Banking Basics

1. Banking Basics Savings

2. How To Do Your Banking Chapter 3: Saving will put you in the driver’s seat

3. How To Save • What are 3 reasons to save money? • What are 8 strategies for saving money? • Read “How To Save” pages 8 – 9 and write answers to the questions above.

4. How To Save • The class will be divided into teams of 2 or 3. Each team will be assigned 1 of the 8 strategies for saving money. • Each team will evaluate the assigned strategy by answering the following questions: • Why is the strategy beneficial? • What might happen if this strategy were ignored? • Give 1 example of how this strategy might be implemented (other than the examples in the book). • The team’s evaluation will be submitted so remember to type the evaluation in complete sentences and to use correct grammar, punctuation, and spelling. Also remember to identify each team member and the date in a header. • Each team will present its strategy to the class.

5. Put Your Money To Work For You • How does a bank make a profit? • What is simple interest? • What is compound interest? • What is compounding? • What is the Rule of 72? • Read “Put Your Money To Work For You” page 9 and answer the questions above. • Watch “How Your Money Makes Money: Interest” • Next we will look at some examples. Make sure to take notes!

6. Interest – Examples • Convert the following interest rates to decimals. 25% 25.0% .25 5% 5.0% .05 18% 6% 15.5% 4.75%

7. Simple Interest – Examples - 1 • Find the interest earned if you deposit $500.00 in a savings account which earns 2% for a year. Interest Earned = Principal x Rate x Time Interest Earned = $500.00 x .02 x 1 Interest Earned = $10.00 • Find the interest earned if you deposit $500.00 in a savings account which earns 2% for six months. Interest Earned = Principal x Rate x Time Interest Earned = $500.00 x .02 x 6/12 Interest Earned = $5.00

8. Simple Interest – Examples - 2 • Find the interest earned if you deposit $500.00 in a savings account which earns 2% for three months. Interest Earned = Principal x Rate x Time Interest Earned = $500.00 x .02 x 3/12 Interest Earned = $2.50 • Find the interest earned if you deposit $500.00 in a savings account which earns 2% for seven months. Interest Earned = Principal x Rate x Time Interest Earned = $500.00 x .02 x 7/12 Interest Earned = $5.83

9. Compound Interest – Examples - 1 • Find the interest earned at the end of one year if you deposit $500.00 in a savings account which earns 2% every six months. Interest Earned = Principal x Rate x Time Interest Earned = $500.00 x .02 x 6/12 Interest Earned = $5.00 Amount in accountafter 6 months = $500.00 + $5.00 = $505.00 Interest Earned = $505.00 x .02 x 6/12 Interest Earned = $5.05 Amount in accountafter 1 year = $505.00 + $5.05 = $510.05

10. Compound Interest – Examples - 2 • Find the interest earned at the end of one year if you deposit $500.00 in a savings account which earns 2% quarterly. Interest Earned = Principal x Rate x Time Interest Earned = $500.00 x .02 x 3/12 Interest Earned = $2.50 Amount in accountafter 3 months = $500.00 + $2.50 = $502.50 Interest Earned = $502.50 x .02 x 3/12 Interest Earned = $2.51 Amount in accountafter 6 months = $502.50 + $2.51 = $505.01

11. Compound Interest – Examples - 3 Interest Earned = Principal x Rate x Time Interest Earned = $505.01 x .02 x 3/12 Interest Earned = $2.53 Amount in accountafter 9 months = $505.01 + $2.53 = $507.54 Interest Earned = $507.54 x .02 x 3/12 Interest Earned = $2.54 Amount in accountafter 1 year = $507.54 + $2.54 = $510.08

12. Rule of 72 - Examples • How long will it take for the money in your account to double if it earns an interest rate of 5%? 72/5 = 14.4 years • How long will it take for the money in your account to double if it earns an interest rate of 10%? 72/10 = 7.2 years

13. To Sum It Up . . . • You earn more interest on your deposited funds when compounding is used. • The more frequent the compounding, the more interest you earn. • The greatest benefit or value of compounding is realized over longer time periods. • Start saving when you are young.

14. Online Calculators • Go to the Simple Saving Calculator at www.bankrate.com/calculators.aspx • Use the calculator to compute Simple Interest Example 1 • Use the calculator to compute Compound Interest Example 2 • What is the monthly deposit? • Write your own savings example and use the simple saving calculator to calculate the result. • Complete the Simple Saving Calculator practice problems (handout).

15. How To Choose The Right Savings Account For You • What is the Truth in Savings Act? • What is annual percentage yield (APY)? Write the definition found at Investopedia .com for this term. • What is liquidity? • What are 3 basic saving instruments? Write the definition found at Investopedia.com for each. • Read “How To Choose The Right Savings Account For You” page 10 and answer the questions above.

16. How To Choose The Right Savings Account For You • Create a Venn Diagram to compare and contrast statement savings, certificates of deposit, and money market savings. • Write legibly and submit your diagram to the correct location. • Venn Diagramexample:

17. Title: __________________ Name: __________________ Date: __________________