Savings and Investing Why Save 8.1

What do you dream of achieving in your lives? What do you dream of achieving in your lives? How do you think you will make those dreams come true? How do you think you will make those dreams come true?

What is your definition of discipline? Is this a good or bad thing? What is your definition of discipline? Is this a good or bad thing? What are three of your financial goals? What are three of your financial goals?

Benefits of Saving Why is saving considered a trade-off? Why is saving considered a trade-off? –When you save, you trade spending now for the ability to spend in the future! –Some future expenses are anticipated –Some expenses aren’t foreseen

Benefits of Saving Save for the unexpected Save for the unexpected –Accidents –Lost and stolen items –Repairs –Lose your job?

Benefits of Saving Save for opportunities Save for opportunities –Take advantage of unexpected opportunities that may arise! Save for major purchases Save for major purchases –Start saving now! –Home theater, car, house

Benefits of Saving Save for flexibility Save for flexibility –Flexibility with life choices –Choose to quit a job you don’t like –Rent an apartment you like Save to achieve your goals Save to achieve your goals –Long terms goals involve large amounts of money

Saving Strategies Pay yourself first Pay yourself first –Deposit some of your paycheck as you pay your bills –Consider a “fixed expense!” –Leave it in the bank

Saving Strategies Save by the numbers Save by the numbers –If you don’t earn the same amount from week to week Save a certain percentage of your take-home pay (net pay) each week Save a certain percentage of your take-home pay (net pay) each week No matter what! No matter what!

Saving Strategies Reward yourself Reward yourself –Every once in a while –Small rewards Saving and self-control Saving and self-control –Remember your goals!

Saving Strategies Automatic saving Automatic saving –Payroll deductions Automatically authorize employer to deduct a specified amount from your paycheck Automatically authorize employer to deduct a specified amount from your paycheck Deposited into savings or checking account Deposited into savings or checking account

Saving Strategies Automatic saving Automatic saving –Checking account transfers Authorize bank to transfer a certain amount each month from checking to savings Authorize bank to transfer a certain amount each month from checking to savings

Savings Institutions and Accounts 8.2

Savings Institutions Four basic types of financial businesses for depositing your savings Four basic types of financial businesses for depositing your savings –Commercial banks –Savings banks –Savings and loan associations –Credit unions

Savings Institutions Commercial banks Commercial banks –Probably what you think of when you think “bank” –Serves individuals and businesses Wide variety of accounts, loans, other financial services Wide variety of accounts, loans, other financial services Offers savings and checking accounts, consumer and business loans, investment services Offers savings and checking accounts, consumer and business loans, investment services –Largest savings institutions in the U.S. –Main source of loans for businesses

Savings Institutions Commercial banks Commercial banks –Harris Bank Harris BankHarris Bank –Fifth-Third Bank Fifth-Third BankFifth-Third Bank –Lasalle Bank Lasalle BankLasalle Bank –Charter National Bank Charter National BankCharter National Bank

Savings Institutions Savings banks Savings banks –Owned by their depositors –Depositors earn dividends instead of interest Dividend is a share of the company’s profits Dividend is a share of the company’s profits Amount of dividend depends on the size of your deposit Amount of dividend depends on the size of your deposit Earning dividends is just like earning interest in a commercial bank! Earning dividends is just like earning interest in a commercial bank! –Most exist in the northeast –Originally established to loan small amounts of money to consumers

Savings Institutions Savings and loan associations Savings and loan associations –Became popular during the Great Depression Commercial banks lost money on consumer loans, so they began to specialize in business loans Commercial banks lost money on consumer loans, so they began to specialize in business loans Consumers found it difficult to get financial services from commercial banks Consumers found it difficult to get financial services from commercial banks Consumers turned to savings and loan associations Consumers turned to savings and loan associations –Specialize in lending money to consumers to buy homes –Owned by depositors

Savings Institutions Savings and loan associations Savings and loan associations –Citizens Savings and Loan Association Citizens Savings and Loan AssociationCitizens Savings and Loan Association –Yakima Federal Savings and Loan Association Yakima Federal Savings and Loan AssociationYakima Federal Savings and Loan Association –First Federal Savings and Loan Association First Federal Savings and Loan AssociationFirst Federal Savings and Loan Association

Savings Institutions Credit Unions Credit Unions –Offer memberships to people who share a common bond Profession, company, church, labor union Profession, company, church, labor union –Not for profit! Exist to provide saving and lending services to members Exist to provide saving and lending services to members –Usually pay higher interest to depositors –Usually charge lower interest to borrowers

Savings Institutions Credit unions Credit unions –Premier Credit Union Premier Credit UnionPremier Credit Union –State Employees’ Credit Union State Employees’ Credit UnionState Employees’ Credit Union –Pentagon Federal Credit Union Pentagon Federal Credit UnionPentagon Federal Credit Union

Savings Institutions Deposit insurance Deposit insurance –Financial institutions can fail—just like other businesses –Savings institutions are insured by federal agencies –FDIC: Federal Deposit Insurance Company –SAIF: Saving Association Insurance Fund –NCUSIF: National Credit Union Share Insurance Fund

Savings Accounts Savings accounts Savings accounts –Offered by any savings institution –Deposit money –Earn interest on your deposits –Withdraw your money at any time Interest rates Interest rates –The higher the balance, the higher the interest rate!

Saving Options 8.3

CD’s Money Market Corporate Bonds Government Bonds Stocks and Mutual Funds Minimum Length Yes – months to years (specified period of time) No(Flexible) Yes – 1 to 30 years Yes – 5 years No Initial Deposit Minimum amount. Larger than Savings Account. Usually $1,000 $1,000 or more Yes – Lending money to a specific corporation for a period of time. Usually issued in $1,000 & $5,000 Yes – Lending money to government for a period of time. Usually issued in $25 - $5,000—1/2 of face value. Mutual Funds $500 - $10,000 Interest Fixed - Higher than Savings Longer the CD, higher the rate Good & Bad Based on market. Higher than savings, but, lower than CD’s Fixed interest rate –Stated on Bond, generally semiannually. Usually higher than CD’s Fixed interest rate –Stated on Bond, generally semiannually. Usually higher than CD’s Fixed interest rate – generally semiannually. Usually higher than CD’s. Lower than corporate bonds Fixed interest rate – generally semiannually. Usually higher than CD’s. Lower than corporate bonds Return depends on the market Insured Yes – Most up to $100,000 Yes – Up to $100,000 No Backed by government. Almost risk free. No Penalties Yes – Substantial fine for early withdrawal Yes – Transaction, below minimum balance, Not for withdrawal No – You can sell it to another investor anytime 3 months interest if cashed before 5 years. No RiskSafeSafe Can Vary Safe Can vary – High Risk Notes Longer the time, the higher the interest rate Guaranteed rate of return for the time of CD Rates vary, banks make short term investments Liquid Bonds are repaid at maturity. You can sell them at anytime. Does not give you ownership in the company like stocks. Investors should consider whether the bond will be repaid at maturity and whether gov’t agency will be able to pay interest until maturity Greatest chance for gains but no guarantee for return.

Savings Bonds

Annual Percentage Rate (APR) APR is the annual rate of interest without taking into account the compounding of interest within that year. APR is the annual rate of interest without taking into account the compounding of interest within that year.interest APR = Periodic Rate x Number of Periods in a Year APR = Periodic Rate x Number of Periods in a Year

Annual Percentage Yield (APY) Truth in Savings Act (1993) Truth in Savings Act (1993) –Banks must report the APY for their accounts –APY is the actual interest rate an account pays –All banks required to figure this rate the same way Easy for consumers to compare accounts! Easy for consumers to compare accounts!

Annual Percentage Yield (APY) APY = (1 + periodic rate) # periods - 1 APY = (1 + periodic rate) # periods - 1 Example Example –A high-yield money market account that pays 0.5% per month with monthly compounding –APY = ( ) 12 – 1 –APY =.0617 or 6.17%

APR vs APY APR in usually seen in relation to loans, and APY in relation to interest bearing accounts. APR in usually seen in relation to loans, and APY in relation to interest bearing accounts.

For example, a credit card company might charge 1% interest each month; therefore the APR would equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be [( )^12 – 1= 12.68%] 12.68% a year. If you only carry a balance on your credit card for one month's period you will be charged the equivalent yearly rate of 12%. However if you carry that balance for the year, your effective interest rate becomes 12.68% as a result of the compounding each month. For example, a credit card company might charge 1% interest each month; therefore the APR would equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be [( )^12 – 1= 12.68%] 12.68% a year. If you only carry a balance on your credit card for one month's period you will be charged the equivalent yearly rate of 12%. However if you carry that balance for the year, your effective interest rate becomes 12.68% as a result of the compounding each month.credit cardcredit card

Simple and Compound Interest 8.4

How many years would it take to double your money at 8% interest? Divide the interest rate into 72! 72/8 = 9 years to double your money!

Rule of 72 Simple Interest Compound Interest

Interest The way your bank calculates interest helps determine how fast your savings will grow! The way your bank calculates interest helps determine how fast your savings will grow! Money you deposit is called the principal Money you deposit is called the principal

The Rule of 72 To find the number of years required to double your money at a given interest rate: To find the number of years required to double your money at a given interest rate: –Assuming the interest is compounded annually –Divide the interest rate into 72 72/Interest 72/Interest

The Rule of 72 Try this! Try this! –Beginning investment = $5,000 –Interest rate = 1.75% –How long to double your money? 41 years! 41 years! –72/1.75 = years

The Rule of 72 Try this! Try this! –You borrow $1,000 from a friend that is going to charge you 6.5% interest on the loan –If you make no payments, how long will it take before the loan doubles? 72/6.5 = 11 years the loan doubles to $2,000 72/6.5 = 11 years the loan doubles to $2,000

The Rule of 72 One more! One more! –You make an investment of $1,500 in a CD earning 2.75% interest –How long will it take for your investment to double? 72/2.75 = 26 years 72/2.75 = 26 years

The Rule of 72 Run it backwards! Run it backwards! If you want to double your money in six years: If you want to double your money in six years: –Divide 6 into 72 to find the interest rate required 72/6 = 12 percent   12% interest is required to double your money in six years!!!

The Rule of 72 One more backwards! One more backwards! –If you want to double a $5,000 investment in 5 years, what interest do you need to be paid?? 72/5 = 14% interest needed! 72/5 = 14% interest needed!

Simple Interest Interest is paid one time a year Interest is paid one time a year –End of year on the average balance in a savings account

Simple Interest You deposit $500 in an account that pays 4% (.04) simple interest You deposit $500 in an account that pays 4% (.04) simple interest At the end of the year, how much does the bank pay you? At the end of the year, how much does the bank pay you? $500 *.04 = $20 interest $500 *.04 = $20 interest $500 principal + $20 interest = $520 $500 principal + $20 interest = $520

Simple Interest You have $1,250 to deposit into a savings account at the given simple interest rates per year You have $1,250 to deposit into a savings account at the given simple interest rates per year In each case, how much would you have in your account at the end of the year? In each case, how much would you have in your account at the end of the year?

Simple Interest DepositRateInterest New Principal After 1 year $1, %$40.63$1, $1,2504.5%$56.25$1, $1,2505%$62.50$1,312.50

Simple Interest Formula Interest = Principal * Rate * Time Interest = Principal * Rate * Time –I = Prt –Time is in years! If time is given in months, convert to percent of a year If time is given in months, convert to percent of a year Five months =.42 (5/12) Five months =.42 (5/12)

Simple Interest in Months January (1) January (1) –.08 February (2) February (2) –.17 March (3) March (3) –.25 April (4) April (4) –.33 May (5) May (5) –.42 June (6) June (6) –.5 July (7) July (7) –.58 August (8) August (8) –.67 September (9) September (9) –.75 October (10) October (10) –.83 November (11) November (11) –.92 December (12) December (12) –1–1

Compound Interest Interest paid on the principal and also on previously earned interest Interest paid on the principal and also on previously earned interest –Assuming that the interest is left in the account!

Compound Interest Interest can be compounded Interest can be compounded –Annually (1) –Semiannually (2) –Quarterly (4) –Monthly (12) –Daily (365) The more often interest is compounded, the more interest your money earns! The more often interest is compounded, the more interest your money earns!

Compound Annually You put $1,000 in a savings account that earns 6% interest annually You put $1,000 in a savings account that earns 6% interest annually Figure the interest compounding it at the end of each year Figure the interest compounding it at the end of each year PrincipalInterestTotal Year 1 $1,000 Year 2 Year 3

Compound Annually Key You put $1,000 in a savings account that earns 6% interest annually You put $1,000 in a savings account that earns 6% interest annually Figure the interest compounding it at the end of each year Figure the interest compounding it at the end of each year PrincipalInterestTotal Year 1 $1,000601,060 Year 2 1, Year

Compounding Frequently To calculate interest compounded more than once a year, divide the annual rate by the # of times during the year the interest will be compounded To calculate interest compounded more than once a year, divide the annual rate by the # of times during the year the interest will be compounded If the annual rate is 6 percent and the interest is compounded semiannually (2) If the annual rate is 6 percent and the interest is compounded semiannually (2) –Divide the rate by 2 –6% / 2 = 3% (.03)

Compounding Semiannually You put $1,500 in a savings account that earns 4% interest compounded semiannually You put $1,500 in a savings account that earns 4% interest compounded semiannually PrincipalInterestTotal ½ Year 1 $1,500 End Year 1 ½ Year 2 End Year 2

Compounding Semiannually Key You put $1,500 in a savings account that earns 4% interest compounded semiannually You put $1,500 in a savings account that earns 4% interest compounded semiannually PrincipalInterestTotal ½ Year 1 $1, End Year ½ Year End Year

Compounding Quarterly You put $2,500 in a savings account that earns 8% interest compounded quarterly You put $2,500 in a savings account that earns 8% interest compounded quarterly PrincipalInterestTotal Year 1, Q1 $2, Year 1, Q Year 1, Q Year 1, Q Year 2, Q Year 2, Q

Compounding Monthly You put $500 in a savings account that earns 6% interest compounded monthly You put $500 in a savings account that earns 6% interest compounded monthly PrincipalInterestTotal Month 1 $ Month Month Month Month Month

Compounding Daily Use Compound Interest Table, page 274 Use Compound Interest Table, page 274 –$800 deposit –6% interest –Compounded daily –How much will you have in eight years? –How much interest have you earned?

What’s the Big Deal? Calculate the simple interest you would earn on $15,000 deposited for one year at 10% interest Calculate the simple interest you would earn on $15,000 deposited for one year at 10% interest Calculate the interest you would earn on $15,000 deposited for one year at 10% interest that is compounded daily for one year Calculate the interest you would earn on $15,000 deposited for one year at 10% interest that is compounded daily for one year –Use chart on page 274 What is the difference between simple and compound interest? What is the difference between simple and compound interest?