1. Financial Literacy Savings
Chapter Objectives
Define personal savings goals.
Calculate compound interest.
Use the Rule of 72 to determine savings outcomes.
Compare different types of savings products.
Savings

2. Creating a Savings Plan
Saving is setting money aside for future use
A savings plan is
a vital part of an overall financial plan
a strategy for using money to reach important goals and advance your financial security

3. Budget for Saving Strategies for growing your savings:
Pay yourself first
Use direct deposit
Let your savings grow
Reduce spending; increase saving

4. Create an Emergency Fund
Financial Literacy Savings
Create an Emergency Fund
Build an emergency fund, covering 6–8 months of living expenses, to be used in case of job layoff or illness
Savings

5. Set Goals for Saving Clearly defined goals make saving easier
Make a list of what you want to achieve with your money (savings goals)
Goals should be
realistic
specific and measurable
time related

6. Maximizing Savings Maximize your savings by considering
total amount deposited
interest rate
time span of deposit
interest type: simple interest or compound interest
frequency of compounding
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7. Financial Literacy Savings
Maximizing Savings
Savings

8. 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
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9. Calculating Compound Interest
Financial Literacy Savings
Calculating Compound Interest
Savings

10. Future Value Tables
Provides an easy way to calculate compound interest earnings at different interest rates and times
Find the future value of a single $100 deposit after 5 years at a 6% interest rate
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11. Financial Literacy Savings
Future Value Tables
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Savings

12. Future Value Tables
Look along the “5 years” row to the number in the “6%” column
Multiply by $100
The $100 deposit would be worth $133.82

13. Rule of 72
Use Rule of 72 to estimate the amount of time or interest needed to double savings
To find the number of years to double savings, divide 72 by interest rate
To find the annual interest rate needed to double savings, divide 72 by number of years
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14. Financial Literacy Savings
Rule of 72
How long will it take $1000 deposited at a 4% interest rate to double in value?
Find the annual interest rate you need to double your savings if your savings was in an account for 20 years
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Savings

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

16. Consider Inflation and Taxes
Inflation and taxes reduce the value of savings
Due to inflation,
goods and services bought with future savings will cost more than they do today
you need a savings plan that pays an interest rate higher than today’s rate of inflation
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17. Consider Inflation and Taxes
Financial Literacy Savings
Consider Inflation and Taxes
Your earnings and the interest earned on your savings are taxed
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Savings

18. Consider Inflation and Taxes
By reducing or deferring taxes on savings, you accumulate more money over time
Minimize taxes by putting money into tax-exempt or tax-deferred savings

19. Savings Choices The Truth in Savings Act
requires financial institutions to provide information about costs and interest-earning accounts in uniform terms
helps consumers compare savings products and make informed decisions
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20. Savings Choices Info financial institutions must provide:
minimum required to open an account
interest rate
annual percentage yield (APY) and effective period
minimum deposit, time requirements, other terms of APY
description of fees, conditions, and penalties
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21. In Your Opinion
Why do you think the Truth in Savings Act was necessary?

22. Savings Choices
Check that the savings product you choose is insured by either
Federal Deposit Insurance Corporation (FDIC)
National Credit Union Administration (NCUA)
Liquidity is the ease with which an asset can be converted into cash without losing value

23. Financial Literacy Savings
Savings Accounts
Regular savings accounts
pay interest
allow you to make deposits and withdrawals
usually offer lowest interest earnings, but most liquidity
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Savings

24. Savings Accounts
Passbook savings—deposits and withdrawals are recorded in a book
Statement savings—you receive regular statements of account activity; may include a debit/ATM card and online banking
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25. Savings Accounts Special purpose accounts
encourage consumers to set aside money in separate accounts for specific purposes: holiday gifts, college tuition
Interest may be tax free or tax-deferred, allowing savings to accumulate faster

26. Money Market Deposit Accounts
Pay higher interest rates than savings accounts
Are liquid
Require higher minimum balances than savings accounts
Offer limited check-writing and money-transfer privileges

27. Financial Literacy Savings
In Your Opinion
What has your experience been with savings accounts? What would you do differently if you could?
Savings

28. Online-Only Savings Accounts
Offered by Internet banks
Customers access bank’s Web site to check balances and make electronic deposits, withdrawals, fund transfers
Pay higher interest rates due to lower overhead costs
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29. Online-Only Savings Accounts
Disadvantages:
Can have a time lag for deposits and withdrawals to clear
Can have technical difficulties, making funds and account info temporarily inaccessible
May have a different person available each time you call

30. Certificate of Deposit
A certificate of deposit (CD)
pays interest rates higher than other savings
earns more interest the longer you agree to hold a CD
is not liquid: early withdrawal penalties

31. Financial Literacy Savings
U.S. Savings Bonds
Buyers of U.S. savings bonds loan money to the government
On a specified date, the government repays the loan with interest
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Savings

32. U.S. Savings Bonds
I Bonds pay a fixed interest rate determined by the Secretary of Treasury (plus a semiannual inflation add-on rate)
EE Bonds earn fixed interest rates based on market yields of Treasury Notes
Tax benefits if used to finance education; can also defer income tax on interest earnings

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

34. Glossary of Key Terms
Back
annual percentage yield (APY). The rate of yearly earnings from an account, including compound interest.
certificate of deposit (CD). Money deposited for a set period of time that earns a set annual rate of interest.
compound interest. Interest figured on money deposited plus interest.

35. Glossary of Key Terms
Back
Rule of 72. A method used to estimate the amount of time or interest it will take for savings to double in value.
simple interest. Interest computed only on the principal.
tax deferred. Savings or earnings that are not taxed until the funds are withdrawn.

36. Glossary of Key Terms
Back
tax exempt. Earnings that are free of certain taxes.
U.S. savings bond. A savings tool that loans money to the U.S. government for a specified period of time. The bondholder is repaid with interest at the time of maturity.