Chapter 8 Savings

Essential Questions What is the purpose of a savings plan? What needs to be considered when considering where to save your money What strategies will aid you in setting up a savings plan?

SAVING To postpone spending until sometime in the future Benefits of Saving (Why Save?) 1. Expected & unexpected needs 2. Financial security 3. To meet short-term needs & goals – Emergencies (unemployment / sickness / death / accident) – Vacations & leisure – Social events – Major purchases 4. To meet long-term needs & goals – Purchase a home – Pay for education (you and/or children) – Retirement – Investment – additional income

SAVINGS – HAVE A PLAN *To insure effectiveness STEPS: 1. Decide what is being saved for 2. Set specific goal  Amount needed by what date 3. Break long-term goal into short-term goals 4. Save regularly & consistently 5. Put savings to work 6. Keep goals in mind  Write them down – picture your goals

Saving Goals & Strategies *Be realistic & consider income * Pay Yourself First:  Effective strategy to aid in saving regularly  Direct Deposit of Payroll o Payroll deposited directly into your account o Interest begins compounding immediately  Automatic Payroll Deductions o Money is taken directly out of your paycheck and put into a savings account or invested into company stocks or bonds  Checking Account Transfers o Authorize bank to transfer from checking into savings (monthly)

SAVINGS ACCOUNTS & OPTIONS (Important Issues to Consider) 1. Liquidity – Speed at which savings vehicle can be converted to cash – Individuals will have different liquidity needs based on goals 2. Safety – FDIC insures to $100k – savings accts. safer than stocks / bonds / etc. 3. Convenience – Branch locations & hours vary & will impact choice of savings vehicle – Interest rates usually comparable so convenience is a major factor 4. Interest-Earning Potential (Yield) – Shop various institutions to find the best possible rate of return – Liquidity & rate of return usually go hand-in-hand 5. Fees and Restrictions – Understand all service fees & restrictions before choosing – ATM charges / early withdrawal penalties / etc.

Homework Page 314 – Review Key Terms and Ideas (1-14)

Essential Questions Compare & contrast a Regular Savings Account, a Certificate of Deposit, and a Money Market Savings Account What is the importance of banks quoting interest rates as Annual Percentage Yield (APY)? What are the benefits of Government Bonds & Treasuries?

Savings Options Regular Savings Account Certificate of Deposit (CD) Money Market Accounts Government Bonds / Treasuries

Regular Savings Account Major advantage is high liquidity (easily converted to cash) – debits & credits are done at any time Disadvantage is lower rate of return (interest) than other savings vehicles Usually offer ATM cards, on-line & telephone banking, etc.

Certificate of Deposit (Time Deposit) Earns a specified interest rate for a specified period of time Interest rate is usually higher than savings accts. Interest accumulates until maturity Early withdrawal will usually result in a penalty (less interest earned) If money is left in CD after maturity date it will automatically renew Interest can be received periodically or put into a separate account

Money Market Accounts Combination saving / investment plan Good liquidity (4-6 withdrawals per month) Some are FDIC insured – still a safe investment (usually U.S. Treasuries) Interest rates vary based on market performance and are typically higher than regular savings accounts Minimum balances are usually required ($1000+)

Government Bonds Lending money to the U.S. Government – originally known as “WAR BONDS” to help finance WWII SERIES EE – A discount bond ($50 - $10,000)that sells for half its maturity value (ie. a $50 bond will be worth $100 at maturity – usually in 10 years) I Savings Bond – pay interest adjusted for inflation every 6 months Exempt for local & state taxes – federal tax will apply when cashed in unless used for education Purchased through local banks

Treasury Securities T-Bills – Available in denominations of $10,000 – then increments of $5000 (3 month, 6 month, or 1 year) T-Notes – Issued for $1000 or $5000 – maturity for 1-10 years – will pay a higher interest rate than T-Bills

Earning Interest on Savings There are a number a factors that have an impact on the amount of interest is earned on savings accounts

INTEREST TERMS The initial amount saved is called principal Interest is paid on principal each period Simple interest is paid one time annually When interest is paid on the interest already earned it is called compounding interest Interest accumulates faster when money is compounded more often – quarterly better than annual – monthly better than quarterly

Annual Percentage Yield APY – the actual interest rate an account pays per year Congress passed the Truth in Savings Act in 1993 that requires all banks to figure out APY rate in the same way (compare apples to apples)

CALCULATING COMPOUNDING INTEREST Rule of 72 – Simple way to calculate the effects of Compounding Interest – If an asset grows by x % a year its value will double in 72 divided by x years Example: A savings account or investment earning 10% interest will double in (72/10 = 7.2 years)  That is why it is so important to start saving when you are young!!!

Savings Institutions Commercial Banks Savings Banks Savings & Loan Associations Credit Unions

COMMERCIAL BANKS Largest savings institutions in the US Offer wide range of banking services – business & personal relationships FDIC – deposits insured up to $100,000 per account Many branches & ATM’s – National or State charter

SAVINGS BANKS Owned by depositors Depositors earn dividends (share of profit) instead of interest Primarily located on east coast (small amount -- about 500) Savings accounts and loans on property (mortgages & home improvement loans) Deregulation in 1980’s allowed other services like checking

SAVINGS AND LOAN ASSOCIATIONS Primarily set up to lend money for home mortgages but do offer other services – checking / credit cards / etc. Failed in 1980’s due to poor judgment on loans Many have merged with banks & are FDIC insured

CREDIT UNIONS Not-for-Profit for union members – owned by members Higher interest on deposits & lower on loans NCUA provides insurance on deposits up to $100,000 Savings account called a share account – “shares” of ownership Recent growth has led to additional services being offered (IRA’s / CD’s / etc.)