2. 11 Savings

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

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

5. Budget for Saving Strategies for growing your savings: –P–Pay yourself first –U–Use direct deposit –L–Let your savings grow –R–Reduce spending; increase saving

6. 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

7. 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 –r–realistic –s–specific and measurable –t–time related

8. Maximizing Savings Maximize your savings by considering –t–total amount deposited –i–interest rate –t–time span of deposit –i–interest type: simple interest or compound interest –f–frequency of compounding continued

9. Maximizing Savings

10. 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

11. Calculating Compound Interest

12. 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 continued

13. Future Value Tables continued

14. Future Value Tables Look along the “5 years” row to the number in the “6%” column Multiply 1.3382 by $100 The $100 deposit would be worth $133.82

15. 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 continued

16. 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 continued

17. 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

18. Consider Inflation and Taxes Inflation and taxes reduce the value of savings Due to inflation, –g–goods and services bought with future savings will cost more than they do today –y–you need a savings plan that pays an interest rate higher than today’s rate of inflation continued

19. Consider Inflation and Taxes Your earnings and the interest earned on your savings are taxed continued

20. 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

21. Savings Choices The Truth in Savings Act –r–requires financial institutions to provide information about costs and interest- earning accounts in uniform terms –h–helps consumers compare savings products and make informed decisions continued

22. Savings Choices Info financial institutions must provide: –m–minimum required to open an account –i–interest rate –a–annual percentage yield (APY) and effective period –m–minimum deposit, time requirements, other terms of APY –d–description of fees, conditions, and penalties continued

23. In Your Opinion Why do you think the Truth in Savings Act was necessary?

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

25. Savings Accounts Regular savings accounts –p–pay interest –a–allow you to make deposits and withdrawals –u–usually offer lowest interest earnings, but most liquidity continued

26. 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 continued

27. Savings Accounts Special purpose accounts –e–encourage consumers to set aside money in separate accounts for specific purposes: holiday gifts, college tuition –I–Interest may be tax free or tax-deferred, allowing savings to accumulate faster

28. 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

29. In Your Opinion What has your experience been with savings accounts? What would you do differently if you could?

30. 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 continued

31. Online-Only Savings Accounts Disadvantages: –C–Can have a time lag for deposits and withdrawals to clear –C–Can have technical difficulties, making funds and account info temporarily inaccessible –M–May have a different person available each time you call

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

33. 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 continued

34. 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 –T–Tax benefits if used to finance education; can also defer income tax on interest earnings

35. 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.

36. Glossary of Key Terms 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. Back

37. Glossary of Key Terms 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. Back

38. Glossary of Key Terms 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. Back