Chapter 30 Savings Accounts pp. 484-497

Learning Objectives After completing this chapter, you’ll be able to: Name reasons for saving money. Explain how interest is earned. continued

Learning Objectives After completing this chapter, you’ll be able to: Identify types of savings accounts. Describe savings accounts.

Why It’s Important Savings accounts allow you to put money aside and help make your money grow.

Key Words savings opportunity cost simple interest compound interest passbook savings account statement savings account certificate of deposit (CD) continued

Key Words maturity date money market fund money market deposit account Federal Deposit Insurance Corporation (FDIC) liquidity inflation risk

Why You Should Save Savings is money put aside for future use. The amount of money you save depends on how much of your income you’re willing not to spend.

Why You Should Save When you save money, you are putting off spending money on something now to get something else later. This is called the opportunity cost, or trade-off.

The average retirement account balance is about $41,000. Figure 30.1 THE AVERAGE NEST EGG The average retirement account balance is about $41,000. How much are you willing to save today in order to support your future?

Major Purchases If you purchase items on credit or borrow money to make purchases, you have to pay finance charges. If you use cash for the purchase, you don’t have to pay those charges.

Emergencies Experts recommend that you have at least six months of income set aside in case of an emergency.

Retirement The three main sources of retirement income are: Social security Retirement plans Savings

Retirement For most people, social security and retirement plans still don’t provide enough money to retire comfortably.

Retirement If you put away just $20 per week starting now, by the time you retire you would have $30,000. With interest earned on a savings account, it could come to several times more than that.

What are the three main sources of retirement income? Fast Review What is a major advantage of saving to buy an item instead of buying it on credit? What are the three main sources of retirement income?

Earning Interest on Savings Interest is like a rental fee for using someone else’s money. Banks use the money in your savings account to lend to other people, so they pay you a rental fee, or interest.

Simple Interest Simple interest is interest earned only on the money you deposited into your savings account, or the principal.

Simple Interest The three main factors determining the amount of interest are: The amount of savings The interest rate Length of time of the account

Simple Interest If you have a savings account that pays you 5 percent annual interest and $1,000 is in the account for the entire year, you will receive $50 in interest.

Compound Interest Compound interest is interest earned on both the principal—the money you deposited in your savings account—and any interest you earned on it.

Compound Interest Compound interest is usually earned daily, monthly, quarterly, or annually. The more often interest is compounded, the more you make in extra interest.

THE POWER OF COMPOUND INTEREST Figure 30.2 THE POWER OF COMPOUND INTEREST Compound interest makes your money grow faster when interest is left to accrue. Which account earned more interest? What is the difference in the account totals after 15 years?

Why do financial institutions pay interest on savings accounts? Fast Review Why do financial institutions pay interest on savings accounts? What is the difference between simple interest and compound interest?

Types of Savings Accounts The three basic types of savings accounts are: Traditional Certificates of deposit Money market

Traditional Savings Account One type of traditional account is a passbook savings account in which all of the deposits and withdrawals are recorded in a book that the depositor keeps.

Traditional Savings Account With the 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.

Traditional Savings Account The interest rate on traditional savings accounts is usually quite low. Many banks charge a service fee if the savings account falls below a certain minimum balance.

Certificate of Deposit A certificate of deposit (CD), requires you to deposit a minimum amount of money in an account for a minimum period of time.

Certificate of Deposit There is a maturity date for a CD, which is when the money becomes available to you.

Certificate of Deposit The interest rate on a CD is higher than a regular savings account. There is a penalty fee if you cash in the CD before the maturity date.

Money Market Fund A money market fund is a kind of mutual fund, or pool of money, put into a variety of short-term debt by business and government.

Money Market Fund Money market funds are offered by brokerage firms and financial institutions that buy and sell stocks and bonds.

Money Market Fund The interest rate on a money market fund varies from month to month. An advantage is that you can withdraw your money at any time.

Money Market Fund The two disadvantages of a money market fund are: A high minimum balance You can only write a limited number of checks

Money Market Deposit Account Banks, savings and loans, and credit unions have their own form of money market fund called a money market deposit account.

Money Market Deposit Account One difference between the money market fund and the money market deposit account is that the federal government generally insures the money in a market deposit account.

Graphic Organizer Graphic Organizer Types of Savings Plans SAVINGS TRADITIONAL SAVINGS ACCOUNTS U.S. SAVINGS BONDS CERTIFICATES OF DEPOSIT SAVINGS MONEY MARKET ACCOUNTS

What happens if you cash in a CD before the maturity date? Fast Review What happens if you cash in a CD before the maturity date? What is the difference between a money market fund and a money market deposit account?

Making an Ethical Decision As a financial planner, would you advise your 67 year-old client to keep his money in secure savings accounts, or transfer his money to high-risk stocks? What if your client was 87 years old?

Insurance Against Loss Banks, savings and loans, and credit unions all have insurance. The Federal Deposit Insurance Corporation (FDIC), a government agency, insures bank accounts for up to $100,000.

Insurance Against Loss Money market funds offered by brokerage firms aren’t federally insured, but most brokerage firms have insurance on their accounts.

Liquidity Liquidity means the ability to quickly turn an investment into cash. Savings accounts are highly liquid because you can easily withdraw cash from them.

Inflation Risk Inflation risk is the risk that the rate of inflation will increase more than the rate of interest on savings.

Inflation Risk The interest rates on most savings accounts increase with inflation. The main risk is with CDs, where you are locked into an interest rate over a long period of time.

Costs of Savings Accounts Some accounts charge a penalty fee for early withdrawal or if the account balance falls below a certain minimum. Some accounts charge a fee for each deposit and withdrawal.

Costs of Savings Accounts You have to pay income tax on the interest you earn on savings accounts.

What kinds of savings accounts doesn’t the FDIC insure? Fast Review What kinds of savings accounts doesn’t the FDIC insure? In what ways can a savings account cost you money?

What is the opportunity cost of carefully handling your CD collection? continued

If you charge interest on CDs you lend out to your friends, what can you do with the interest you earn? continued

A music club says you can have 12 free CDs A music club says you can have 12 free CDs. First, you have to purchase 5 full-priced CDs. What is the maturity date of the free CDs? continued

When you decide to sell your CD collection for cash, is this an example of liquidity or inflation?

End of Chapter 30 Savings Accounts pp. 484-497