CHAPTER 8 SAVING Plan for Financial Security Economic Educatin for Consumers 10/24/11 CHAPTER 8 SAVING Plan for Financial Security WHAT’S AHEAD 8.1 Why Save? 8.2 Savings Institutions and Accounts 8.3 Save with Safety 8.4 Simple and Compound Interest Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 LESSON 8.1 Why Save? GOALS Explain how you can benefit from saving regularly Describe strategies you can use to meet your saving goals Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Benefits of Saving Save for the unexpected Car repairs, accidents, job loss… Save for opportunities Unexpected good deals Save for major purchases Car, house, college, home theater… Save for flexibility Change jobs, different life choices… Save to achieve your goals Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Saving Strategies Pay yourself first Treat saving as a required expense Save by the numbers Save a certain percentage of net income Reward yourself Non-monetary rewards for saving Saving and values Understand opportunity costs in decisions Automatic saving Payroll deductions, Checking account transfers Chapter 8

LESSON 8.2 Savings Institutions and Accounts Economic Educatin for Consumers Chapter 8 10/24/11 LESSON 8.2 Savings Institutions and Accounts GOALS Describe differences among types of savings institutions Explain how to select the savings account that is right for you Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Savings Institutions Commercial banks Variety of services; savings, checking loans, investments and many other… Savings and loan associations Specialize in loans to consumers; very similar to commercial banks Credit unions Memberships for people who share a common bond; do not operate for a profit; earn higher interest; lower interest on loans Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Deposit Insurance Federal Deposit Insurance Corporation (FDIC) Govt. insured accounts up to $250,000 Saving Association Insurance Fund (SAIF) Same for Savings/Loans National Credit Union Share Insurance Fund (NCUSIF) Insurance for Credit Unions Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Savings Accounts Interest rates Shop around for the best rate or APY (annual percentage yield) Fees and restrictions ATM fees?, minimum amt., No. of withdraws, teller fees…. Chapter 8

LESSON 8.3 Save with Safety Economic Educatin for Consumers Chapter 8 10/24/11 LESSON 8.3 Save with Safety GOALS Describe the benefits and trade-offs of different saving options Discuss government bonds and some reasons for investing in them Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Savings Options Certificate of deposit (CDs) Minimum deposit Higher interest rate earned Must leave in for a specified time period Penalty for early withdrawal Money market account Interest rate changes over time Usually higher interest than savings accts. Flexibility: may withdraw without penalty Some offer check writing Chapter 8

Annual Percentage Yield (APY) Economic Educatin for Consumers Chapter 8 10/24/11 Annual Percentage Yield (APY) Truth in Savings Act 1993 All banks must report APY to consumers Actual interest rate an account pays per year Makes comparison shopping of banks easier Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Government Bonds A written promise to pay a debt corporate, govt., municipal Treasury securities Treasury bills (1 yr. or less term) Treasury notes (1-10 yr. term) Savings bonds Series EE savings bonds Interest rate varies; paid every 6 months; must own for at least 1 yr.; held up to 30 yrs; cash in at bank Series HH savings bonds (no longer issued) I savings bonds (pay interest adjusted for inflation) Govt. set rate every 6 months=inflation+fixed amnt. Chapter 8

Why Buy Government Bonds Economic Educatin for Consumers Chapter 8 10/24/11 Why Buy Government Bonds Tax advantages No state or local on govt. bond interest Federal tax when bond is cashed; no tax if bond is used for higher education Safe investment Federal govt. guarantees payment Chapter 8

LESSON 8.4 Simple and Compound Interest Economic Educatin for Consumers Chapter 8 10/24/11 LESSON 8.4 Simple and Compound Interest GOALS Describe how to calculate simple and compound interest Discuss the importance of compounding to a successful savings plan Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 Simple Interest Simple interest is interest paid one time a year at the end of the year on the average balance in a savings account. Chapter 8

Economic Educatin for Consumers Chapter 8 Compound Interest 10/24/11 Compound interest is interest paid on the principal and on previously earned interest, assuming that the interest is left in the account. Interest can be compounded in several ways. Annually – every year Semiannually – every six months Quarterly – every three months Monthly Daily ***The more often interest is compounded the more money you earn Chapter 8

Compound Interest Table Economic Educatin for Consumers Chapter 8 10/24/11 Compound Interest Table Year 3% 6% 10% 1 1.030 1.062 1.105 2 1.062 1.127 1.221 3 1.094 1.197 1.350 4 1.127 1.271 1.492 5 1.162 1.350 1.649 6 1.197 1.433 1.822 7 1.234 1.522 2.014 8 1.271 1.616 2.225 9 1.310 1.716 2.459 10 1.350 1.822 2.718 Look at page 280 In class activity Chapter 8

Economic Educatin for Consumers Chapter 8 10/24/11 The Rule of 72 To find out how long it takes an investment to double, divide 72 by the annual rate of return. Examples 10 percent annual rate of return 72 ÷ 10 = 7.2 years 6 percent annual rate of return 72 ÷ 6 = 12 years 3 percent annual rate of return 72 ÷ 3 = 24 years Chapter 8