1. Savings

2. Differences Between Saving and Investing
Now that you know how important it is to pay yourself first you must decide what to do with that money.

3. Savings what people usually do to meet short-term goals.
money is safe in a savings account.
usually earn a small amount of interest.
It’s also easy to get to (high liquidity).

4. How INVESTING is Different
Setting money aside for longer-term goals.
In the long run, investments can earn a lot more than you can usually make in a savings account.
There is some risk that you may lose money on an investment

5. Why It’s Important
Savings/Investments are money put aside for future use.
Savings plans will allow you to put money aside and help you make your money grow.
The amount of money you save depends on how much of your income you’re willing not to spend.
Opportunity cost of savings—when you save money, you are putting off spending money on something now to get something else later.

7. Reasons to Save
Major purchases
Emergencies
Retirement

8. Major Purchases
If you purchase items on credit or borrow money to make purchases, you have to pay finance charges.
If you use cash for the purchase, you don’t have to pay those charges.

9. Emergencies
Experts recommend that you have at least 8 months of income set aside in case of an emergency.
Worse yet, 28 percent of respondents had less than two weeks' worth of expenses in savings.

10. The three main sources of retirement income are:
Social Security
Retirement Plans
Savings

11. Retirement
For most people, social security and retirement plans still don’t provide enough money to retire comfortably.
If you put away just $20 per week starting now, by the time you retire you would have $50,000. With interest earned on a savings account, it could come to several times more than that.

12. Advantages of Starting to Save Early!

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

14. 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..
continued

15. Insurance Against Loss
Banks, savings and loans, and credit unions all have insurance.
The Federal Deposit Insurance Corporation (FDIC), a government agency, insures bank accounts for up to $250,000.

16. Evaluating Savings Plans
When evaluating savings plans, consider these factors:
Risk
Liquidity
Rate of Return
Inflation
Restrictions and Fees

17. Risk Pyramid Savings Accounts Money Market Accounts Bonds/Cds
Least risky, easy to get to
Money Market Accounts
Little Risk, but required to maintain high balances
Bonds/Cds
Little Risk from changing interest rates
Money is tied up for period of time

18. Liquidity
Liquidity means the ability to quickly turn an investment into cash.
Savings accounts are highly liquid because you can easily withdraw cash from them.
Houses are NOT liquid because someone has to want to buy it to get a value from it

19. Rate of Return
Rate of Return is the percentage increase in the value of your savings from earned interest.

20. Rate of Return How much interest can you make on your investment?
Are you Locked into a rate?
Is it adjustable

21. The Time Value of Money A dollar is not always worth a dollar.
The value of a dollar changes dramatically depending on when you get it and what you do with it.
So time is a critical variable in the exact value of a dollar.
Time value of money refers to the relationship among time, money, and rate of interest.

22. Inflation Risk
Inflation risk is the risk that the rate of inflation will increase more than the rate of interest on savings.
(Inflation is the rise in prices)

23. Inflation Risk
If you put all your money in the savings at 1% interest and the rate of inflation (rise in the cost of prices) is 3% you LOSE Money due to being able to buy less!
Your rate of savings MUST be higher than the inflation rate to make savings worthwhile.
If it is not, you may need to invest some of your savings

24. Inflation Risk
The interest rates on most savings accounts increase with inflation.
The main risk is with CDs, where you are locked into an interest rate over a long period of time.
If you need your money early you will have to pay a penalty fee.

25. 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..

26. Cost of Savings Plans-fees
Some accounts charge a penalty fee for early withdrawal or is the account balance falls below a certain minimum.
Some accounts charge a fee for each deposit and withdrawal.
You have to pay income tax on the interest you earn on savings accounts.

27. Three Elements of Time Value of Money
The more money you have to save or invest, the more money you are likely to earn.
The higher the rate of interest you earn, the more money you are likely to have.
The sooner you invest your money, the more time it has to make new money.

28. Earning Interest on Savings
Interest Income- Payments you receive for letting the bank use your money.
Banks use the money in your savings account to lend to other people, so they pay you a rental fee, or interest.

29. Simple Interest
Simple interest is interest earned only on the money you deposited into your savings account, or the principal.

30. Simple Interest
The three main factors determining the amount of interest are:
The amount of savings.
The interest rate.
Length of time of the account.

31. Simple Interest
If you have a savings account that pays you 5 percent annual interest and $1,000 is the account the entire year, you will receive $50 in interest.
$1,000 x .05 (5%) x 1 = $50 interest

32. Compound Interest
Compound interest is interest earned on both the principal—the money you deposited in your savings account—and any interest you earned on it.
You are earning interest on interest.

33. Compound Interest
Compound interest is usually earned daily, monthly, quarterly, or annually.
The more often interest is compounded, the more you make in extra interest.

34. Compound Interest $100 in savings that earns 10 percent a year
$100 x 10% = $10
At the end of year 1, you will have $110.
$100 + $10 = $110
At the end of year two you will have $121.
$110 x 10% = $11
$110 + $11 = $121

35. Calculating Compound Interest
Foundations of Personal Finance Ch. 11
Calculating Compound Interest

36. The Power of Compound Interest
Compound interest makes your money grow faster when interest is left to accrue.

37. Rule of 72
Use Rule of 72 to estimate the amount of time or interest needed to double savings
The Rule of 72 can also tell you the interest rate you need to earn to double your money in a certain amount of time by dividing 72 by the number of years.
continued

38. Rule of 72
To find the number of years to double savings, divide 72 by interest rate
How many years to double your money at an 8% interest rate
72/8 = 9 years
To find the annual interest rate needed to double savings, divide 72 by number of years..
What interest rate do I need to double money money in 10 years
72/10 = 7.2 years
continued

39. Rule of 72
You can see how long it will take to double your money by dividing 72 by the interest rate.
$200 will take 12 years to double to $400 at 6%.
72/6% interest = 12 years 72
Interest Rate =
Years Needed to
Double Investment

40. Rule of 72
To double your $200 to $400 in 4 years, you would need an 18% interest rate.
72/4 years = 18% interest. 72
Interest Rate
Required =
Years Needed to
Double Investment

41. Rule of 72 Practice
You have $5,000 from savings bonds that just matured. You want to double that money in time to use it to purchase a house in 8 years. What rate of return would you need to do this?
You are getting 3% on a $1,000 CD. How long will it take to double your principle at this rate?
As part of your long term planning, you set aside $25,000 for your child’s college savings plan. Your child will be going to college in approximately 15 years. What rate of return would you need to double that investment in 15 years?
You have $725 in your savings account and you are getting 0.5% interest. How long will it take to double your savings?

42. 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..
continued

43. 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..
continued

44. Types of Savings Plans The basic types of savings accounts are:
Traditional
Certificates of Deposit
Money Market Deposit Accounts
U.S. Savings Bonds

46. Foundations of Personal Finance Ch. 11
Savings Accounts
Traditional savings accounts
pay interest
allow you to make deposits and withdrawals
usually offer lowest interest earnings, but most liquidity..
continued

47. Traditional Savings Account
Advantages:
Low risk—safety guaranteed by the federal government.
High level of liquidity.

48. Traditional Savings Account
Disadvantages:
Interest rates are usually quite low.
Many banks charge a service fee if the savings account falls below a certain minimum balance.

49. 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..

50. 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

51. 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..

52. Certificate of Deposit
Advantages:
The interest rate on a CD is higher than a regular savings account.
The rate is guaranteed for the time of the CD.
Low risk—safety guaranteed by the federal government.

53. Certificate of Deposit (CD)
Disadvantages:
Requires a minimum deposit for a specified period of time.
The maturity date for a CD is when the money becomes available to you.
Penalty fee if you cash in the CD before the maturity date.

54. Money Market Deposit Account
Banks, savings and loans, and credit unions have their own form of money market fund called a money market deposit account.

55. Money Market Deposit Accounts
Advantages:
Works like a checking account.
You can withdraw your money at any time.
Pays a higher rate of interest than a regular savings account, but usually lower than a CD.
Low risk—safety guaranteed by the federal government.

56. Money Market Deposit Accounts
Disadvantages:
A higher initial deposit required.
Must maintain a higher minimum balance or no interest will be earned and charged a service fee.
You can only write a limited number of checks.

57. Foundations of Personal Finance Ch. 11
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

58. U.S. Savings Bonds Advantages: Low minimum deposit.
Good rate of return.
Guaranteed by the federal government.
Do not have to pay local or state taxes on the interest earned.

59. U.S. Savings Bonds Disadvantages:
Money is tied up for a long period of time—usually 20 to 30 years.
Lower rate of return if cashed in before maturity date.

60. Two Main Types
Series EE savings bond—purchased for half of its face value—the minimum is $25 for a $50 bond—guaranteed to reach face value in 20 years.
Series I savings bonds—you can purchase at their face value and earn a fixed rate of interest.

61. Types of Savings Plans

62. 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.

63. 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.

64. 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.