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Chapter 5 The Banking System

Chapter 5 The Banking System. What Is the Purpose of Savings?. A savings account is a demand deposit account for the accumulation of money. It is a safe place to hold money to meet future needs and wants. It pays interest at a low rate. 5-2 Savings Accounts. How Can You Grow Your Savings?.

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Chapter 5 The Banking System

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  1. Chapter 5 The Banking System

  2. What Is the Purpose of Savings? • A savings account is a demand deposit account for the accumulation of money. • It is a safe place to hold money to meet future needs and wants. • It pays interest at a low rate. 5-2 Savings Accounts Slide 2

  3. How Can You Grow Your Savings? • Principal is the money set aside on which interest is paid. • Simple interest is computed once during a time period. • Compound interest is earned on both principal and interest earned previously. 5-2 Savings Accounts Slide 3

  4. Computing Simple Interest • P = amount of money set aside • R = interest rate • T = time that money will be set aside Simple Interest Interest (I) = Principal (P) × Rate (R) × Time (T) = $1,000 × 6% annual rate × 6 months = $1,000 × 0.06 × 6/12 = $30 5-2 Savings Accounts Slide 4

  5. Computing Compound Interest Quarterly Compounding Annual Interest Rate 6% Beginning Rate EndingYear Balance 6% Quarter Balance 1 2 3 4 1 $100.00 0.015 $1.50 $1.52 $1.55 $1.57 $106.14 2 $106.14 0.015 $1.59 $1.62 $1.64 $1.66 $112.65 3 $112.65 0.015 $1.69 $1.72 $1.74 $1.77 $119.57 5-2 Savings Accounts Slide 5

  6. What Are Your Savings Options? • Money market accounts earn the market rate of interest. • Certificates of deposit (CDs) pay a fixed interest rate for a time period. • U.S. savings bonds pay a guaranteed minimum interest rate. • Individual retirement accounts (IRAs) help you save for retirement. 5-2 Savings Accounts Slide 6

  7. Focus On . . . The FDIC • Protects depositors of insured U.S. banks against loss if the bank fails • Covers all types of deposits • Covers principal and accrued interest • Does not insure some items • Examples: stocks, bonds, valuables • Insures deposits in different banks separately 5-2 Savings Accounts Slide 7

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