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Unit 2 Understanding Finance

Unit 2 Understanding Finance . Learning Outcomes. At the end of this unit, students should be able to: Understand the history of money Investigate examples of opportunity cost Understand the term “saving” and how it works in credit unions. Learning Outcomes (continued).

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Unit 2 Understanding Finance

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  1. Unit 2Understanding Finance Unit 2

  2. Learning Outcomes At the end of this unit, students should be able to: • Understand the history of money • Investigate examples of opportunity cost • Understand the term “saving” and how it works in credit unions Unit 2

  3. Learning Outcomes (continued) At the end of this unit, students should be able to: • Define compound interest and show how to calculate it • Understand the term “DIRT” and show how to calculate it Unit 2

  4. What is Barter? Before money, how did individuals exchange goods or services? BARTER “Barter is a medium in which goods or services are directly exchanged for other goods and/or services, without the use of money…” Unit 2

  5. Examples of Barter • Long ago farmers used livestock for barter, then crops • Nowadays we have moved onto electronic money (paying for goods over the internet) Unit 2

  6. What is Money? “Money is anything that is generally accepted as payment for goods and services and repayment of debts…” What forms are available? Can you think of a few examples… Unit 2

  7. Opportunity Cost ”Opportunity cost is the economic cost of using a resource for a specific activity is equal to the income foregone by not using it for an alternative activity” Unit 2

  8. Opportunity Cost For example the opportunity cost of using an acre of land in your faming operation is the income foregone by not renting it to a neighbouring farmer. Can you think of any more examples? Unit 2

  9. What are Savings? “Savings are the process of setting aside money until a future date instead of spending it today. The goal of saving is provide funds for emergencies, short term goals and investments” OR “A fund of money put as a reserve for the future” Do you have a savings ( share) account in your credit union? Unit 2

  10. Uses of Money Students understand 4 main uses on money from communion to birthday presents: • Saving (10%) • Giving (10%) • Investing (10%) • Spending (70%) Example: allowance €/£ 10 per week but put €/£1 in savings for Christmas, holidays, birthdays, college, debs etc. Unit 2

  11. Savings: Why save in the Credit Union? • You become a member and have a vote • Your savings are insured • No transaction fees Unit 2

  12. Savings: Why save in the Credit Union? • Your Credit Union declares a dividend at AGM and each share you hold you are entitled to dividend i.e. €1=1 share • You can access savings as long as the shares are not held as security against a loan • All members have a common bond, your local community or place or type of work • Savings in Credit Unions are called SHARES Unit 2

  13. How do savings work? • Contact your local Credit Union and open a share account • The Credit Union pays you a dividend on the money/shares in your account • The Credit Union loans that money out to other people, but charges a slightly higher interest rate on the loan Unit 2

  14. How do savings work? A depositor / investor will look at the options on how interest is calculated and credited?He / she will assess the A.E.R.( Annualised Equivalent Rate of Return) Unit 2

  15. Compound Interest This is the interest added to the principal so you get interest on interest. The COMPOUND ANNUAL RATE ( c.a.r.) is the rate you get when calculating your interest.Example: how much will you receive if you invest €/£500 @ 4% per annum for two years?(see worksheet for solution and additional questions including D.I.R.T.) Unit 2

  16. Deposit Interest Retention Tax (DIRT) Deposit Interest Retention Tax This is a tax paid on the interest you receive on your savings. It is calculated as a % of the interest you received e.g. 30% Gross Interest €/£ 200 DIRT 30% € /£ 60 Net interest received €/ £ 140 Unit 2

  17. Savings and lending for CU • When you save you become a member with your shares or savings • You get a share of any profit the Credit Union makes • You may pay DIRT on interest received • If a member dies, insurance will add to the values of shares Unit 2

  18. Savings and lending for CU • Loans up to ‘x’ times the value of shares held (savings) • If a member dies, insurance usually pays off the remaining loan • Interest rate charged may be lower than banks as its charged on the reducing balance • Interest earned is called a dividend and decided at AGM Unit 2

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