Savings will put you in the drivers seat

Lesson Objectives IIdentify “ emergencies, goals and irregular expenses” as the three categories of savings EExplore t he eight saving strategies presented IIdentify t he Truth in Savings Act and define the term “annual percentage yield” (APY) EExplain t he benefits of interest compounding and calculate compound interest.

LList t hree benefits of depositing savings in an FDIC insured account UUse the Rule of 72 to determine savings outcomes. CCompare different types of savings products. DDiscuss how investing money is different from saving money

Reasons for Saving Money  Emergencies -put aside 6 – 8 months of living expenses, to be used in case of job layoff, illness, or other “SHIFT HAPPENS”  Irregular or seasonal expenses -such as holiday spending, replacement or purchase of big ticket items  Financial Goals- such as retirement, home ownership, college and technical training

8 Saving Strategies to Help You Save FFocus on reaching a “SMART” goal UUse the “Pizza Principle” MMotivate yourself PPay yourself first CComparison shop before you buy EExamine your spending habits BBegin today and save regularly DDirect Deposit your savings into a savings account

Review Major Vocabulary Terms and concepts PPay yourself first- P ut at least 10% of your pay away in a savings account FFDIC -Federal Deposit Insurance Corporation ensures deposits up to 250,000 IInterest - money paid regularly at a particular rate for the use of money lent

CCompound interest rate - Interest figured on money deposited plus interest at a specified rate. RRule of 72. A method used to estimate the amount of time or interest it will take for savings to double in value. TTruth in Savings A ct-Law established in 1991, requires financial institutions to provide information about costs and interest-earning accounts in uniform terms. Helps consumers compare savings products and make informed decisions.

Vocabulary Terms and concepts aannual percentage yield (APY) - The rate of yearly earnings from an account, including compound interest. LLiquidity – Refers to how quickly and conveniently you can retrieve your money from an investment, and at what cost if any.

How to Chose the Right Savings Account for you?  Look for Financial Institutions that are insures with the FDIC or NCUA (National Credit Union Association)  Compare APR (interest rate) to ensure maximum growth  Determine the liquidity of your savings- Do you want to be able to take the money out without penalty? (The longer you promise to keep it in a savings account the better the higher the interest rate.)  Ask customer service representatives

Basic Types of Accounts SSavings Accounts- o ffer liquidity in exchange for lower interest rates AA Certificate of Deposit (CD)- O ffer higher interest rates in exchange for less liquidity. You make a contract with the financial institution to leave a certain amount of money on deposit for an agreed about period of time. MMoney Market Accounts o ffer you a higher interest and liquidity in exchange for maintaining a high minimum balance. continued

Investing for Future Long-Term Goals is different from saving because the risk is higher with the possibility of earning even more money. SStocks -Shares or small pieces of a company that can be purchased MMutual Funds – Allow you to pool your money with other investors to purchase many different stocks, bonds, or other assets held by the fund. BBonds – Are long term loans issued by the government, company, or local authority usually used to finance things such as schools, construction, and development. continued

Investing for Future Long-Term Goals RReal Estate- purchasing property such as homes, apartments, complexes, land, or buildings usually takes longer to purchase and sell than many other investments PPrecious Metals and Collections -Gold, silver, jewelry, antiques, and other collectibles continued

How to Choose the Right Savings Account for you?  Maximize your savings by considering  total amount deposited  interest rate  time span of deposit  interest type: simple interest or compound interest compound interest  frequency of compounding

Compare rates

Calculating Compound Interest 1. Multiply the deposit amount by the annual interest rate 2. Divide Step 1 answer by rate of compounding 3. Add Step 2 answer to deposit amount to get new balance with interest continued

Calculating Compound Interest

Calculating compound interest (problem one)  Jacob opens an online only savings account and deposits $50 each month. The annual interest rate is 2.5 percent. Interest is compounded monthly. What is the account balance after 5 months?

Calculating compound interest (problem one) Month- EVERY MONTH ADD FIFTY DOLLARS to balance Step 1 Multiply the deposit amount by the annual interest rate Step 2 Divide Step 1 answer by rate of compounding Step 3 Add Step 2 answer to deposit amount to get new balance with interest I. Opening balance 0 add $50.00 $50.oo x 2.5% 50 x.025 = $1.25 $1.25 / 12 =.10$ = $ $ $50.00 =$ $ x.025 = $2.50 $2.50 /12 =.21$ = $ $ $50.00 =$ $ x. 025 = $3.76 $3.76 / 12 =.31$ = $ $ $50.00 = $ $ x. 025 = $5.02 $5.02 / 12 =.42$ = $ $ $50.00 = $ $ x.025 = $6.28 $ /12 =.52$ = $251.56

Challenge yourself then check with your partner James opened a savings account and deposited $1, The interest rate is 2.73 percent and interest is compounded quarterly. How much interest will her deposit earn her after one year?

Don’t PANIC …  There are calculators to help!  =calc_savings_bank-rates_globalnav =calc_savings_bank-rates_globalnav  pound-interest.html pound-interest.html

Rule of 72 UUse Rule of 72 to estimate the amount of time or interest needed to double savings TTo find the number of years to double savings, divide 72 by interest rate TTo find the annual interest rate needed to double savings, divide 72 by number of years continued

Rule of 72 HHow long will it take $1000 deposited at a 4% interest rate to double in value? FFind the annual interest rate you need to double your savings if your savings was in an account for 20 years continued

Rule of 72 772 divided by 4 is 18; in 18 years your $1,000 will be worth approximately $2,000 772 divided by 20 is 3.6; your savings must be in an account paying 3.6% for it to double in 20 years

Central Ideas of the Chapter AA savings plan is an essential piece of an overall financial program. CCompound interest helps your savings grow over time.