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## Savings and Investing

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**Savings and Investing**Why Save8.1**What do you dream of achieving in your lives?**• How do you think you will make those dreams come true?**What is your definition of discipline? Is this a good or**bad thing? • What are three of your financial goals?**Benefits of Saving**• Why is saving considered a trade-off? • When you save, you trade spending now for the ability to spend in the future! • Some future expenses are anticipated • Some expenses aren’t foreseen**Benefits of Saving**• Save for the unexpected • Accidents • Lost and stolen items • Repairs • Lose your job?**Benefits of Saving**• Save for opportunities • Take advantage of unexpected opportunities that may arise! • Save for major purchases • Start saving now! • Home theater, car, house**Benefits of Saving**• Save for flexibility • Flexibility with life choices • Choose to quit a job you don’t like • Rent an apartment you like • Save to achieve your goals • Long terms goals involve large amounts of money**Saving Strategies**• Pay yourself first • Deposit some of your paycheck as you pay your bills • Consider a “fixed expense!” • Leave it in the bank**Saving Strategies**• Save by the numbers • If you don’t earn the same amount from week to week • Save a certain percentage of your take-home pay (net pay) each week • No matter what!**Saving Strategies**• Reward yourself • Every once in a while • Small rewards • Saving and self-control • Remember your goals!**Saving Strategies**• Automatic saving • Payroll deductions • Automatically authorize employer to deduct a specified amount from your paycheck • Deposited into savings or checking account**Saving Strategies**• Automatic saving • Checking account transfers • Authorize bank to transfer a certain amount each month from checking to savings**Savings Institutions**• Four basic types of financial businesses for depositing your savings • Commercial banks • Savings banks • Savings and loan associations • Credit unions**Savings Institutions**• Commercial banks • Probably what you think of when you think “bank” • Serves individuals and businesses • Wide variety of accounts, loans, other financial services • Offers savings and checking accounts, consumer and business loans, investment services • Largest savings institutions in the U.S. • Main source of loans for businesses**Savings Institutions**• Commercial banks • Harris Bank • Fifth-Third Bank • Lasalle Bank • Charter National Bank**Savings Institutions**• Savings banks • Owned by their depositors • Depositors earn dividends instead of interest • Dividend is a share of the company’s profits • Amount of dividend depends on the size of your deposit • Earning dividends is just like earning interest in a commercial bank! • Most exist in the northeast • Originally established to loan small amounts of money to consumers**Savings Institutions**• Savings and loan associations • Became popular during the Great Depression • Commercial banks lost money on consumer loans, so they began to specialize in business loans • Consumers found it difficult to get financial services from commercial banks • Consumers turned to savings and loan associations • Specialize in lending money to consumers to buy homes • Owned by depositors**Savings Institutions**• Savings and loan associations • Citizens Savings and Loan Association • Yakima Federal Savings and Loan Association • First Federal Savings and Loan Association**Savings Institutions**• Credit Unions • Offer memberships to people who share a common bond • Profession, company, church, labor union • Not for profit! • Exist to provide saving and lending services to members • Usually pay higher interest to depositors • Usually charge lower interest to borrowers**Savings Institutions**• Credit unions • Premier Credit Union • State Employees’ Credit Union • Pentagon Federal Credit Union**Savings Institutions**• Deposit insurance • Financial institutions can fail—just like other businesses • Savings institutions are insured by federal agencies • FDIC: Federal Deposit Insurance Company • SAIF: Saving Association Insurance Fund • NCUSIF: National Credit Union Share Insurance Fund**Savings Accounts**• Savings accounts • Offered by any savings institution • Deposit money • Earn interest on your deposits • Withdraw your money at any time • Interest rates • The higher the balance, the higher the interest rate!**Saving Options**8.3**Annual Percentage Rate (APR)**• APR is the annual rate of interest without taking into account the compounding of interest within that year. • APR = Periodic Rate x Number of Periods in a Year**Annual Percentage Yield (APY)**• Truth in Savings Act (1993) • Banks must report the APY for their accounts • APY is the actual interest rate an account pays • All banks required to figure this rate the same way • Easy for consumers to compare accounts!**Annual Percentage Yield (APY)**• APY = (1 + periodic rate) # periods -1 • Example • A high-yield money market account that pays 0.5% per month with monthly compounding • APY = (1 + .005) 12 – 1 • APY = .0617 or 6.17%**APR vs APY**• APR in usually seen in relation to loans, and APY in relation to interest bearing accounts.**For example, a credit card company might charge 1% interest**each month; therefore the APR would equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be [(1 + 0.01)^12 – 1= 12.68%] 12.68% a year. If you only carry a balance on your credit card for one month's period you will be charged the equivalent yearly rate of 12%. However if you carry that balance for the year, your effective interest rate becomes 12.68% as a result of the compounding each month.**How many years would it take to double your money at 8%**interest? Divide the interest rate into 72! 72/8 = 9 yearsto double your money!**Interest**• The way your bank calculates interest helps determine how fast your savings will grow! • Money you deposit is called the principal**The Rule of 72**• To find the number of years required to double your money at a given interest rate: • Assuming the interest is compounded annually • Divide the interest rate into 72 • 72/Interest**The Rule of 72**• Try this! • Beginning investment = $5,000 • Interest rate = 1.75% • How long to double your money? • 41 years! • 72/1.75 = 41.14 years**The Rule of 72**• Try this! • You borrow $1,000 from a friend that is going to charge you 6.5% interest on the loan • If you make no payments, how long will it take before the loan doubles? • 72/6.5 = 11 years the loan doubles to $2,000**The Rule of 72**• One more! • You make an investment of $1,500 in a CD earning 2.75% interest • How long will it take for your investment to double? • 72/2.75 = 26 years**The Rule of 72**• Run it backwards! • If you want to double your money in six years: • Divide 6 into 72 to find the interest rate required • 72/6 = 12 percent • 12% interest is required to double your money in six years!!!**The Rule of 72**• One more backwards! • If you want to double a $5,000 investment in 5 years, what interest do you need to be paid?? • 72/5 = 14% interest needed!**Simple Interest**• Interest is paid one time a year • End of year on the average balance in a savings account**Simple Interest**• You deposit $500 in an account that pays 4% (.04) simple interest • At the end of the year, how much does the bank pay you? • $500 * .04 = $20 interest • $500 principal + $20 interest = $520**Simple Interest**• You have $1,250 to deposit into a savings account at the given simple interest rates per year • In each case, how much would you have in your account at the end of the year?**Simple Interest Formula**• Interest = Principal * Rate * Time • I = Prt • Time is in years! • If time is given in months, convert to percent of a year • Five months = .42 (5/12)**January (1)**.08 February (2) .17 March (3) .25 April (4) .33 May (5) .42 June (6) .5 July (7) .58 August (8) .67 September (9) .75 October (10) .83 November (11) .92 December (12) 1 Simple Interest in Months**Compound Interest**• Interest paid on the principal and also on previously earned interest • Assuming that the interest is left in the account!