Chapter 4 Saving

Reasons to save  Emergency fund  First priority after needs are met  Should be approximately 2-3 months of expenses  Where to keep money is based on your discipline level  Large purchases  New Car, Home, Child’s Education  Figure out your values and spend on those  Wealth building  Investing, Retirement,  Consistency is the key

Accounts for saving  Checking  Demand deposit- it can be withdrawn at anytime  Very liquid- Checks, ATM  Average interest rate=.4%  Online accounts pay more  NOW- negotiable order of withdrawal  Like checking but must maintain a minimum balance  Can have additional fees/penalties  May pay higher monthly interest rates=.5%-.75%

Accounts for saving  Savings Account  Liquid but no check writing capabilities  Less transactions  IR=.9%  Money Market Deposit Account (MMDA)  Maintain minimum balance  Offer limited check writing privileges  IR=.9%

Certificates of Deposit  Contract between an individual and financial institution that specifies the length of time the person will leave a deposit with the bank at a specified rate  Slightly less liquid  3mo, 6mo, 1 year, 3, year, 5 year,  IR- 1 year=.9% 5 year= 2.3%

FDIC Insured  Federal Deposit Insurance Corporation  Established in 1933 because of the Great DepressionGreat Depression  Covers checking, saving, MMDA, CD’s  standard insurance amount- $250,000 per depositor, per insured bank, for each account ownership category  Fractional reserve banking

Savings bonds  Issued by the US Department of Treasury  You loan the amount to the US gov’t  Come in eight values: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000  IR depends on series and year but is around 1.5%  Historically 0-5%

Places to Save Money  Banks  Brick and Mortar- have branches, tellers, higher expenses  Online, Internet only- can offer higher rates (Capital One 360)  Credit Unions  member-owned financial cooperative  “serve- people, not profit”  Use different terminology but have similar products  Video Video

Fees associated with banking  Minimum Balance Fees  Non-Direct Deposit Fees  Overdraft-Bounced Check Fees  ATM withdrawal fees  Check Image Service Fee

Brokerage Houses/Firm  facilitates the buying and selling of financial securities  serve a clientele of investors who trade public stocks and other securities  research the markets to provide appropriate recommendations  Can sometimes be combined with a bank  Fidelity, Schwab, Capital One 360  Commission based

Historical Interest Rates  Checking and Savings accounts.75-2%  CD’s %  Treasury Bills.15-4%  Municipal Bonds 4-6%  Corporate Bonds 6-8%  Stocks 8-12%  Mortgages 6-10%  Today’s Rates are extremely low, Why??

Compound Interest- Rule of 72  Compound interest- paid on your principal and interest  Compounding frequency is important  Use the annual percentage yield (APY) - the interest rate that takes compounding frequency into account  Rule of 72- uses annual compounding  Divide 72 by your interest rate to find the number of years it will take for your money to double