans are the largest source of income for banks.
*Banks are business/profit seeking firms
so loans are use to make them money!
So you need money?
You are borrowing $20,000 from the bank to buy a car. Looking at the information on your borrower’s slip, figure out the cost of borrowing based on your credit score.
B of A 8 % 2.6% 1%
Chase 9% 3% 1.2%
Students First 11% 3.5% 2.5%
FICO Score 100 – 549
FICO Score 600 – 741
FICO Score 750 - 850
The Real Price
B of A
Chase
Students First
FICO Score FICO Score FICO SCORE 100 – 599 600 – 741 750 - 850
$ 21,600
$ 20,520 $ 20,200
$ 21,800 $ 20,600 $ 20,240
$ 22,200 $ 20,700 $ 20,500
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