1. 0 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill

2. 1 Chapter 5 Banking What You’ll Learn  Section 5.1 Identify types of financial services. Describe the various types of financial institutions.  Section 5.2 Compare the costs and benefits of different savings plans. Explain features of different savings plans. Compare the costs and benefits of different types of checking accounts. Explain how to use a checking account effectively.

3. 2 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill How to Manage Your Cash Today, with more than 11,000 banks, 2,000 savings and loan associations, and 12,000 credit unions in the United States, you have a wide array of financial services from which to choose. Your choice of financial services will depend on your:  Daily cash needs  Savings goals Section 5.1 Financial Services and Institutions

4. 3 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Types of Financial Services In order to stay competitive in today’s marketplace, banks and other financial institutions have expanded the range of services that they offer. These services can be divided into three main categories:  Savings  Payment services  Borrowing

5. 4 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Savings Safe storage of funds for future use is a basic need for everyone. Some examples of time deposit funds include:  Money that you keep in any type of savings account  Certificates of deposit or CDs Having a savings account is essential for any personal finance plan.

6. 5 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Payment Services Transferring money from a personal account to businesses or individuals for payments is a basic function of day-to-day financial activity at a bank. The most commonly used payment service is a checking account. Money that you place in a checking account is:  Called a demand deposit  Able to be withdrawn at any time, or on demand

7. 6 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Borrowing Most people use credit at some time during their lives. If you need to borrow money, financial institutions allow you to:  Borrow money for a short term by using a credit card or taking out a personal cash loan.  Borrow money for a longer term by applying for a mortgage or auto loan.

8. 7 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Other Financial Services Financial institutions may also offer a variety of services, such as:  Insurance protection  Stock, bond, and mutual fund investment accounts  Income tax assistance  Financial planning services

9. 8 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Electronic Banking Services Your bank’s electronic services allow you to:  Check the status of your account.  Make a transaction from an ATM, by telephone, or online.  Get up-to-date information with personal financial management software. Security is the number one issue for online customers. The way to ensure online security is to:  Use a security code, or password.  Use a customer identification name or number.

10. 9 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Direct Deposit Many businesses offer their employees direct deposit. Instead of a paper paycheck, employees receive a printed statement that lists:  Deductions  Other information about their earnings Direct deposit offers a safe way to transfer funds and saves:  Time  Money  Effort direct deposit an automatic deposit of net pay to an employee’s designated bank account

11. 10 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Automatic Payments With your authorization, your bank can withdraw the amount of your monthly payments or bills from your bank account. In order to use automatic payments, you will need to:  Make sure you always have enough money in your account for the payment.  Arrange your payments according to when you receive your paycheck.  Check your bank statements each month to make sure that the payments were made correctly.

12. 11 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Automated Teller Machines (ATMs) A cash machine, or automated teller machine (ATM), allows you to:  Withdraw cash from an account  Make deposits  Transfer money from one account to another To use an ATM for banking, you must apply for a debit card from your financial institution. Unlike a credit card, a debit card enables you to spend only the money that you have in your account. automated teller machine (ATM) a computer terminal that allows a withdrawal of cash from an account debit card a cash card that allows you to withdraw money or pay for purchases from your checking or savings account

13. 12 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions ATM Fees The fees that some financial institutions charge for the convenience of using an ATM can add up over time. You might consider these suggestions:  Compare ATM fees before opening an account.  Use your bank’s ATM machines to avoid the additional fees that other banks charge when you use their machines.  Consider using traveler’s checks, credit cards, personal checks, and prepaid cash cards when you are away from home.

14. 13 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Plastic Payments Although cash and checks are very common methods of paying for goods and services, various access cards are also available. These include:  Point-of-sale transactions  Store-value cards  Electronic cash point-of-sale transaction a purchase by a debit card of a good or service at a retail store, a restaurant, or elsewhere

15. 14 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Opportunity Costs of Financial Services When you are making decisions about saving and spending:  Try to find a balance between your short- term needs and your future financial security.  Consider the opportunity costs, or trade- offs, of each choice you make as you select financial services. Remember to consider the value of your time in addition to the money you are saving.

16. 15 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Types of Financial Institutions After you have identified the services you want, you can choose from among many types of financial institutions. You may select an institution that:  Offers a wide range of services  Specializes in certain services  Provides the option of cyber-banking, or banking via the Internet  Operates exclusively on the Internet

17. 16 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC):  Protects deposits in banks  Insures each account in a federally chartered bank up to $100,000 per account  Administers the Savings Association Insurance Fund (SAIF) for savings and loan associations All federally chartered banks must participate in the FDIC program.

18. 17 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Deposit Institutions Most people use deposit-type institutions to handle their banking needs. These institutions include:  Commercial banks  Savings and loan associations  Mutual savings banks  Credit unions commercial bank a for-profit institution that offers a full range of financial services, including checking, savings, and lending credit union a nonprofit financial institution that is owned by its members and organized for their benefit

19. 18 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Non-Deposit Institutions Financial services are also available at institutions such as:  Life insurance companies  Investment companies  Finance companies  Mortgage companies

20. 19 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.1 Financial Services and Institutions Comparing Financial Institutions When you compare banks and other financial institutions, you should ask these questions to help choose the best one:  Where can you get the highest rate of interest on your savings?  Where can you obtain a checking account with low (or no) fees?  Will you be able to borrow money from the institution when you need it?  Does it have online banking services?  Does it have convenient locations?

21. 20 STOP HERE – The rest is Standard 4 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill

22. 21 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Types of Checking Accounts Checking accounts can be divided into three main categories:  Regular accounts  Activity accounts  Interest-earning accounts

23. 22 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Regular Checking Accounts Regular checking accounts usually do not require a minimum balance. You may have to pay a monthly service charge, however, if:  The account requires a minimum balance.  Your account drops below that amount. Some institutions will waive a service charge if you keep a certain balance in your savings account.

24. 23 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Activity Accounts An activity account might be right for you if you:  Write only a few checks each month  Are unable to maintain a minimum balance The financial institution may charge a fee for:  Each check you write  Each deposit In addition, a monthly service fee will be charged.

25. 24 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Interest-Earning Checking Accounts Interest-earning checking accounts are a combination of:  Checking accounts  Savings accounts These accounts pay interest if you maintain a minimum balance.

26. 25 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Evaluating Checking Accounts How do you decide which type of checking account will meet your needs? You will need to weigh several factors:  Restrictions  Fees and charges  Interest  Special services

27. 26 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Restrictions The most common restriction is the requirement that you keep a minimum balance. Other restrictions may include:  The number of transactions allowed  The number of checks you may write in a month

28. 27 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Fees and Charges You may pay a monthly service charge as well as fees for:  Check printing  Overdrafts  Stop-payment orders

29. 28 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Interest An interest-earning checking account will be affected by:  Interest rates  Frequency of compounding  The way in which interest is calculated

30. 29 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Special Services Checking account services include:  ATMs  Banking by telephone and online As a checking account customer, you may also receive overdraft protection. overdraft protection an automatic loan made to an account if the balance will not cover checks written

31. 30 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Using a Checking Account After you select the type of checking account that best fits your needs, you need to know how to use it effectively.

32. 31 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Opening a Checking Account Before you open a checking account, decide whether you want:  An individual account  A joint account Personal joint accounts are usually “or” accounts, which means that only one of the owners needs to sign a check.

33. 32 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Writing Checks Before writing a check, use your check register to record the:  Date  Number of the check  Name of the party who will receive the payment  Exact amount of the check Be sure to keep a current balance of the money you have by deducting from or adding to your balance the amount of any check transaction.

34. 33 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Steps in Writing a Check Follow these steps when you write a check:  Write the current date.  Write the name of the party who will receive the check.  Record the amount of the payment in numerals.  Write the amount in words.  Sign the check.  Make a note of the reason for the payment.

35. 34 Writing a Check Step 1 – Current date Step 2 – Name (Payee) Step 3 – Dollar amount (numbers) Step 4 – Dollar amount (words) Step 5 – Sign your name Step 6 – Notes about the transaction  3434  Step 1  Step 2  Step 3  Step 4  Step 5  Step 6

36. 35 Writing a Check Step 7 – Write the check number, date, payee, amount of the check or ATM transaction. Step 8 – Subtract amount of check from the balance.  3535

37. 36 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Stop-Payment Order You may ask the bank to issue a stop-payment order if:  A check is lost or stolen.  You want to take back your payment for a business transaction. Fees for this service can range from $10 to $20 or more. stop-payment order a request that a bank or other financial institution not cash a particular check Section 5.2 Savings Plans and Payment Methods

38. 37 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Making Deposits To add money to your checking account:  Fill out a deposit ticket.  Endorse the back of each check you want to deposit. Here are some tips to follow when endorsing a check:  Do not endorse a check until you are ready to cash or deposit it.  Use a pen so that your signature cannot be erased.  If depositing a check by mail, write “For deposit only” above your signature. endorsement the signature of the payee, the party to whom the check has been written

39. 38 Depositing Money Into Your Account Step 1 – Write today’s date. Step 2 – Write down any currency deposited by the word “Currency.” Step 3 – Write down any coins deposited by the word “Coin.”  3838

40. 39 Depositing Money Into Your Account Step 4 - Write checks down individually. Step 5 – Total deposits and write in space marked “Subtotal.” Step 6 – Write down cash withdrawn following the words “Less Cash Received.”  3939

41. 40 Depositing Money Into Your Account Step 7 – Subtract cash received from subtotal and write that amount after “Net Deposit.” Step 8 – If withdrawing cash, sign your name on the line below the date.  4040

42. 41 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Keeping Track of a Checking Account Each month your bank will send you a statement that shows your checking account activity for the month. Your bank statement will list:  Deposits  Checks you have written  ATM withdrawals  Debit card charges  Interest earned  Fees The balance reported on the bank statement may be different from the balance in your check register.

43. 42 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Reconciliation You can fill out a bank reconciliation form to determine your true balance. To balance, or reconcile, your account, follow these steps:  Compare the checks you have written during the month with those that are listed on the bank statement as paid, or cleared.  Determine whether any recent deposits are not on the bank statement.  Subtract fees and charges listed on the statement from your checkbook balance.  Add interest earned to your checkbook balance. bank reconciliation a report that accounts for the differences between the bank statement and a checkbook balance Section 5.2 Savings Plans and Payment Methods

44. 43 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Section 5.2 Savings Plans and Payment Methods Other Payment Methods You can make payments using methods other than writing a personal check. Some alternatives include:  Certified checks  Cashier’s checks  Money orders  Travelers check  Prepaid travelers cards

45. 44 Standard 5 Stop Here - this is for Standard 5 Savings Information Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill

46. 45 Savings and Investing: Getting Started Standard 5.

47. 46 Deciding to Save Decisions about savings involves opportunity costs. Opportunity Costs - things you give up today to fund your future goals. Before purchasing, ask yourself: “Do I want this more than reaching my personal or financial goals?”

48. 47 Strategies for Saving “Pay yourself first” is saving a portion of your earnings before spending any. Saving money can be done in two different ways. In a safe place, where it will earn interest – such as a savings account In government savings bonds, money market accounts, or certificates of deposit (CDs)

49. 48 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Types of Savings Plans To achieve your financial goals, you will need a savings program. Various types of savings programs include:  Regular savings accounts  Certificates of deposit  Money market accounts  U.S. Savings Bonds

50. 49 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Regular Savings Accounts Regular savings accounts are ideal if you plan to make frequent deposits and withdrawals. These accounts:  Require little to no minimum balance  Earns Interest  Allow you to withdraw money on demand  Are very Liquid The trade-off for this convenience is that the interest you earn will be low compared with other savings plans.

51. 50 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Certificates of Deposit A certificate of deposit (CD) is a relatively low-risk way to invest your money. It offers a higher interest rate than a regular savings account pays, but you will have to accept three key limitations:  You may have to leave your money on deposit for one month to five or more years.  You probably will pay a penalty if you take the money out before the maturity date.  Financial institutions require that you deposit a minimum amount to buy a certificate of deposit. certificate of deposit (CD) a savings alternative in which money is left on deposit for a stated period of time to earn a specific rate of return

52. 51 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods CD Investment Strategies Here are some tips for investing in CDs:  Find out where you can get the best rate.  Consider the economy as you decide what maturity date to choose.  Never let a financial institution “roll over” a CD.  Consider when you will need the money.  If you have enough funds to have several accounts, you might consider creating a CD portfolio, which includes CDs that mature at different times.

53. 52 Savings Plans and Payment Methods Certificate of Deposit A CD requires a certain amount of time to mature. The longer the term of maturity, the higher interest rate you will receive. CDs are less liquid than savings accounts Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill

54. 53 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Money Market Accounts The interest rates of a money market account float, or go up and down, as market rates change. Although the interest rate of a money market account is usually higher than that of a regular savings account:  A money market account also requires a higher minimum balance, typically $1,000.  You may have to pay a penalty if your balance goes below the minimum amount. money market account a savings account that requires a minimum balance and earns interest that varies from month to month

55. 54 Savings Plans and Payment Methods Money Market Mutual Funds These are invested in very short-term investments with low risk. Banks and credit unions insure through FDIC, while other institutions do not. Uninsured accounts generally pay a higher interest rate because of additional risk.

56. 55 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods U.S. Savings Bonds Another savings option is purchasing a U.S. Savings Bond. The maturity date of a bond depends on:  The date it was bought  The interest rate the bond is earning Your bond’s worth will depend on current interest rates and on the month and year in which the bond was issued.

57. 56 Savings Plans and Payment Methods US Savings Bonds Backed by the U. S. Government. Have little or no default risk. Designed to be held a minimum number of years. Because of the length of maturity, government bonds have a higher rate of return than savings accounts or CDs.

58. 57 Investing Plans and Payment Methods Mutual Funds Investors pool money to buy shares of a fund that invests in many financial products (stocks, bonds, and securities). Great for people with limited funds or knowledge about investing. Have professional money managers who closely monitor accounts. Rate of return is affected by a variety of economic factors that can vary over time. Highly recommended by financial experts because potential benefit of gains is greater than potential costs of losing.

59. 58 Investing Plans and Payment Methods Stocks Stocks allow partial ownership in a company. Owning stock carries more risk than mutual funds. Advisable to diversify your portfolio and spread your risk. Investors should own at least ten different single stocks in different industries.

60. 59 Investing Plans and Payment Methods Corporate Bonds When you own a corporate bond, you are basically loaning money to a company. The interest you receive is the value of your investment. If something happens to the company, you can lose most or all of your money. Investing in bonds is a lower risk option with lower returns on your investment.

61. 60 Investing Plans and Payment Methods Collectables – Are rare items in number –High risk, not as liquid Include: Paintings, sculptures, other art, Trading cards, sports motif, coins, toys, and Antiques

62. 61 Investing Plans and Payment Methods Real Estate – Not very liquid –Residential –Commercial –Corporate Apartments –Land –Farmland

63. 62 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Evaluating Savings and Investment Plans Your selection of a savings or investment plan will be influenced by several factors. You should consider:  The rate of return  Inflation  Tax considerations  Liquidity  Restrictions  Fees

64. 63 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Rate of Return Earnings on savings can be measured by the rate of return, or yield. Compounding can have a great impact on large amounts of money that are held in savings accounts for long periods. The more frequently your balance is compounded, the greater your rate of return will be. rate of return the percentages of increase in the value of your savings from earned interest compounding the process in which interest is earned on both the principal—the original amount you deposited— and on any previously earned interest

65. 64 Rates of Return Rate of return - amount of money you can earn when saving and investing. The higher the average return, the more risk you are taking as an investor. Asset ClassRate of Return* Common stocks10%-13% Stocks of smaller companies14%-16% Long term corporate bonds6.5%-8% Long term US government bonds5%-7.5% Short term US Treasury bills3.5%-5%  *Average rate of return since 1926, Ibbotson and Associates

66. 65 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Inflation  You should compare the rate of interest you earn on your savings with the rate of inflation.  Usually, the interest rates offered on savings accounts increase if the rate of inflation increases.  The biggest problem with inflation occurs if you are locked into a lower interest rate for a long period of time.

67. 66 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Tax Considerations Like inflation, taxes reduce the interest earned on savings. You may want to look into:  Tax-exempt saving plans  Tax-deferred savings plans

68. 67 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Liquidity Ease of turning an item into cash without losing money Check the savings plans you are considering to determine whether early withdrawal of funds will cause them to:  Charge a penalty  Pay a lower rate of interest If you are saving for long-term goals, a high interest rate may be more important than liquidity.

69. 68 Personal Finance Unit 2 Chapter 5 © 2007 Glencoe/McGraw-Hill Savings Plans and Payment Methods Restrictions and Fees Be aware of any restrictions on savings plans, such as:  A delay between the time when interest is earned and when it is actually paid into your account  Fees for making deposits and withdrawals  Service charges you may have to pay if your balance drops below a certain amount or if you do not use your account for a certain period

70. 69 Financial Planning Pyramid  Penny  Stock  Commo - dities  Collectibles  Speculative  Stock / Bonds /  Mutual Funds  Real  Estate  Blue-Chip  Common  Stock  Growth  Mutual  Funds  High-Grade  Convertible  Bonds  High-Grade  Preferred  Stock  Balanced  Mutual  Funds  High-Grade  Corporate Bonds  or Mutual Funds  High-Grade  Municipal Bonds  or Mutual Funds  Money Market  Accounts  or Mutual Funds  Certificates  of Deposit  U.S. Savings  Bonds  Insured Savings /  Checking Accounts  Treasury  Issues  Highest Risk  Highest Earnings  Lower Risk  Lower Earnings

71. 70 Do review sheets 5.1 and 5.3 Do Review Sheets

72. 71 Interest Calculations and The Rule Of 72 Standard 5. 2 Savings and Investing

73. 72 Calculating Interest Interest: Paid when someone else uses your money. Higher the risk, the greater the return. Two methods for calculating interest: Simple interest Compound interest

74. 73 Calculating Simple Interest Simple Interest Formula: Principle X interest X number of years

75. 74 Simple Interest Example 1.You save $50 at 10% for 5 years 50 x.10 x 5 = $25 interest earned $50 + $25 = $75 In Account Now 2.You save $750 at 3% for 8 years 750 x.03 x 8 = $180 interest earned $750 + $180 = $930 In Account Now

76. 75 Simple Interest Examples 3.You save $2,500 at 8% for 20 years 2500 x.08 x 20 = $4,000 interest earned $2,500 + $4,000 = $6,500 In Account Now 4.You save $10,000 at 5% for 25 years 10,000 x.05 x 25 = $12,500 interest earned $10,000 + $12,500 = $22,500 In account Now

77. 76 Calculating Interest Compound Interest Calculated on money you invest or loan, plus any interest already paid. The longer the money is invested, the more impact you will receive from compounding.

78. 77 Compounding Interest Formula M = P( 1 + i ) n M is the final amount including the principal. P is the principal amount. i is the rate of interest per year. n is the number of years invested.

79. 78 Compound Interest Examples Let's say that I have $1000.00 to invest for 3 years at rate of 5% compound interest. M = P( 1 + i ) n M = 1000 (1 + 0.05) 3 = 1000(1.05) 3 = 1000 x 1.157625 = 1,157.63 (round up) You can see that my $1000.00 is worth $1157.63.

80. 79 Compound Interest Examples $1000 invested with compound interest at a rate of 15% per year for 9 years. M = P( 1 + i ) n M = 1000(1+.15) 9 = 1000(1.15) 9 = 1000 X 3.517876 = $3517.88 (round up) You can see that my $1000.00 is worth $3517.88.

81. 80 Compound Interest Examples Compound interest calculator http://math.about.com/library/ blcompoundinterest.htm

82. 81 Rule of 72  3-H  72  Interest Rate =  Years Needed to Double Investment  72  Interest Rate Required =  Years Needed to Double Investment 72 divided by the expected rate of return equals the number of years it will take the investment to double.

83. 82 The Rule of 72 The Rule of 72 Examples: Years needed to double 72/6% = 12 years 72/3% = 24 years Interest Rate Required 72/9 year = 8% 72/10 years = 7.2%

84. 83 Compounding interest explains why it is important to start saving NOW! Earnings Understanding how to get your money to work for you will help you to get the most of your savings.

85. 84 Time Is Money Standard 5. 4 Savings and Investing

86. 85 Time Factors Time is one of the most important factors to consider when making decisions about savings or investing. The longer your “time horizon,” the more aggressively you can invest your money.

87. 86 Time Factors List of asset classes, from least to more risky: Fixed Income Items Bank AccountsImmediate access to cash, insured Certificates of Deposits Time varies based on contract, insured Government BondsMoney loaned to U. S. Government Municipal BondsMoney loaned to a municipality Corporate BondsMoney loaned to a business corporation

88. 87 Time Factors In general, fixed income items are associated with “loaning” your money to someone else. Equity Items Large Cap StocksOwnership in large companies Small Cap StocksOwnership in small companies International StocksOwnership in international companies CommoditiesOwnership of hard assets Microcap StocksOwnership in very small companies with a high rate of failure

89. 88 Time Factors Fixed income items tend to have low risk, and therefore, pay lower interest rates. Equities are generally associated with “ownership.” Financial experts recommend equities as the better option if you have at least seven years until your financial goal.  8888

90. 89 Risk Factors Risk tolerance relates to how much negative change or potential for loss you can handle with your investment. Portfolio is a common name given to all of your personal assets. Losses in your portfolio can be difficult to replace.

91. 90 Risk Factors That is the reason most financial experts recommend investments with less risk to meet short-term goals. Choosing low risk investments to meet long-term goals is not the best option. Low risk savings and investments have less potential for growth than equity items, which could leave you short of your long-term goals.

92. 91 Inflation Factors Leaving unspent money in a non- interest bearing checking account can result in a loss of money. Inflation - increases in average prices of goods and services from one year to the next. If you are not earning interest, your savings may not keep up with future prices.

93. 92 REMEMBER Is your “savings goal” seven or more years away? Investing is a good way to make money. Or is your “savings goal” less than seven years away? Probably better to put your money in a savings account or short- term CD.

94. 93 Lots of options are available for saving and investing your money. Remember to consider the following in making your choices: Time horizons, Risk tolerance, and The impact of inflation. Earnings