copyright 2007 thomson south-western unit two savings & budgeting
TRANSCRIPT
Copyright 2007 Thomson South-Western
Unit Two
Savings & Budgeting
Chapter 1: Savings AccountsKey Terms
• Saving• Investing• Deposit• Withdrawal• Interest• Interest rate
• Account balance• Compounding of interest• Future value• Present value• Discount factor• Rule of 72
Slide 3
The Purpose of Savings
• Saving means accumulating money to use for future needs
• A savings account– Is a time deposit in a bank or other financial
institution– Is a safe way to set aside money – Typically pays interest– May have some restrictions on how quickly or
easily the money can be withdrawn
5-2 Savings Accounts
Purpose of Savings Accounts
Definition Goal
• The process of setting money aside for a future date instead of spending it
• Provide funds for emergencies
• Short-term goals • Investments
Pay yourself first 10%
Investing
• The process of setting money aside to increase wealth over time and accumulate funds for long-term financial goals such as retirement
Savings Accounts
Provides you with a secure place to store your cash while earning a little something extra call interest.
Interest is money paid to you by the bank for being able to use your money (+)
Deposit put in money into your savings account (+)Withdrawal take out money from your savings
account (-)Accounts at banks are insured by the Federal Deposit
Insurance Corporation (FDIC). This insurance is for up to $100,000 per depositor per bank.
Savings Options
• Certificates of deposit• Money market accounts• Individual retirement arrangements (IRAs) • U.S. savings
bonds
5-2 Savings Accounts
The TreasuryDirect Web site provides information on savings bonds.
Source: TreasuryDirect, http://www.treasurydirect.gov (accessed April 27, 2006).
Compare and Contrast THREE savings accounts
1.Name of bank?2. Is there a student savings account?3. Is there a minimum balance required?4. Is a debit card included?5.What is the minimum age to start an
account?6.What is the address of the closest branch to
your house?7.Would you use this bank? Why?
Types of Savings accountspassbook account Depositor receives a booklet in which deposits, withdrawals, and interest are
recorded. Average interest rate is lower at banks and savings and loans than at credit
unions. Funds are easily accessible.statement account Basically the same as a passbook account, except depositor receives monthly
statements instead of a passbook.
Accounts are usually accessible through 24-hour automated teller machines (ATMs).
Interest rates are the same as passbook account. Funds are easily accessible.interest-earning checking account Combines benefits of checking and savings. Depositor earns interest on any unused money in his/her account.
Types of Certificates of Deposit1. Rising-rate CDs with higher rates at
various intervals, such as every six
months.
2. Stock-indexed CDs with earnings
based on the stock market.
3. Callable CDs with higher rates and
long-term maturities, as high as 10–15
years. However, the
bank may “call” the account after a
stipulated period, such as one or two
years, if interest rates drop.
4. Global CDs combine higher interest with
a hedge on future changes in the dollar
compared to
other currencies.
5. Prombotional CDs attempt to attract
savers with gifts or special rates.
Money Market Accounts
what they are and how they work Checking/savings account. Interest rate paid built on a complex structure that varies with size of
balance and current level of market interest rates.
Can access your money from an ATM, a teller, or by writing up to three-six checks a month.
benefits Immediate access to your money. (liquidity) trade-offs Usually requires a minimum balance of $1,000 to $2,500. Limited number of checks can be written each month. Average yield (rate of return) higher than regular savings accounts.
Certificates of Depositwhat they are and how they work Bank pays a fixed amount of interest for a fixed amount of money during a
fixed amount of time.benefits No risk Simple No fees Offers higher interest rates than savings accounts.trade-offs Restricted access to your money Withdrawal penalty if cashed before expiration date
(penalty might be higher than the interest earned)
Choosing a savings accountfactors that determine the dollar yield on an account:
Interest rate (also called rate of return, or annual yield)• All money earned comes from this factor.
the following factors reduce money earned and can even turn it into a loss:
Fees, charges, and penalties• Usually based on minimum balance requirements, or transaction fees.
Balance requirements• Some accounts require a certain balance before paying any interest.• On money-market accounts, most banks will pay different interest rates for different size balances. (Higher balance earns a higher rate.)
Balance calculation method• Most calculate daily. Some use average of all daily balances.
Slide 14
Purpose of Budgeting
• Budget – A spending and saving
plan– Based on expected
income and expenses– Allows you to compare
financial resources with financial needs
4-2 Budgeting
A budget can be created using a spreadsheet.
Slide 15
Four Steps to Building a Budget
• Estimate income• Plan savings• Estimate expenses
– Variable expenses– Fixed expenses
4-2 Budgeting
Eating at a fancy restaurant is entertainment, a variable expense.
• Balance the budget
Slide 16
Personal Budget
4-2 Budgeting
Slide 17
Budget Analysis
• Income, savings, and expenses will not be exactly as budgeted
• Differences between planned and actual amounts are called variances– Favorable variances– Unfavorable variances
• Looking at variances can help you budget better in the future
4-2 Budgeting
Slide 18
Budget Variances Report
4-2 Budgeting
Why are these variances favorable/unfavorable?
Interest Payments
• Interest rate is the percentage you are paid for your money and can vary from month to month
• Account balance is the total amount of money that is in the account at a given point in time.
Federal Reserve System
• Is the central bank of the United States • Seeks to provide the nation with safe, flexible,
and stable monetary and financial systems
Slide 21
Computing Interest
• Money deposited in a savings account typically earns a set rate of interest– Simple interest
5-2 Savings Accounts
SIMPLE INTEREST
Interest (I) = Principal (P) x Rate (R) x Time (T)
Interest = $1,000 x 6% annual rate x 6 months
$30 = $1,000 x 0.06 x 0.5
Pay yourself first (a little can add up)
A little can add up!
Save this each week … at % interest … in 10 years you’ll have
$7.00 5% $4,720 14.00 5% $9,440 21.00 5% $14,160 28.00 5% $18,880 35.00 5% $23,600
You can buy … two fast food meals or one movie ticket (and a candy bar) or save $7.00 this week.
You can buy … two small cheese pizzas or one large pepperoni pizza, delivered or one new CD or save $14.00 this week.
What can you give up to save for your financial goals?
Slide 23
Computing Interest
– Compound interest
5-2 Savings Accounts
$119.57$1.77$1.74$1.72$1.690.015$112.653
$112.65$1.66$1.64$1.62$1.590.015$106.142
$106.14$1.57$1.55$1.52$1.500.015$100.001
Ending Balance4321Rate
Beginning BalanceYear
Quarterly Interest
QUARTERLY COMPOUNDINGAnnual Interest Rate 6%
.Why do interest payments increase over time? .How long do you think it takes to double your money over time?
Slide 26
Meeting Financial Goals
• When choosing a savings option, consider– The amount to save– The length of time you will save– The interest you can earn
• Use the Rule of 72 to estimate how long it will take the money to double at a certain interest rate
5-2 Savings Accounts
Monetary Policy
• Key interest rates are controlled by the Fed – Discount rate– Federal funds rate– Prime rate
• The Fed sells and buys U.S. government securities in open-market transactions– Government bills (Treasury bills)– Treasury notes– Treasury bonds
Monetary Policy
• The Fed plays a major role in operating the country’s payment systems – Reserve banks act as a clearinghouse for checks – Checks may be deducted from your account in a
single business day
• The Fed regulates the banking industry– All interstate banks must be Fed members– Intrastate banks are also subject to Fed rules
Commercial Bank vs Credit Union – Part 1
1. Credit Union (general information)
2. Overview of Credit Unions
3. How Banks Work
4. Credit Union Definition
5. Bank Definition Slide 29
Complete the Bank vs Credit Union Venn Diagram using the websites listed below (one per group)
Commercial Bank vs Credit Union – Part 2
• Locate Local Banks (Enter “banks” in the place for name and enter your zip code)
• Locate Local Credit Unions ; General Credit Union Information
• Locate ONE BANK and ONE CREDIT UNION in this area (using web sites above)
• Fill this information in to the Criteria for Choosing a Bank or Credit Union worksheet.
Slide 30
Commercial Bank vs Credit Union – Part 3
• Complete the Bank Criteria worksheet (one per group)
• Present your group’s findings to the class
Slide 31