Savings Accounts. Chapter 30 12/4/2017 1

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Gillian Phelps
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1 Savings Accounts Chapter 30 12/4/2017 1

2 Why save money? 12/4/2017 2

3 What is savings? Savings is money put aside for future use. Save for: Major purchases Save to buy with cash rather than credit Emergencies Have money set aside in case something happens Usually want 3-6 months of monthly net income Retirement Start saving as early as possible A personal budget is not complete without a plan for regular savings 12/4/2017 3

4 All savings involve some sacrifice Opportunity cost When you save money, you are putting off spending money now to get something later You re giving up the opportunity to use that money now because you re saving it. 12/4/2017 4

5 Interest Earn interest on savings accounts The bank uses your money to give out home loans, car loans, etc. Your money is being used for loans, so you receive the rental fee/interest How interest is calculated: Simple Interest Compound Interest Depends on 3 Factors Amount of savings/invested Interest rate Length of time in the account 12/4/2017 5

6 Simple Interest Simple interest Interest earned only on the money you deposited into your savings account. For example: A savings account that pays you 5% annual interest. Balance in the account is $1,000. At the end of one year you will earn $50 on the account. $1,000 x 5% = $50 12/4/2017 6

7 Compound Interest Compound interest Interest earned on both the money you deposit and the interest you earned on it. Interest on interest Usually compounded daily, monthly, quarterly, or annually Look at example on page 490 Real-World Example Which is better simple or compound? 12/4/2017 7

8 Rule of 72 General rule that will tell you how long it will take your money to double. 72 / interest rate If you have your money invested in an account that earns 5% interest, how long will it take for your money to double? 12/4/2017 8

9 Types of Savings Accounts Traditional Savings Accounts Certificate of Deposit Money Market Fund Money Market Deposit Account 12/4/2017 9

10 Traditional Savings Accounts Offered by all types of financial institutions. Usually have low minimum deposits (around $100) Passbook savings account All of the deposits and withdrawals are recorded in a book that the depositor keeps Rarely exists anymore Statement savings account All of the activity in the account is recorded on a statement that is sent to the person who has the account 12/4/

11 Traditional Savings Accounts Can withdraw money at any time without penalty Interest rates on traditional savings accounts is usually quite low Bank Interest Rate Examples 12/4/

12 Certificate of Deposit (CD) Requires you to deposit a minimum amount of money in an account for a minimum period of time Usually at least 6 months, 1 year, or 5 years CD has a maturity date which is when the money becomes available to you. Interest is usually higher than a savings account Penalty for early withdrawal 12/4/

13 Money Market Fund A kind of mutual fund, or pool of money, put into a variety of short-term debt (less than one year) by business and government. Issued by brokerage firms Interest rate varies from month to month Can withdraw money at any time Usually need to deposit at least $1000 Can write limited number of checks each has a minimum balance of up to $500. NOT insured by the FDIC 12/4/

14 Money Market Deposit Account Same as money market fund, but issued by banks Is insured by the FDIC 12/4/

15 Savings Account Video 12/4/

16 Advantages of Savings Accounts Main advantage is earning interest Federal Deposit Insurance Corporation (FDIC) A government agency that insures bank accounts Bank accounts are insured for up to $250,000 Money market accounts offered by brokerage firms are not federally insured 12/4/

17 Advantages of Savings Accounts Liquidity the ability to quickly turn an investment into cash An investment such as a car or a business is not very liquid because you have to sell it in order to get cash Savings accounts are highly liquid because you can easily withdraw cash from them Even CDs which have a penalty for early withdrawal are considered liquid. 12/4/

18 Disadvantages of Savings Accounts Inflation Risk Risk that the rate of inflation will increase more than the rate of interest on savings. Inflation is 6% Savings account earns 4% You lost money by having it in a savings account Main risk is with CDs, where you are locked into an interest rate over a long period of time 12/4/

19 Disadvantages of Savings Accounts Costs associated with having a savings account Penalty fee for early withdrawal Fee if account balance falls below a minimum Fees charged for each deposit and each withdrawal Interest earned is taxable 12/4/

20 Spending More, Saving Less CBS News July 31, /4/

CHAPTER 5-THE BANKING SYSTEM. Section 2- Savings Accounts

CHAPTER 5-THE BANKING SYSTEM. Section 2- Savings Accounts CHAPTER 5-THE BANKING SYSTEM Section 2- Savings Accounts THE PURPOSE OF SAVINGS To save money for your future wants and needs Helps you meet your financial goals Every personal goal, should have financial