Chapter 8 Savings
Essential Questions • What is the purpose of a savings plan? • What needs to be considered when considering where to save your money • What strategies will aid you in setting up a savings plan?
SAVINGTo postpone spending until sometime in the future Benefits of Saving (Why Save?) • Expected & unexpected needs • Financial security • To meet short-term needs & goals • Emergencies (unemployment / sickness / death / accident) • Vacations & leisure • Social events • Major purchases • To meet long-term needs & goals • Purchase a home • Pay for education (you and/or children) • Retirement • Investment – additional income
SAVINGS – HAVE A PLAN*To insure effectiveness STEPS: • Decide what is being saved for • Set specific goal • Amount needed by what date • Break long-term goal into short-term goals • Save regularly & consistently • Put savings to work • Keep goals in mind • Write them down – picture your goals
Saving Goals & Strategies *Be realistic & consider income * Pay Yourself First: • Effective strategy to aid in saving regularly • Direct Deposit of Payroll • Payroll deposited directly into your account • Interest begins compounding immediately • Automatic Payroll Deductions • Money is taken directly out of your paycheck and put into a savings account or invested into company stocks or bonds • Checking Account Transfers • Authorize bank to transfer from checking into savings (monthly)
SAVINGS ACCOUNTS & OPTIONS(Important Issues to Consider) • Liquidity • Speed at which savings vehicle can be converted to cash • Individuals will have different liquidity needs based on goals • Safety • FDIC insures to $100k – savings accts. safer than stocks / bonds / etc. • Convenience • Branch locations & hours vary & will impact choice of savings vehicle • Interest rates usually comparable so convenience is a major factor • Interest-Earning Potential (Yield) • Shop various institutions to find the best possible rate of return • Liquidity & rate of return usually go hand-in-hand • Fees and Restrictions • Understand all service fees & restrictions before choosing • ATM charges / early withdrawal penalties / etc.
Homework • Page 314 – Review Key Terms and Ideas (1-14)
Essential Questions Compare & contrast a Regular Savings Account, a Certificate of Deposit, and a Money Market Savings Account What is the importance of banks quoting interest rates as Annual Percentage Yield (APY)? What are the benefits of Government Bonds & Treasuries?
Savings Options • Regular Savings Account • Certificate of Deposit (CD) • Money Market Accounts • Government Bonds / Treasuries
Regular Savings Account • Major advantage is high liquidity (easily converted to cash) – debits & credits are done at any time • Disadvantage is lower rate of return (interest) than other savings vehicles • Usually offer ATM cards, on-line & telephone banking, etc.
Certificate of Deposit (Time Deposit) Earns a specified interest rate for a specified period of time Interest rate is usually higher than savings accts. Interest accumulates until maturity Early withdrawal will usually result in a penalty (less interest earned) If money is left in CD after maturity date it will automatically renew Interest can be received periodically or put into a separate account
Money Market Accounts Combination saving / investment plan Good liquidity (4-6 withdrawals per month) Some are FDIC insured – still a safe investment (usually U.S. Treasuries) Interest rates vary based on market performance and are typically higher than regular savings accounts Minimum balances are usually required ($1000+)
Government Bonds Lending money to the U.S. Government – originally known as “WAR BONDS” to help finance WWII SERIES EE – A discount bond ($50 - $10,000)that sells for half its maturity value (ie. a $50 bond will be worth $100 at maturity – usually in 10 years) I Savings Bond – pay interest adjusted for inflation every 6 months Exempt for local & state taxes – federal tax will apply when cashed in unless used for education Purchased through local banks
Treasury Securities T-Bills – Available in denominations of $10,000 – then increments of $5000 (3 month, 6 month, or 1 year) T-Notes – Issued for $1000 or $5000 – maturity for 1-10 years – will pay a higher interest rate than T-Bills
Earning Interest on Savings • There are a number a factors that have an impact on the amount of interest is earned on savings accounts
INTEREST TERMS • The initial amount saved is called principal • Interest is paid on principal each period • Simple interest is paid one time annually • When interest is paid on the interest already earned it is called compounding interest • Interest accumulates faster when money is compounded more often – quarterly better than annual – monthly better than quarterly
Annual Percentage Yield • APY – the actual interest rate an account pays per year • Congress passed the Truth in Savings Act in 1993 that requires all banks to figure out APY rate in the same way (compare apples to apples)
CALCULATING COMPOUNDING INTEREST • Rule of 72 – Simple way to calculate the effects of Compounding Interest • If an asset grows by x % a year its value will double in 72 divided by x years Example: A savings account or investment earning 10% interest will double in (72/10 = 7.2 years) • That is why it is so important to start saving when you are young!!!
Savings Institutions • Commercial Banks • Savings Banks • Savings & Loan Associations • Credit Unions
COMMERCIAL BANKS • Largest savings institutions in the US • Offer wide range of banking services – business & personal relationships • FDIC – deposits insured up to $100,000 per account • Many branches & ATM’s – National or State charter
SAVINGS BANKS • Owned by depositors • Depositors earn dividends (share of profit) instead of interest • Primarily located on east coast (small amount -- about 500) • Savings accounts and loans on property (mortgages & home improvement loans) • Deregulation in 1980’s allowed other services like checking
SAVINGS AND LOAN ASSOCIATIONS • Primarily set up to lend money for home mortgages but do offer other services – checking / credit cards / etc. • Failed in 1980’s due to poor judgment on loans • Many have merged with banks & are FDIC insured
CREDIT UNIONS • Not-for-Profit for union members – owned by members • Higher interest on deposits & lower on loans • NCUA provides insurance on deposits up to $100,000 • Savings account called a share account – “shares” of ownership • Recent growth has led to additional services being offered (IRA’s / CD’s / etc.)