Teaching Financial Literacy Virtually…
Lesson 1: Money & Banks
What’s money anyway?
Welcome to Equitable Investing! We congratulate you on your initiative to learn more about the exciting (I promise) world of economics, finance, and investing. Here, we will be discussing the concept of money and banking.
If you’re anything like me, you’ve probably had some disturbing thoughts regarding the concept of money. What is it? Where does it come from? What stops us from using Ben Franklin’s face as a place to write our grocery lists?
Let’s start from the beginning and get to the bottom of what money really is. Like everything we’ve learned in school, money starts with a brief history lesson. A long time ago, in the Kingdom of Lydia in 1000 BC, people used a bartering system to exchange goods and services. For example, if I have chicken and I want steak, I’ll trade some of my chicken for some of someone else’s steak (clearly I have gotten the better end of this barter).
But let’s bring this concept to the modern-day. If I want a subscription to a music streaming service like Apple Music, my chicken probably won’t do me much good. So as a society, we thought of a system that lets me get music without giving Tim Cook chicken. We all agree to make something else that is valuable to both Tim Cook and myself. That “thing” is money and we’re willing to trade our goods and services for it. This “money” is denoted by currency depending on your country - in the US we agreed on dollars to be the medium (aka the thing) of value, whereas Japan decided on “yen” and India decided on “rupees.”
Boom. That’s what money is.
Now where does it come from. Imagine for a moment that you give the cashier at your local cafe a $20 bill for an overpriced $9.50 latte. The $10.50 you get in rumpled cash and change may have come from a customer, who got it from their work, who got it from another business, and so on. If you trace the rumpled cash back enough and you get to the Treasury, an institution of the federal government whose job is to create, or mint all the dollar bills and coins in the US. It’s also their job to make sure there’s a stable amount of currency in the country, meaning they can’t print too much or too little (we will cover the concepts of inflation and interest in a later lesson).
Boom. Now you know where money comes from.
Let’s say the local cafe where you bought your latte actually has lots of people paying cash for their steeply priced beverages (we get it, lattes are trendy). After accumulating a sum of money, the cafe will eventually have to store their money in a bank. When the cafe (or any money earning entity like yourself) deposit money in the bank, you are customers in a business. Unlike our childhood understanding of banks, they do not have a compartment labeled with your name where the exact crumpled bills you deposit can be withdrawn at any time. Banks take your money and loan it out to other clients, who pay the bank interest in exchange for the loan. For instance, if Zach saves $100 at his local Bank of America, the bank may lend that money to Ben. Eventually, Ben repays the $100, with an added interest of $20. At the end of the day, the bank made a $20 profit.
At first glance, it might seem that Zach was short changed $20. Afterall, the bank used his money, right? For starters, banks exist to keep money safe; if you lose a mattress loaded with $100, it's gone; however, if a bank loses your $100, they still must pay you back (you might have heard “member FDIC” at the end of bank commercials). Secondly, banks will pay you interest for the right of holding your money, though it will be less than the interest charged to customers who take out a loan. To go back to that above example, while the bank makes $20 off Ben, they might pay Zach $2 of interest. Banks present a tough deal but we can’t live without them. Besides, who still uses the same pink piggy bank they were given at their 5th birthday party to store coins and small bills of cash… not me… obviously…
That’s all for today. Make sure to check out the next lesson on value and look into the topics of additional interest.
Topics of Additional Interest (from easiest to most difficult):
investment banks
fractional banking
quantitative easing
Sources:
Content: (Curriculum activity found on page 11 & 12) - https://youth.handsonbanking.org/wp-content/uploads/2019/08/InstructorGuide_MiddleSchool.pdf
Wells Fargo Bank. "Money and Banking." Hands on Banking Instructor Guide, 2013.
Image: “Ben Franklin winks at us from the 100 dollar bill” https://www.shutterstock.com/video/clip-1063968514-ben-franklin-winks-us-100-dollar-bill
Lesson 2: Value & Earning Power
How can we use value and earning power in our daily runs to the grocery store?
We’ve all bought something and instantly regretted it. Whether it's a trendy overpriced latte or a new pair of Jordan’s we have all experienced the pang of regret that comes after spending hard earned money in a seemingly immature way. Whether you feel that you got your new shoes at a good price or you feel that Nike has single handedly consumed your summer’s earnings, both of these feelings relate to the concept of value.
Value is the amount an individual is willing to pay for an item or service. Value can vary from person to person or country to country. In fact, value is almost always different for each individual. For example, I would be willing to pay a decent sum of money for a durable pair of white tennis shoes. However, my friends who don’t play tennis or care for white colored shoes are likely to have a different value for these shoes. It is important to know that money has value, and each person makes their own decisions about where and when to spend their own money in order to maximize its value.
When determining value, it’s important to consider a number of different factors. Firstly, we should look at the quality of the product or service. For the most part, products that have a higher level of quality usually cost more to make and therefore are more valuable. While looking to purchase an item this may be easy to discern, but when looking at a company or a service, this is harder to quantify. Another aspect to consider in regards to value is availability (or supply). For example, the last pair of white tennis shoes in a store may increase my value for the product, especially if I had waited for my old shoes to tear in half (a situation which has, ironically, happened more than once). In terms of a business, the idea of supply and demand can govern the success of a company in the eyes of analysts (professionals who value companies based on quantitative and qualitative data). This process, known as valuation, is helpful when determining the current or future worth of a company.
As a simple example of the importance of valuation, let us consider a trip to the supermarket. Pretend that your mom sends you to buy eggs so that she can bake your favorite cake. Being the smart consumer you are, you decide to stop at 2 stores before making a purchase (your mom did not have change and is making you use your hard earned allowance money). Store A sells grade A white eggs for $3 a dozen. Store B sells the same grade A white eggs at $4.50 for 16 eggs. Based on your middle school math classes you decide to find the unit price of an egg at each store. At Store A, you divide $3 by 12 to get .25 an egg. At Store B you divide $4.50 by 16 to get .28 an egg. Given the quality, availability, and price of the eggs you can now safely complete your valuation of the eggs. Since Store A saves you 3 cents an egg, you decide that this is the best value for the item you are trying to buy. We can’t guarantee that creating valuations of companies will be this easy but the concepts of supply, demand, quantitative, and qualitative analysis remain the same.
Lastly, let’s talk about earning power. Earning power combines concepts of value with the possibility of income. Let's look at earning power by pretending you work at a local supermarket (Store B, since they sell more expensive eggs and probably pay more per hour). If you happen to be a shelf stocker, you are likely to get paid less than a manager, who is likely to get paid less than the CEO. While this may seem obvious, it's the concept of earning power that creates these disparities in pay. Earning power is the ability to earn money in exchange for work that is provided. Some of these factors include time, quality, education level, skills, and experience.
So why is it that your shelf stocking job at Store B did not pay as much as the CEO? Well, the cashiers and stockers are entry-level positions that don’t require loads of education or too many specific skills. Although an essential function of our grocery store, these jobs can be done by most people. Now let’s move up a level to the managers of the store. Their duty entails making sure the entire store runs smoothly by overlooking all the other employees and aspects of the store. This is why the manager position will require years worth of work experience and more education than our cashier or stocker. As a result, the manager will also have higher earning power and generate more income (money received). Lastly, we can look at this grocery store from an even larger view. In order for multiple stores to be functioning in various regions, the chain of supermarkets needs a CEO. The CEO (chief executive officer) is responsible for making managerial decisions and is considered the highest rank representative in a company. The CEO of Wegmans, for example, is worth $3 billion and is responsible for 106 stores across the east coast. Given your shelf stocking job does not make you responsible for over a hundred stores, it follows that your paycheck doesn’t wander into the billions.
However, if you want a raise, it's important to understand how we can increase earning power. The most common way is time. If we are paid by the hour (like 58% of Americans) we can work more hours to merit higher income. Another way to increase earning power is by improving our results. Let’s go back to our stocker from our grocery store example earlier. If this stocker got an extra $100 for every shelf he stocked, he could increase his earning power by stocking more shelves. Another interesting way to increase earning power is the quality of the product or service. If we continue to use our grocery store example, we can look at the quality of the groceries we sell. If our grocery store sells better quality fruits and vegetables, customers will be willing to pay more for our products than they will for wilted greens at another store. As a result, our store will generate more income and increase earning power. Lastly, note that education, experience, and skills are the best ways to increase earning power in the long term. As you probably noticed earlier, a common trend among higher positions was the presence of experience, education, and skills possessed by the manager and CEO. These qualities can come in many forms ranging from an advanced degree all the way to time in the workforce. Other skills such as knowing multiple languages or being good at math can help increase an individual’s earning power. Therefore, if you want a raise, be sure to present your boss with your experience, education, and skills to merit higher earning power!
While making money and increasing earning power should never overtake meaningful and purposeful work, it’s something to keep in mind as we become financially literate adults. Knowing how much we can make means knowing how much we can save and spend. Earning power is a great metric to measure your work and, just maybe, you won’t feel bad about buying that expensive latte in the future!
Topics of Additional Interest:
Sources:
Content: https://youth.handsonbanking.org/wp-content/uploads/2019/08/InstructorGuide_MiddleSchool.pdf
Content: https://www.investopedia.com/financial-term-dictionary-4769738
Lesson 3: Personal Budget
Drake says separate your wants and needs to create a budget.
Now that we’ve covered the basics of currency, value, and earning power, let’s talk about creating a personal budget. Say, for example, there are some things that you want to buy. Maybe a new pair of shoes, the latest iPhone, a 24 karat gold chain, or even a new car.
The process of organizing your money to pay (or not pay) for different types of goods and services is called budgeting. A budget helps determine how much money to spend and how much to put aside for savings and unexpected events. A budget also helps to separate your spending into wants and needs. Creating a budget and sticking to it can effectively save your money for large and unexpected expenses.
Imagine you are playing basketball and sprain your ankle. It may be difficult to pay the doctor’s office for the x-rays and brace you need without a budget. By creating a budgeting plan, you can control the situation and get through this time without significant financial concern.
The process of creating a budget is very straightforward. There are only three things you need to start creating your very own personal budget:
You need to know your income, which is how much money you earn in a given period of time.
You need to know your expenses, which is how much money you spend in a given period of time.
You need to know how you can modify your spending habits to save for unexpected events and get the most value out of your money.
Expenses can be split into three categories to make budgeting more clear. The first category is fixed expenses. These are expenses that occur regularly and do not change on a month-to-month basis. An example of this would be rent, which is generally a consistent amount every month.
The second category is flexible expenses. These, like fixed expenses, occur regularly; however, you can control how much you spend on these flexible expenses. An example of this would be gasoline and money spent eating out; you can control the amount you spend on gas and how much you spend at restaurants.
Finally, the third category is discretionary expenses. This is money that you choose to spend. This category also includes money that you save and the money you spend on things like that 24 karat gold chain or tickets to see Marvel movies with friends.
In broad terms, approximately 50% of your budget should be devoted to fixed expenses (housing, debt, and utilities). Another 20% should go towards flexible expenses (food, clothing, medical bill, and transportation). Additionally, 10% can be used for discretionary expenses (movies, new clothes, video games, excluding savings); it’s important to have fun with your money. Lastly, the final 20% should be set aside for savings and debt repayment.
Everyone has a different budget with different allocations depending on your income, where you live, and other factors. Use this as a general guideline but stick to whatever plan you set for yourself. Remember that your future self will thank you for a responsible budget with good savings.
The important thing to remember as you create a budget is that it is a personal plan. Everyone has spending habits, but as long as yours are responsible and fit your plan, your budget can be as flexible or inflexible as you’d like. If you still want a 24 karat gold chain, that’s great! Just make sure you have adjusted for it in your budget so you can stay prepared for whatever the future may hold.
Topics of Additional Interest:
Sources:
*All rights of content are reserved to the Wells Fargo Hands on Banking Curriculum*
“What Is a Budget?” Personalfinanceimu, brightstarlearning.wixsite.com/personalfinanceimu/what-is-a-budget.
https://brightstarlearning.wixsite.com/personalfinanceimu/what-is-a-budget
Lesson 4: Savings
Savings for all.
What do the newest iPhone, tickets to your favorite concert, and college have in common? All of them require savings.
The key to being able to make large purchases like these is saving money; it’s a good financial habit that consists of putting money away somewhere, but also making sound financial decisions when banking. More specifically, opening a savings account can be a useful tool to earn interest and benefits over time. Saving means putting money aside for future use, banks and other financial institutions offer incentives for people to keep their money in a savings account. These incentives are referred to as earning interest.
In other words, banks pay interest on money put into savings accounts because the bank can use the money to make loans to other customers. So basically, by putting your money away in a savings account in hopes of buying that new iPhone or Carti ticket, you will have more than what you started with. However, it is important to know that the amount of interest earned depends on several factors, including the type of savings account, which bank has the account, and how long the money is kept in the account. There are also many different types of savings accounts that can be opened, so it is crucial that you research to see which is the best fit for you. At the end of the day, planning well and putting your money into a savings account can be an extremely beneficial financial decision.
Now that we’ve talked about how important saving money in your savings account is, let’s talk about how to open a savings account. Now I’m sure you’re thinking, “Saving sounds great and all, but how in the world do I open a savings account at this age?!” Actually, the answer is quite simple. Kids like us can open a savings account at a bank or another financial institution as long as a parent or adult guardian is present. All you have to do is know your Social Security number and have some money to deposit! Finally, your parent or guardian will co-sign the account - which means that they will be sharing responsibility for the account. Boom, it is as easy at that! Now, the road to saving for whatever your heart may desire just got that much easier (and you don’t have to worry about someone stealing your piggy bank)!
We have talked about saving money and even how to open a savings account, now let’s jump into using an actual account. There are procedures called deposits- to put money in, and withdrawals- to take money out of a savings account. Although quite simple, these procedures are important and need to be done with caution. To make a deposit, or put money into the account, you need to fill out a deposit slip. Once you fill out this slip, all you have to do is hand it to the bank teller and the rest is all handled. The procedure for withdrawals, or taking money out, is very similar to that of a deposit. All you have to do is fill out a withdrawal slip, sign the slip while at the bank, and show your ID. After that, the money towards your new gadget is all yours and ready to go!
Example of Deposit and Withdrawal Slips
Savings deposits can also be made by using an automated teller machine, or ATM. You can even check with your bank to find out the age requirement for using an ATM. ATMs are a convenient and simple tool to use and are found in banks and many other convenient locations all over the place. When a bank gives you an ATM card, they also give you a personal identification number or PIN. This PIN is like your personal secret code that only you should know! If someone else knows it, they may be able to take money out of your account…don’t share your PIN with anyone!
Lastly, we’ll talk about how to keep track of your savings account! While saving up to eventually get that new iPhone you’ve been wanting, it is important to have a record of all your withdrawals and deposits along the way. All banks keep track of their customers’ savings accounts, however, it’s your responsibility to keep track of all transactions. It’s essential to make careful calculations and make sure each deposit or withdrawal is correctly recorded. When you open a savings account, the bank provides you with a savings account register to track your deposits and withdrawals.
In all, savings represent a net surplus of funds for an individual or household after all expenses and obligations have been paid. Savings are kept in the form of cash or cash equivalents (e.g. as bank deposits), which are exposed to no risk of loss but also come with minimal returns. Savings can be grown through investing, a higher risk, higher reward process.
Topics of Additional Interest:
Sources:
*All rights of content are reserved to the Wells Fargo Hands on Banking Curriculum*
Lesson 5: Checking Accounts
How to check your checks…
Now that you have learned about savings accounts and how to properly save towards your large purchases, let’s talk about another type of bank account. These are called checking accounts. Like savings accounts, checking accounts are used in order to keep track of an individual’s finances. Both checking and savings accounts are ways to keep your money safe, but each account has a different function. Checking accounts are designed for frequent transactions which can occur multiple times in one day! Unlike savings accounts, banks expect people to make frequent withdrawals and deposits to checking accounts. These can be from a few times a day to a few times a week, depending on the person. So rather than using a checking account for that expensive new electronic you want, it would rather be used for that new sweatshirt or bright pink top you’ve been wanting!
So you might be thinking, “Why would I open a checking account?” Well, Checking accounts are an essential piece for money management that can provide safety and accessibility. A major difference between checking and savings accounts is that checking accounts come with actual checks! Woah mind blown! Checks are legal documents that function just like cash and can be used to pay for things like groceries, clothes, and other services.
How to fill out a check
Checks work to help people pay bills or make everyday purchases without having to carry around loose bills and coins which are easy to lose. It is crucial for you to understand that to write a check, there must be sufficient funds in the checking account to cover the amount. For example, you can’t write a check to buy groceries worth $100 if you only have $50 in your checking account. If you were to try and do this, the check would be bounced, or returned to the person who tried to deposit it due to the lack of funds in the account. Not only is this plain awkward but having a check bounced will result in a fee charged by the bank. It is important that whenever you make a deposit or write a check, you also record the details of each transaction in your check register. A check register, much like a savings register, is a document to keep track of each transaction you make to maintain accuracy and the correct balance at all times. This helps to ensure you always have sufficient funds when making purchases.
The most notable difference between savings and checking accounts is that savings accounts earn interest while checking accounts do not. This is why checking accounts are used for frequent transactions whereas savings accounts are often untouched in order to earn interest over time. Utilizing a checking account can help you maintain your finances without having to carry around loose change and miscellaneous bills to make a normal purchase.
Now that you know all about checking accounts and how they are used and differ from savings accounts, let’s talk about how to open one yourself! The process for opening a checking account is similar to that of opening a savings account. You will need a parent or guardian to accompany you and likely the same personal identification required to open a savings account. You should bring some form of government-issued ID, social security number, and some money to deposit! Make sure to check with your bank to be extra careful, as some may have different policies.
Just like savings accounts, you can utilize an Automated Teller Machine (ATM) to make deposits, withdrawals, and money maintenance easier. Like savings accounts, the bank will issue you an ATM card which allows you to access ATMs anywhere at any time! Along with this card, you will be given a secret Personal Identification Number (PIN). Make sure to keep this PIN to yourself because it is the key to all your hard-earned money!
Since you now know what a checking account is and how it can be useful, buying that new sweater or pink top you want just got a little bit easier! You no longer have to worry about losing track of your money and carrying around loose change. Next time you want to be more efficient with your daily purchases, make sure to utilize the benefits of a checking account!
“Checking accounts are designed for frequent transactions which can occur multiple times in one day.”