3.1 savings & the financial systems

Financial System

A network of savers, investors, financial institutions and financial assets that work together to transfer saving from savers to investors.

What is a necessary part of a growing economy?

Investment

How do individuals contribute to economic growth?

Individuals may invest in their homes.

How do businesses contribute to economic growth?

Businesses invest some funds in tools, equipment, or machinery.

How does the government contribute to economic growth?

Government invests in highways, hospitals, universities, and other public goods.

What are the four parts of the financial systems?

Savings, financial intermediaries, borrowers, financial assets

Savings

Savers provide savings that borrowers will use

(Weekly check, contributions to retirement funds, investing surplus cash, etc)

Financial Intermediaries

Collect funds that savers provide so that they can loaned to borrowers.

(Institutions like banks, credit unions, life insurance companies, pension funds, and finance companies)

Borrowers

Use theses funds for various purposes

(Businesses might invest in capital goods for growth, individual might buy a house/car, etc)

Financial Assets

Documents to prove borrowing has taken place and there is a claim on income and assets from borrower

Financial Intermediaries

Includes banks, credit unions, finance company, life insurance companies, pensions funds.

Banks

Fewer than 6,000 banks in the country but many have branch locations.

What do banks offer?

Checking, savings, and CD accounts

What is the banks most profitable product?

Credits cards

Why are credit cards profitable?

Because of credit cards, overdrafts and late fees.

Credit union

Non-profit service cooperative that is operated for the benefit of their members (municipal workers, teachers, employees at large companies) w/ around 7,200 credit unions.

What do credit unions do?

Accept deposits, make loans, issues CDs and offer checking accounts.

Finance company

Firm that specializes in making loans directly to consumers.

What do finance companies also do?

Buy installments contracts from merchants who sell good on credit.

What is sold to the financial companies?

Unfinished installment contracts

Why does the financial companies take unfinished installment contracts?

Because merchants usually can't wait for the installment contract to finish so they sell and leave the risk with the financial companies.

What do life insurance companies provide?

Financial protection for a spouse, children, or other dependent in events of a person's death.

What is a premium in the context of life insurance?

A periodic fee that the insured pays for the policy.

What does the premium life insurance lead to?

A surplus of cash lend to large businesses because it is periodically collected.

Pension funds

A fund that collects periodic contributions from a firm's employees and eventually make regular payments to workers who become eligible for retirement or disability benefits

What are pension funds usually invested in?

In high quality corporate stocks and bonds.

What are the basic investments considerations?

Consistency, Simplicity, and Diversification

Consistency

Invest periodically at the same rate to grow your investments

Simplicity

Stay w/ what you understand and stay away from investment that seem too far out of the ordinary.

Diverification

Understand the strengths and weaknesses of financial assets and spread out investments to covering different things

What does diversification prevents?

Prevents you from losing everything or being impacted severity from one event

Risk

The degree to which the outcome is uncertain but a probable outcome can be estimated

What does a high risk mean?

Usually demands higher returns as compensation

As an investor you should consider what?

The level of risk that you can tolerate/comfortable with

low risk vs high risk

What are the reasons for investing?

Cover living expenses during unemployment

Buy financial assets that can easily be converted into cash

Save for retirement