SAVINGS Maximizing your Return
Savings Setting aside money for future use Discretionary income (aka disposable income): the amount of money left over after all obligations have been met Gross Pay Taxes and Deductions = Net Pay Net Pay Bills = Discretionary Income
Interest Interest is money paid for the use of someone s money Simple Interest Interest is computed on amount borrowed or saved only Accumulated interest doesn t earn interest
Simple Interest Calculations I = P x R x T I interest P principal (amount borrowed or outstanding) R rate, usually expressed as an annual percentage (APR) T length of time (usually in years) Note: R and T must be in the same units
Simple Interest Example How much interest would you pay on a three year loan of $10,000 at 5% APR? I = P x R xt I = 10,000 x.05 x 3 $1,500
Manipulating the Formula What is the APR on a six month 1,000 loan that costs $50 in interest? I = P x R X T ($50 = $1,000 x n x.5) R = I/(P x T) (R = 50/(1000 x.5) R=10% Note: Where did.5 come from? The loan was for 6 months which is half a year.5
SIMPLE INTEREST DO THE MATH SHOW YOUR RESULTS Jamie wants to earn $500 in interest so she ll have enough to buy a used car. She puts $2000 into an account that earns 2 ½% interest. How long will she need to leave her money in the account to earn $500 in interest? A local bank is advertising that you can double your money in eight years if you invest with them. Suppose you have $1000 to invest. What interest rate is the bank offering? Kelly plans to put her graduation money into an account and leave it there for 4 years while she goes to college. She receives $750 in graduation money that she puts it into an account that earns 4.25% interest. How much will be in Kelly s account at the end of four years? Randy wants to move his savings account to a new bank that pays a better interest rate of 3.5% so that he can earn $100 in interest faster than at his old bank. If he moves $800 to the new bank, how long will it take for him to earn the $100 in interest?
Compound Interest Interest is computed on the original principal AND the accumulated interest. For example if you save $100 at 6% and it is compounded annually: Year Principal($) Interest ($) Total ($) 1 100 6 106 2 106 6.36 112.36 3 112.36 6.74 119.10
COMPOUND INTEREST CLICK ON THE LINK BELOW A man invests $10, 000 in an account that pays 8.5% interest per year, compounded quarterly. What is the amount of money that he will have after 3 years? http://www.moneychimp.com/calculator/compound_interest_calculator.htm Go to the website below. How much are you willing to invest to be a millionaire. How old will you be when you reach your goal? http://www.youngmoney.com/millionaire-calculator/
DO YOU GROW YOUR SAVINGS FASTER WITH SIMPLE INTEREST OR COMPOUND INTEREST? AT THE END OF YEAR 5, INVESTMENT W/COMPOUND INTEREST $ INVESTMENT W/SIMPLE INTEREST $
Savings Products Savings products are purchased at a bank or similar financial institution There is a trade off between liquidity and rate of return Liquidity is the ease of conversion to cash The less liquid the higher the return Investment use of savings to earn a financial return Investments usually contain an element of risk
Highly liquid Demand account Savings Account Low, usually fixed rate of interest 2010 1.2% average Can be linked to checking account and accessed via an ATM FDIC insured (if purchased through a bank)
Certificate of Deposit (CD) Time deposit Earns a fixed rate of interest for a specific term (3 months to 2 years) Average rate 2010 1.98% for 5 year CD Maturity date dateon which interest comes due for payment Redeem for cash or renew Automatic renewal option Check for change in interest rate Steep penalty for early withdrawal Ties up your money FDIC insured
Money Market Account Liquid investment account ex: money market checking account Deposits are invested in safe, liquid securities Variable rate of return Generally low 2010 average bank rate.32% Minimum balance requirements Account limitations may include: Min. $ per check, max # of checks BUT money available immediately Not FDIC insured
Establish a Savings Plan Determine a specific dollar amount or percentage of income to invest each pay period Automatic payments take the pain out of saving You don t miss what you don t see Direct Deposit Payroll Deduction