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Chapter 12

Savings

Section 12.1 The Role of Saving

• Objectives– Explain the benefits of saving;– Distinguish between saving and investing;

and – Explain reasons for saving.

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 Benefits of Saving

Saving - means setting aside present income for future use

 Benefits of Saving

Allows you to accumulate money for future purchases

To earn income

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Savings and Investing Difference Between Savings and Investing

- is the main purpose of savings is to set aside money for some anticipated future need

Investing - is committing money for the purpose of making a profit over time

 Investing requires taking risks with your money, not as liquid

Investing begins with savings

Savings - has no risk and is liquid. 

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Reasons for Savings

•Emergency Fund – money set aside in case of loss of income or unexpected major expense

Equal 3-6 times monthly net income

•Recurring Expenses – real estate taxes and insurance premiums

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Reasons for Savings Continued

•Future Purchase – do not use credit cardsPay interest on credit cardSavings earns interestSavings has a wait period so you spend money wisely

•Financial Goals – family life cycle

•Retirement – start when you’re young

Section 12.2Your Savings Plan

• Objectives– Explain steps for reaching savings

goals; and– Describe ways to establish a successful

savings habit.

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 Why You Need a Plan

•Saying you’re going to do it is different then doing it

Savings-plan - step-by-step approach for putting money aside in savings

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Steps to Saving

•Decide what you’re saving for Item (Stereo)

•Set a specific goal Set money amount ($250)Set date (June 1, 6 months)

•Break your long-term goal into short-term goalsSet aside reasonable amounts ($10 / per week)

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Steps to Saving Continued

•Save regularly and consistently – don’t touch

•Put your savings to work – earn interest!

•Keep your savings goal in mind - motivation PictureCheck off-listChart progress

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Consider Your Budget

•Be realistic

•Discretionary income – amount of available income after taxes and necessary spending for food,

clothing, and shelter

•Start small – develop habit of saving

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Pay Yourself First

Set aside money for savings first, then spend what is leftSet amount and stick to itIf income varies, set a percentage

 Automatic Savings

•Automatic transfers •Direct deposit

SavingsChecking

•Payroll deductions – employee authorizes a specific amount to be deducted from each paycheck and

put into a savings plan

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Stick to Your Plan

Make money last till next pay day

Adjust spending habits

Do not dip into your savings unless necessary

Keep your goals in mind

Section 12.3Earning by Saving

• Objectives– Distinguish between simple and

compound interest;– Explain the significance of annual

percentage yield; and – Analyze how time impacts the growth

of savings.

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 Calculating Interest

•How often is interest paid and how is the interest calculated made?

Monthly, QuarterlyStated interest = annual rateExample = 3% interest, paid monthly, Each

month, you’re paid 0.25%

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Simple Interest - calculated only on the money you have deposited, not on prior interest

 Compound Interest - calculated on both deposits made and prior interest earned (interest paid on interest)

Daily, monthly, yearly or as frequently as institutions chooses

More often the better 

Example:What account would you choose?

One that earns 8.25% simple interest or one that earns 8% interest compounded daily.

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Annual Percentage Yield (APY) - figure that tells you the actual annual rate at which interest is earned.

Truth in Savings Act, 1991 - helps consumers make comparisons by requiring financial institutions

to tell them the APY

Example:8.25% simple interest APY is 8.25%

8% interest compounded daily APY is 8.33%

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Time is Money

– Longer you leave money on deposit to earn interest, the more quickly that interest starts to add up.

The Long-Term Effects of CompoundingFirst year not a lot of money is made, but the more years the bigger the difference.

 The Long-Term Effect of Interest Rates

Higher interest rate over time earns most money so shop around

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Rule of 72How long will it take to double your money?Use 72 and divide by APY to figure.Helps you see the Long-Term Effect of Interest

RatesSmall Amounts Grow Large

When saved regularly and put into an interest-earning account, small amounts can add up!

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Section 12.4Savings Options

Objectives•Explain factors affecting the choice of savings options•Identify and compare various savings options 

Factors in Choosing Savings Options

Safety and riskInsured (FDIC or NCUA)Check individual account options (small print)Services that are not insured

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Factors in Choosing Savings Options Continued

•Liquidity – ease of which savings or investment can be turned into cash

Ability to withdraw money when you need it;Term – a period of time during which money must

be kept on deposit.Withdraw early pay a penalty set by the bank, 3

or 6 months interest

•Earnings - APY

•Taxes – pay on interest earned on savings; some investment have tax advantages and lets you keep more of the money you earn

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Factors in Choosing Savings Options Continued

•RestrictionsRequired to deposit a certain amount to openMaintain a certain minimum balanceLimited to number of transactions you can makeResearch helps choose account that meets your needs

•Fees & service chargesMonthly maintenanceFalls below minimum balance

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Basic Savings Option

– higher interest rate more restrictions Savings Accounts – most liquid, minimum balance is

lower, fewer restrictions and fees, interest paid is lower;

Transactions recorded in a passbook in the past when bank teller recorded

Today done by ATM, phone, pc and you receive a statement at the end of the month that lists deposit, withdrawals, and interest earned

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Basic Savings Option

Money Market Accounts - type of savings account which deposits are invested by the financial

institution to yield higher earningsHigher interest, more restrictions, minimum

deposit = $2500Check writing option, fewWithdrawals limitedDo not confuse with money market funds – form of

mutual fund not FDIC protected

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Basic Savings Option

Certificate of Deposit (CD’s) – issued by a financial institution to indicate that money has been

deposited for a certain term (amount deposited, interest rate, term)

3 months to 5 yearsearly withdrawal penaltylonger term higher raterate locked in until end of termcash in or renew at current interest rateautomatically renew unless you notify the Financial

Institution by certain dateminimum can rage from $1000 to $100,000

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Basic Savings Option

Savings Bonds - nontransferable debt certificates issued by U.S. Treasury

Loaning money to federal governmentSafe, no risk of losing moneyInterest earned is exempt from state and local taxesFederal income tax can be deferred until bond is

cashed in or stops earning3 types of savings bond (page 312)

Series EESeries HHSeries I