Financial Unit Savings

Materials Needed Story 8-1 “Savings”

During this Presentation you will Explore reasons for saving Learn about earning interest on savings through basic investments Calculate interest to compare a variety of savings outcomes Consider realistic savings goals for yourselves.

At the end of this presentation you will be able to … Describe the reasons to save and list basic investments. Calculate simple and compound annual interest and total savings. State savings goals that support your transition from secondary school. Adjust a budget to include savings.

What does Savings mean? Saving simply means NOT spending, when you save you accumulate money.

Overhead 8-1 “Reasons to Save” To buy a big item or pay for a big bill that’s coming. To have emergency funds: health problems or unemployment. To build funds to invest or save for retirement Putting your Money to Work When you save, your money can earn interest A savings account is a simple investment Interest depends on time and risk.

Savings and Banks When you accumulate money (while saving for a car, a holiday or university), you can keep the money in a chequing account, or you can put it to work in a savings account. When you put money in a savings account, you’re putting it to work – the bank uses the money (to lend to other people), and in exchange pays you a fee in the form of interest. In effect, you’re lending your money to the bank. The bank protects your savings, and guarantees that they’ll be there when you need them. Because you have the right to take back your money at any time, the bank pays only a low interest rate; if you’re willing to let the bank keep your money for a longer time, you can put your savings in a term deposit or a guaranteed investment certificate and the bank will pay a higher interest rate.

Overhead 8-2 “Choices” When you save, you must make some choices: Do I save money now or spend what I earn? If I save it, what’s my best savings choice? When do I think I might need the money? Will I need it soon, or can I set it aside for a long time? Between now and the time I need it, can I put the money to work for me? Do I need to keep the money safe, or can I take some risks with it?

Overhead 8-3 “Ways to Save” Reduce spending on “wants” Ask the class to ID examples of spending on “wants”, and how much they could save by cutting back on these purchases. E.g. spending $1.50 on pop once a day doesn’t seem like much, but it adds up to: $10.50 a week (enough for one days’ groceries) $45.00 a month (enough for a monthly student transit pass) $550 a year (enough for a month’s rent in some places)

Overhead 8-3 “Ways to Save” Pay yourself first The easiest way to save is to put away the first 10 per cent of your income before you can spend it. You won’t notice a small percentage deducted from your paycheque, but your savings will accumulate over time. You can arrange to have your bank automatically transfer a small amount of your paycheque into a savings account (the bank will have the discipline even if you don’t!).

Overhead 8-3 “Ways to Save” Put your savings to work Who has a savings account? Who set it up? What is the purpose of you having that account? A savings account is one way to save, and there are many others. Those that earn money in the form of interest (or other profits) are called investments. The most common are: Savings account: a deposit account that’s secure but accessible and pays a small amount of interest. When you put money into a savings account, it’s a form of investment because the money earns interest People don’t usually think of a savings account as an investment, because the return is low. People often choose to move some of their savings to other types of investment that pay a better return. Guaranteed Investment Certificate (GIC) and term deposit for a fixed period of time that pays a set (or sometimes variable) interest rate. Canada Savings Bond (CSB): a loan to the Government of Canada at a guaranteed interest rate (that may change from year to year). Each type of investment has advantages and disadvantages. The key point is to start the habit of saving, regardless of how you choose to put those savings to work.

Overhead 8-4 “Expected Return and Risk” Money earns income at different rates One key factor in determining whether money earns a high income or a low income is the amount of risk associated with the investment: If risk is low, as with a bank savings account, you may be willing to invest your money for a low rate of return. If risk is high, as with an investment in a new business (where the return is hard to predict and you might even lose money), you would not choose to invest unless there’s a good chance of earning a much higher return. Because different investments have different levels of return and risk, you have to be aware of your options, and how to choose between them.

Overhead 8-5 “Savings Add Up” Simple Interest: Interest paid only on the initial deposit. E.g. $100.00 at 5% simple interest earns $5.00 each year $5.00 in the second year (total $110.00) $5.00 in the third year (total $115.00) $5.00 in the fourth year (total $120.00), etc. Compound Interest: Interest paid on the initial deposit and on any interest that has been earned. In Canada, financial institutions pay compound interest, which is usually paid and compounded monthly. Interest compounding means that starting long-term savings while you’re young creates a bid advantage. E.g. $100 at 5% compound interest earns $5.00 in the first year. $5.25 in the second year (total $110.25) $5.51 in the third year (total $115.76) $5.79 in the fourth year (total 121.56), etc.

Overhead 8-6 “Saver and Spender” Two friends graduate from secondary school at the same time, take two years of college, and start a new job at the age of 19. Joe Saver knows the value of compound interest, and starts saving right away. At the beginning of each year, he puts $3,000 into a long- term investment that earns 8% annual compound interest. He manages this for nine years. Then, at age 28, he starts a family and spends all of his income supporting his family. He puts no more money into the investment, but lets it grow until his retirement. He works until he’s 65, then he retires and checks to see what his savings amount to. What do you think his savings were?

Jim Spender likes to party and travel, so he spends all of his money for a while. When he turns 28, he decides he had better be like his friend and start to save. He starts putting $3,000 a year into the same long-term investment earning 8 per cent annual compound interest. He continues to save $3,000 every year for the next 37 years until he retires at age 65, and then checks to see what his saving amount to. What do you think his savings were?

Answer: Who has more $$$? Who has more money at retirement? Joe who invested $3,000 for nine years Jim who saved $3,000 for 37 years Joe has $697,752 Jim has $657,847 Joe has slightly more because he started earlier and let compounding do much of the work.

Overhead 8-7 “Rule of 72” The “Rule of 72” is an easy way to calculate approximately how long it takes for your savings to double at a compound interest rate. Divide 72 by the interest rate to find out the number of years it’ll take to double the amount saved. Divide 72 by the number of years of saving to find out the interest rate needed to double the amount saved. You can use calculators or online savings calculators provided by many financial institutions (including one at www.bcsc.bc.ca, click Planning 10) to calculate precise savings at varying rates of interest and terms. Be sure to use CANADIAN online calculators, as US institutions use different assumptions for some types of calculations Savings growth will depend on how often interest is compounded (yearly, semi-annually, monthly, etc) The more frequent the compounding, the faster your savings will grow. Fees can also affect how fast your investments grow. For instance, financial institutions often charge their customers monthly fees to operate accounts. Those fees can eat up some of the interest customers earn.

Worksheet Distribute Handout 8-1 “Calculate Savings” On your own complete the calculations Review answers using the Calculate Savings Answer Key

Discussion How would the savings you calculated affect your transition from secondary school? Questions to consider: Which of the first three calculations showed the greatest accumulation of interest? Why? Answer: The third accumulated most interest, because the principal amount increased with yearly contributions. You’re able to earn interest on the additional contributions as well as on the accumulated interest. Note that many financial institutions offer savings accounts that compound twice a year, or on a monthly balance, so interest would be even greater. What would be an effective way to save for your future goals? Answer: Make regular monthly contributions to an investment that pays compound interest.

Continued… How would it affect your transition from secondary school, and your progress toward your education and career goals, if you were to begin a regular savings plan now? Answer: It would provide a fund you could use when you leave high school. How realistic is it for students to begin a regular savings plan now? Answer: Answers will vary, students who can decrease their spending or work a part-time job may be able to put some money away.

Activity Distribute Handout 8-2 “My Savings Goals” Complete Handout. Review Handout with your parents

Closure Individually write the three most import things you learned about savings on a piece of paper. Everyone will read one point aloud.