1 / 27

Chapter 12

Chapter 12. Savings. Section 12.1 The Role of Saving. Objectives Explain the benefits of saving; Distinguish between saving and investing; and Explain reasons for saving. Benefits of Saving Saving - means setting aside present income for future use Benefits of Saving

brian-mccormick
Download Presentation

Chapter 12

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 12 Savings

  2. Section 12.1 The Role of Saving • Objectives • Explain the benefits of saving; • Distinguish between saving and investing; and • Explain reasons for saving.

  3. Benefits of Saving • Saving - means setting aside present income for future use • Benefits of Saving • Allows you to accumulate money for future purchases • To earn income

  4. Savings and Investing • Difference Between Savings and Investing • - is the main purpose of savings is to set aside money for some anticipated future need • Investing - is committing money for the purpose of making a profit over time •  Investing requires taking risks with your money, not as liquid • Investing begins with savings • Savings - has no risk and is liquid.

  5. Reasons for Savings • Emergency Fund – money set aside in case of loss of income or unexpected major expense • Equal 3-6 times monthly net income • Recurring Expenses – real estate taxes and insurance premiums

  6. Reasons for SavingsContinued • Future Purchase – do not use credit cards • Pay interest on credit card • Savings earns interest • Savings has a wait period so you spend money wisely • Financial Goals – family life cycle • Retirement – start when you’re young

  7. Section 12.2Your Savings Plan • Objectives • Explain steps for reaching savings goals; and • Describe ways to establish a successful savings habit.

  8. Why You Need a Plan • Saying you’re going to do it is different then doing it • Savings-plan - step-by-step approach for putting money aside in savings

  9. Steps to Saving • Decide what you’re saving for • Item (Stereo) • Set a specific goal • Set money amount ($250) • Set date (June 1, 6 months) • Break your long-term goal into short-term goals • Set aside reasonable amounts ($10 / per week)

  10. Steps to Saving Continued • Save regularly and consistently – don’t touch • Put your savings to work – earn interest! • Keep your savings goal in mind - motivation • Picture • Check off-list • Chart progress

  11. Consider Your Budget • Be realistic • Discretionary income – amount of available income after taxes and necessary spending for food, clothing, and shelter • Start small – develop habit of saving

  12. Pay Yourself First • Set aside money for savings first, then spend what is left • Set amount and stick to it • If income varies, set a percentage • Automatic Savings • Automatic transfers • Direct deposit • Savings • Checking • Payroll deductions – employee authorizes a specific amount to be deducted from each paycheck and put into a savings plan

  13. Stick to Your Plan • Make money last till next pay day • Adjust spending habits • Do not dip into your savings unless necessary • Keep your goals in mind

  14. Section 12.3Earning by Saving • Objectives • Distinguish between simple and compound interest; • Explain the significance of annual percentage yield; and • Analyze how time impacts the growth of savings.

  15. Calculating Interest • How often is interest paid and how is the interest calculated made? • Monthly, Quarterly • Stated interest = annual rate • Example = 3% interest, paid monthly, Each month, you’re paid 0.25%

  16. Simple Interest - calculated only on the money you have deposited, not on prior interest • Compound Interest - calculated on both deposits made and prior interest earned (interest paid on interest) • Daily, monthly, yearly or as frequently as institutions chooses • More often the better • Example: • What account would you choose? • One that earns 8.25% simple interest or one that earns 8% interest compounded daily.

  17. Annual Percentage Yield (APY) - figure that tells you the actual annual rate at which interest is earned. • Truth in Savings Act, 1991 - helps consumers make comparisons by requiring financial institutions to tell them the APY • Example: • 8.25% simple interest APY is 8.25% • 8% interest compounded daily APY is 8.33%

  18. Time is Money – Longer you leave money on deposit to earn interest, the more quickly that interest starts to add up. The Long-Term Effects of Compounding First year not a lot of money is made, but the more years the bigger the difference. The Long-Term Effect of Interest Rates Higher interest rate over time earns most money so shop around

  19. Rule of 72 • How long will it take to double your money? • Use 72 and divide by APY to figure. • Helps you see the Long-Term Effect of Interest Rates • Small Amounts Grow Large • When saved regularly and put into an interest- earning account, small amounts can add up!

  20. Section 12.4 • Savings Options • Objectives • Explain factors affecting the choice of savings options • Identify and compare various savings options

  21. Factors in Choosing Savings OptionsSafety and riskInsured (FDIC or NCUA)Check individual account options (small print)Services that are not insured

  22. Factors in Choosing Savings Options Continued • Liquidity – ease of which savings or investment can be turned into cash • Ability to withdraw money when you need it; • Term – a period of time during which money must be kept on deposit. • Withdraw early pay a penalty set by the bank, 3 or 6 months interest • Earnings - APY • Taxes – pay on interest earned on savings; some investment have tax advantages and lets you keep more of the money you earn

  23. Factors in Choosing Savings Options Continued • Restrictions • Required to deposit a certain amount to open • Maintain a certain minimum balance • Limited to number of transactions you can make • Research helps choose account that meets your needs • Fees & service charges • Monthly maintenance • Falls below minimum balance

  24. Basic Savings Option • – higher interest rate more restrictions • Savings Accounts – most liquid, minimum balance is lower, fewer restrictions and fees, interest paid is lower; • Transactions recorded in a passbook in the past when bank teller recorded • Today done by ATM, phone, pc and you receive a statement at the end of the month that lists deposit, withdrawals, and interest earned

  25. Basic Savings Option • Money Market Accounts - type of savings account which deposits are invested by the financial institution to yield higher earnings • Higher interest, more restrictions, minimum deposit = $2500 • Check writing option, few • Withdrawals limited • Do not confuse with money market funds – form of mutual fund not FDIC protected

  26. Basic Savings Option • Certificate of Deposit (CD’s) – issued by a financial institution to indicate that money has been deposited for a certain term (amount deposited, interest rate, term) • 3 months to 5 years • early withdrawal penalty • longer term higher rate • rate locked in until end of term • cash in or renew at current interest rate • automatically renew unless you notify the Financial Institution by certain date • minimum can rage from $1000 to $100,000

  27. Basic Savings Option • Savings Bonds - nontransferable debt certificates issued by U.S. Treasury • Loaning money to federal government • Safe, no risk of losing money • Interest earned is exempt from state and local taxes • Federal income tax can be deferred until bond is cashed in or stops earning • 3 types of savings bond (page 312) • Series EE • Series HH • Series I

More Related