1. Saving Money

2. What does it mean to save money?
Saving means putting some of your money away for emergencies and/or short-term (less than one year) financial goals.
Money that is saved for an emergency and/or short-term goals should be placed where there is very little risk of your money losing its value.
Because you don’t want to assume too much risk when saving your money, the rate of interest that you receive is typically very low.

3. Continued
Money that is saved for an emergency and/or a short-term financial purpose should be easily and readily accessible.
We will talk about investing money later in this unit.
We will see that investing money is typically for longer-term financial goals and involves greater financial risk than putting money in savings. However, investing money can also lead to much greater potential financial rewards.

4. Continued
It is important to understand that the amount of time that you have until you need your money is crucial when deciding whether that money should be saved or invested.
The shorter the time period that you have until you need the money the more likely that putting your money in savings and avoiding risk is the appropriate course of action.

5. Continued
The longer the time period that you have until you need the money the more likely that investing your money is the appropriate course of action. This is because you do not need the money immediately so you can assume more risk and potentially earn a greater rate of return.
We will study risk and return in more detail when we talk about investing money.

6. Pay Yourself First Rule (Savings)
This is arguably the most important financial rule that we will talk about in personal finance.

7. Pay Yourself First
Whenever you receive money you should immediately put a certain amount into an account that you will set aside to use later to meet your short-term financial goals.
We will talk more about the “Pay Yourself First Rule” when we talk about investing money for longer term financial goals.

8. Types of Savings Instruments
On the next few slides we are going to talk about some of the most common places where people save their money.
These include:
Savings Accounts
Money market accounts
Certificates of deposit

9. Savings Accounts
Regular bank or credit union savings accounts are the most common places where people save their money.
These are also typically the first banking product that people use.
The money in savings accounts is guaranteed by the federal government (up to $250,000).
Because there is virtually no risk associated with a bank or credit union savings account, the rate of interest paid is very low.

10. Savings Accounts Continued
The money is easily accessible and can be withdrawn at any time with no penalty.
There is typically a very low minimum balance that is required to open and maintain a savings account at a bank or a credit union.

11. Money Market Accounts
These operate similarly to a savings account and are offered by both banks and credit unions. One of the key differences is that you typically have limited check writing privileges.
Money market accounts typically pay slightly higher interest rates than regular savings accounts. The difference is that money market accounts usually have a much higher minimum balance required to open and maintain the account.
Money market accounts at banks and credit unions are also insured by the government.

12. Certificates of Deposit (CD)
A certificate of deposit is an agreement between the saver and the bank or credit union.
The bank or credit union pays interest on the money in the CD for an agreed upon amount of time.
The longer the term, the higher the interest rate that is paid.
The primary drawback to a certificate of deposit is that some of the earned interest is forfeited if the money is withdrawn before the agreed upon time.

13. Interest from Banks
We will talk more in detail about all of the services that banks provide at a later date.
However, it is important for us to understand the reasons that banks pay customers interest on the money that they have in their savings accounts, money market accounts, and their certificates of deposit.

14. Continued This is the primary way that banks make money.
Banks pay interest to customers for the usage of their money.
Banks will take the majority of these deposits (banks must keep a percentage of these deposits as reserves) and loan them out to other customers for mortgages, cars, school loans, businesses, etc…
The interest charged for these loans is greater than the interest that is paid to customers on their savings, money market accounts, and certificates of deposit.
This is the primary way that banks make money.

15. Final Words About Savings Accounts
Individuals should use savings accounts, money market accounts, and/or certificates of deposit to save for emergencies and/or short-term financial goals.
The money is safe and will be there when you need it.
The interest rates paid on these accounts is typically much lower than what you would receive by investing your money. That is why it is appropriate to invest your money for longer-term financial goals.
Also, the interest rates paid on these accounts typically does not keep pace with the rate of inflation.