Unit 2Understanding Finance
Unit 2
Unit 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
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
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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…”
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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)
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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…
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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”
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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?
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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?
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Uses of Money
Students understand 4 main uses on money from communion to birthday presents:
1. Saving (10%)2. Giving (10%)3. Investing (10%)4. Spending (70%)
Example: allowance €/£ 10 per week but put €/£1 in savings for Christmas, holidays, birthdays, college, debs etc.
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Savings: Why save in the Credit Union?
You become a member and have a vote
Your savings are insured
No transaction fees
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
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Savings: Why save in the Credit Union?
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1. Contact your local Credit Union and open a share account
2. The Credit Union pays you a dividend on the money/shares in your account
3. The Credit Union loans that money out to other people, but charges a slightly higher interest rate on the loan
How do savings work?
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)
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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.)
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Deposit Interest Retention Tax (DIRT)
Deposit Interest Retention TaxThis 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 €/£ 200DIRT 30% € /£ 60Net interest received €/ £ 140
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
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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
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