STARTING A SAVINGS PROGRAM Chapter 19-1
WHY HAVE A SAVINGS PLAN? • SAVINGS PLAN: Putting money aside in a systematic way to help reach a financial goal. • INVESTING: using your savings to earn more money.
EARNING INTEREST Simple Interest • Interest that is computed only on the amount saved. Compound Interest • Interest that is computed on the amount saved plus the interest previously earned.
SELECTING A SAVINGS PLAN • When deciding how to invest your savings, three main factors should be considered:
1. SAFETY • The assurance that the money you have invested will be returned to you. • http://www.fdic.gov/about/affaq.html
2. YIELD • The rate of return, the percentage of interest that will be added to your savings over a period of time.
3. LIQUIDITY • The ease with which an investment can be changed into cash without losing any of its value
Types of Savings Programs • You can open an account through almost any large financial institution, including banks, credit unions, and brokerage firms. • Savings Account • Money Market Accounts • Certificates of Deposit (CDS) • IRA Accounts
REGULAR SAVINGS ACCOUNTS • Similar to opening a checking account • Signature card, make deposit, receive register • Withdrawing money • Complete withdrawal slip: a written request to take money out of your account. • Be sure to record withdrawal in register • will usually have either no minimum balance requirement or a low one, but will offer a very low interest rate (meaning your money won't earn that much) • A typical basic savings account lets you withdraw your money whenever you want • Considered one of the most safest investments
MONEY MARKET ACCOUNTS • An account that pays a variable interest rate based on interest being paid in the money markets. • Don’t require long-term deposits • Usually require large minimum balance • Interest paid varies daily or weekly • Yield is higher than regular savings, less than long-term CD’s. • You also may be limited to how many withdrawals you can make in a month • http://www.ally.com/bank/money-market-account/
CERTIFICATES OF DEPOSIT • A long-term time deposit that commonly meets these conditions and pays higher interest rates than regular savings accounts. • THREE REQUIREMENTS: • A minimum deposit • Certain period of time • Penalty for early withdrawal • https://www.bankofamerica.com/deposits/bank-cds/standard-term-certificate-of-deposit.go • https://www.chase.com/savings/bank-cd
INDIVIDUAL RETIREMENT ACCOUNT (IRA) • A tax-sheltered retirement plan that allows certain workers to invest a couple thousand dollars annually and pay no tax either on that sum or on its earnings until withdrawal. • Penalties assessed if withdrawal prior to age 59 ½, must have account for five years. • The main difference between the two types of IRAs is when you pay taxes on your investments. (Traditional IRAs) can delay the taxes until retirement, but with (Roth IRAs), you pay tax now rather than later.
ASK BEFORE YOU SAVE: • How safe is your money with the institution? • How much interest do you want to earn? • How frequently is interest compounded & added to your account? • What services are offered that are important to you?
Continued.. • Does the financial institution offer help in selecting the best savings plan from among its options? • What are the institution's business hours? Is electronic banking available for after-hours transactions? • Is the institution conveniently located?
SAVINGS AND THE ECONOMY • When CONSUMERS borrow money, the money is spent, and then demand for goods and services increases. • When BUSINESSES borrow money to expand, replace, or sell new product, new jobs are created & economic activity increases. • When GOVERNMENT borrows to build highways, schools, etc. economic activity increases