Savings Plans and Payment Methods Chapter 5

Why do people save money? Emergencies Big Ticket items Financial security

Tips for saving Pay yourself first Save regularly Make sure to set aside the amount of money you are willing to save first before spending any of it on something else Save regularly If you make consistent deposits then the savings will add up fast

Why deposit your money? It’s safe and secure It earns interest FDIC Insured

What is interest? Money paid regularly at a particular rate for the use of money. Meaning the bank will pay you for using their institution to hold your money.

Evaluating savings plans Rate of return Compound interest Inflation Tax considerations Liquidity Restrictions and fees

Which institution to use? Which offer the best interest rates These are public because of the Truth in savings act Law that requires financial institutions to present their interest rate on a savings account in terms of annual percentage yield The APY is the yearly rate of return you will get on you interest paying account. The truth in savings act makes it easier for you to compare the interest you will earn from different savings accounts when comparing institutions.

Liquidity and interest The amount of interest you earn will depend on how liquid your funds are. If you have easy access to your money, the interest rate will be lower. If you have restriction on your account, the rate of interest will likely be higher.

Penalties of savings Withdrawal fees Minimum balance fees Number of transaction fees

Types of savings plans Regular Savings Accounts—frequent deposits and withdrawals, lower interest Certificates of deposit (CD)—money is left for a stated period of time and earns a specific rate of return MONEY market account—requires minimum balance and interest varies from month to month US Savings bonds—Keep until maturity date and it will be worth the face value

CDs A Certificate of Deposit (CD) offers a higher interest rate, but contractual obligations apply. Meaning, you will have to leave your money in that account for a set amount of years, typically 5-10 years. Penalties will apply for early withdrawals.

Money markets Money Market Accounts offer both higher interest and higher liquidity, but a minimum balance is required. This balance is usually around 1,000 to 10,000.

Stocks Stocks are shares of a company you can purchase. The company gives you rights to the dividends of the company and the money is paid out to you depending on how many shares of stock you own and the portion of earnings the company makes.

Mutual funds Mutual Funds allow you to join your money with other individuals, usually investors, making up pooled or collective investments. It is similar to purchasing stocks, but mutual funds allow you to become part owner of many different stocks, bonds, or other assets that might be included in the fund.

bonds Bonds are generally a longer term investment and usually the longer the term, the higher the interest rate. Bonds are loans issued by the government, a local authority or a company. These borrowed funds can be used to finance things such as developmental projects or construction.

What type of savings accounts is right for you? Depends on your long term or short term goal How much access do you want to have to your money? Are there penalties involved? What is the interest rate?