PERSONAL SAVING AND BORROWING
Personal Saving
Chapter 5
1
1.5
PERSONAL SAVING AND BORROWING
Learning Intentions
At the end of this unit I will be able to:
• Define saving
• Identify the reasons for saving and not saving
• Define Interest
• List three financial institutions to save with
• Factor to consider when saving
2
1.5
PERSONAL SAVING AND BORROWING
List three words that come to mind
when you think of the word saving
3
1.5
PERSONAL SAVING AND BORROWING
4
1.5
PERSONAL SAVING AND BORROWING
BEFORE WE BEGIN
Do this exercise individually. Tick whether you agree or disagree with the
statements.
Revisit it after the unit to see if you have changed your mind about any of them.
Before
I
agree
After
I
disagree
Statement
I
agree
I
disagree
Saving is the part of income that we do not
#04AFEF
spend
Banks are financial institutions
DIRT is a tax on your savings
Debit cards are the same as credit cards
Investing is using our money to earn a greater
return than is possible from an ordinary savings
account
5
1.5
PERSONAL SAVING AND BORROWING
Saving
Saving is the part of our income
that we do not spend
• What might be the pros and cons of saving?
• Why do people save money?
6
1.5
PERSONAL SAVING AND BORROWING
Saving
• Saving means holding on to and not
spending your money
• Saving should be done regularly
• You should get into the habit of
saving from a young age
7
1.5
PERSONAL SAVING AND BORROWING
Financial Independence
Financial independence
means having the freedom to
make choices in your life.
You are never too
young to think
about savings and
investments.
8
1.5
PERSONAL SAVING AND BORROWING
Top Tip
If you would like to own a home one
day, you need to get saving.
Most mortgages (house loans) require a
percentage of the value of the house as a
deposit (down payment).
9
1.5
PERSONAL SAVING AND BORROWING
Example:
If you want a loan of €200,000 and the
deposit is 10%.
€200,000 x 10% = €20,000
You need to have €20,000 deposit saved
before you can get a loan (Mortgage)
10
1.5
PERSONAL SAVING AND BORROWING
Example 2:
If you want a loan of €350,000 and the
deposit is 10%.
How Much of a deposit do you need to save?
11
1.5
PERSONAL SAVING AND BORROWING
Example:
If you want a loan of €350,000 and the
deposit is 10%.
€350,000 x 10% = €35,000
You need to have €35,000 deposit saved
before you can get a loan (Mortgage)
12
1.5
PERSONAL SAVING AND BORROWING
Reasons for Saving
There are many reasons for saving:
• To buy something in the future
• To earn additional income through interest
• To have a deposit to buy a house
• To apply for a loan in the future
• For emergencies
• For retirement
13
1.5
PERSONAL SAVING AND BORROWING
Key Words
Interest is the additional money
a saver receives when saving their
money in a financial institution
(bank)
14
1.5
PERSONAL SAVING AND BORROWING
Activity Time
Workbook page 27
1. Explain Saving
2. Three reasons why a person might save
15
1.5
PERSONAL SAVING AND BORROWING
Reasons for Not Saving
• if the price of this item is rising faster than
the interest you would receive from saving
the same amount.
• If you need all your income to cover daily
expenses
16
1.5
PERSONAL SAVING AND BORROWING
Reason not for saving example:
Sean has €800. He is unsure to save it in a
bank and receive 8% interest per year or buy
a laptop costing €800. He will need the laptop
next year for college. He was informed by the
sales assistance that the laptop will go up in
price to €1,000 in two weeks time. What
should he do?
17
1.5
PERSONAL SAVING AND BORROWING
Reason not for saving example:
Solution:
Prices rises by €200 (€1,000 – €800 = €200)
Interest for saving for one year is
€800 x 8% = €64 per year
If he saves the money instead of buying the
laptop, he will be worse off. €200 - €64 =
€136
He should buy the laptop
18
1.5
PERSONAL SAVING AND BORROWING
Time to think
• What would you like to save for?
• Do you save or know anyone who
saves?
• Can you name any financial instructions
in your area you could save money?
19
1.5
PERSONAL SAVING AND BORROWING
Financial Institutions
• Bank – Bank of Ireland, Ulster Bank, AIB
• Credit Union
• An Post
20
1.5
PERSONAL SAVING AND BORROWING
Key Words
Credit Union - A co-operative organisation
where a group of people save together and
lend to each other at a fair and reasonable rate
of interest.
An Post -As well as operating the post office
network throughout Ireland, An Post offers a
number of savings options to members of the
public.
21
1.5
PERSONAL SAVING AND BORROWING
Why save with financial Institution
When deciding where to save your money, consider the
following:
• Safety – No risk of theft
• Interest – will earn interest when saving with a
financial institution
• Convenience – you have access to your
money when you want and now most banks
have online banking
• Credit rating – savers can build up a good
credit rating
22
1.5
PERSONAL SAVING AND BORROWING
Personal Saving
Chapter 5 – Lesson 2
23
1.5
PERSONAL SAVING AND BORROWING
Calculating Interest on Savings
When stating the rate of interest, most financial institutions give the
CAR (Compound Annual Rate).
• At the end of the year interest is added to the amount you saved
• In the second year, you will earn interest on the interest!
24
1.5
PERSONAL SAVING AND BORROWING
Example 1: Roz’s Loan Using CAR
Roz saves €1,000 in her local bank in 2017 at an interest rate of 10%.
At the end of the year she will earn €100 in interest:
€1,000 (principal) at 10% (interest) = 1,000 x 10/100 = €100
The total money in the savings account will then be €1,100 (€1,000 + €100).
At the end of 2018 she will earn €110 in interest:
€1,100 (new principal including 2017 interest) at 10% (interest) =
1,100 x 10/100 = €110
25
1.5
PERSONAL SAVING AND BORROWING
Example 2: Roz’s DIRT on Savings
Roz has to pay DIRT – tax on interest on savings – of 41%. In 2017 she
earned €100 in interest, which means that she must pay €41 in tax:
€100 (interest) at 41% (DIRT) = 100 x 41/100 = €41
This means that Roz earned €59 in interest after tax in 2017 (€100 – €41 =
€59).
26
1.5
PERSONAL SAVING AND BORROWING
1. Give three reasons for getting into the savings habit.
2. Explain how CAR (compound annual rate) interest works.
3. What is the name of the tax paid on savings?
27
1.5
PERSONAL SAVING AND BORROWING
Investments
Investing means putting your money/savings into a product or
scheme that should make a profit (income).
• Types of investments include stocks, shares, bonds, or property
• Having shares in a company means that you will have a share of the
profits that company makes
• Investments offer the opportunity to make more money than savings
• Investments also carry the risk that you could lose all your invested
money
28
1.5
PERSONAL SAVING AND BORROWING
Time to think
• If you were investing in shares, what type of company would you
choose to invest in?
• Check out the share price of Google. Would you invest in it at that
price?
29
1.5
PERSONAL SAVING AND BORROWING
Pensions
• You can save a percentage of your income for when you retire
• The money accumulates in a fund (a bit like savings)
• When you retire you can withdraw these savings a little every week
• The state also offers a pension of approximately €230 a week
The younger you start paying into
your pension, the more you will
have when you retire.
30
1.5
PERSONAL SAVING AND BORROWING
Be Aware
To have a pension of €40,000:
• Start contributing at 25 years of age and your pension contribution
will be €238 a month
• Start contributing at 35 years of age and your pension contribution
will be €432 a month
• Start contributing at 45 years of age and your pension contribution
will be €864 a month.
31
1.5
PERSONAL SAVING AND BORROWING
WORKING WITH OTHERS
• Discuss why it is sensible to start paying into a pension as soon as
you start work.
• The population is getting older. People are living longer
and fewer babies are being born in the West.
At the moment there are six
working people for every one#04AFEF
retired person in Ireland.
Within forty years, this may
have reduced to just two
working people for every one
retired person in Ireland.
What are the likely effects of
these changes?
Page
69
32
1.5
PERSONAL SAVING AND BORROWING
1. What is a pension?
2. Why should you start paying into a pension fund at an early age?
3. How might a pension fit into your personal financial life cycle plan?
33
1.5
PERSONAL SAVING AND BORROWING
Borrowing
Borrowing means receiving money (a loan) from a financial
institution that you must pay back with interest.
To receive a loan, you must:
• Be 18 years of age or older
• Be creditworthy
• Have a regular income
• Have collateral
34
1.5
PERSONAL SAVING AND BORROWING
35
1.5
PERSONAL SAVING AND BORROWING
Time to think
You would really like to learn to play the violin. You have seen a beautiful
violin in the local music shop, but it is very expensive. You cannot afford
to buy it and to pay for lessons to learn how to play the violin.
Should you get a loan? What other options might be open to you?
36
1.5
PERSONAL SAVING AND BORROWING
Reasons for Borrowing
• It is better to save for what we want, rather than borrow
• Sometimes we need to borrow for big purchases, such as:
• College fees
• A house
37
1.5
PERSONAL SAVING AND BORROWING
Types of Borrowing
Over the next four slides, we’ll look at the following types of borrowing:
• Cards
• Overdraft
• Loans
• Mortgages
38
1.5
PERSONAL SAVING AND BORROWING
Debit and Credit Cards
A debit card is used to withdraw
money that you have in your
account, but if you have an overdraft
it can be used to borrow money.
A credit card is used to buy goods on credit.
You are billed at the end of each month, and
charged interest if you don’t pay in full.
39
1.5
PERSONAL SAVING AND BORROWING
Top Tip
If you have to use a credit card (buy and pay later, with a cost)
ensure that you pay off the full amount within the month. It could cost
you twice as much if you don’t as interest rates on credit cards are
quite high.
Saving money should mean that you are always able to pay off your
credit card bill on time.
40
1.5
PERSONAL SAVING AND BORROWING
Overdrafts
• An overdraft is similar to a loan:
• You pay interest on the extra money you withdraw
• You only pay interest on what you use
• To get an overdraft, you need a current account
• You need to agree the overdraft limit with the bank
An overdraft is the most common source of short- term finance.
41
1.5
PERSONAL SAVING AND BORROWING
Loans
A loan is a fixed amount of money that you borrow and agree to
repay with interest.
• Fixed amount of money
• Borrow for an agreed period
• Repayments with interest
• Check the APR (annual percentage rate)
42
1.5
PERSONAL SAVING AND BORROWING
Example 3: Cost of Credit
Martha decides to borrow €7,000 to buy a second-hand car. She
arranges a loan with her bank. She agrees to repay the loan and
interest over five years (60 monthly payments).
The rate of interest is 11.5% APR and her repayment each month will
be €151.85.
Martha’s total repayments will be: €151.85 x 60 (months) = €9,111
The total cost of the credit is: €9,111 (repayments) – €7,000 (loan) =
€2,111.00
43
1.5
PERSONAL SAVING AND BORROWING
Mortgages
A mortgage is a long-term loan used to buy a house. They are
typically for 20-30 years.
To get a mortgage, you need:
• Safe, secure job
• Some savings
• Be able to make repayments
• Good credit history
The house should also be in good condition.
44
1.5
PERSONAL SAVING AND BORROWING
Example 4: Cost of Credit
Ava and Kirsty want to buy their first house at a cost of €220,000. They
have saved up the deposit of €22,000 (10% of the value of the house).
They need a mortgage to cover the remaining €198,000.
They arrange a fixed-rate mortgage with a bank. They agree to repay the
mortgage over thirty years (360 monthly payments). The rate of interest is
4.5% and their repayment each month will be €1,003.24.
The total repayments will be: €1,003.24x360 = €361,166.40
The total cost of the credit is: €361,166.40 – €198,000 = €163,166.40
45
1.5
PERSONAL SAVING AND BORROWING
WORKING WITH OTHERS
• Example 4 is just the repayments for the mortgage: Ava and Kirsty
will have other expenses for day-to-day living and for setting up a
new home. What might they be?
• Working together, estimate how much money you might
need every year for: household
goods (furniture and appliances),
food, transport, light and heat,
insurance, clothes, phone, TV,
#04AFEF
broadband, entertainment,
holidays, miscellaneous items
(and anything else you wish to
include).
Present the information in a
graph.
Page
73
46
1.5
PERSONAL SAVING AND BORROWING
Time to think
Be the banker who is providing the mortgage.
• What sort of person would you prefer to lend money to?
• What characteristics would you look out for?
• Why might you not provide a mortgage to an applicant (the person who
has applied for a mortgage)?
If you were refused a mortgage, what changes might you make to be
successful next time you apply?
47
1.5
PERSONAL SAVING AND BORROWING
WORKING WITH OTHERS
• It is really important to shop around for the best value that you can
afford. Most financial institutions have websites that show their latest
mortgage interest rates. Check these out and discuss the range of
rates on offer.
• House prices are affected by the state of the economy. In an economic
boom they go up and in a bust they drop. What problems might this
create for people with mortgages?
#04AFEF
• At the moment, a mortgage cannot be for more than 3.5 times your
gross income.
So if your gross income is €40,000, the maximum mortgage you
can get is €140,000 (€40,000 x 3.5).
Do you agree or disagree with this limit? Give reasons for
your answer.
Page
75
48
1.5
PERSONAL SAVING AND BORROWING
Short-Term, Medium Term, Long-Term Finance
Short-term finance
Medium-term finance
Long-term finance
Overdraft
Medium-term loan
Long-term loan
Debit cards
Leasing
Mortgage
Credit cards
Hire purchase
49
1.5
PERSONAL SAVING AND BORROWING
1. Give three reasons why you might borrow money.
2. Name the sources of finance for each reason and state why you chose
each source.
3. What do you need to consider before applying for a mortgage?
50
1.5
PERSONAL SAVING AND BORROWING
Quick Quiz
Which of the following is an example of mediumterm finance?
Overdraft
Mortgage
Hire purchase
51
1.5
PERSONAL SAVING AND BORROWING
Quick Quiz
Which of the following is an example of mediumterm finance?
Overdraft
Mortgage
Hire purchase
52
1.5
PERSONAL SAVING AND BORROWING
Quick Quiz
Which of the following is an example of mediumterm finance?
Overdraft
Mortgage
Hire purchase
53
1.5
PERSONAL SAVING AND BORROWING
Quick Quiz
Which of the following is an example of mediumterm finance?
Overdraft
Mortgage
Hire purchase
54
1.5
PERSONAL SAVING AND BORROWING
Quick Quiz: Review
An overdraft is an example of short-term finance.
Hire-purchase is an example of medium-term finance.
A mortgage is an example of long-term finance.
55
1.5
PERSONAL SAVING AND BORROWING
Save or Borrow?
Saving
Borrowing
• Is free
• Not free
• Earn interest
• Pay interest
• No repayments
• Must make repayments
• Own what you buy
• May not own what you buy
If possible, it is better to save than borrow.
56
1.5
PERSONAL SAVING AND BORROWING
Why Borrow?
There may be situations where it is necessary to borrow:
• Need the product immediately
• Take advantage of a special offer
• Future benefit
• Too expensive to pay all at once
57
1.5
PERSONAL SAVING AND BORROWING
Making the Decision
When deciding whether to borrow, ask yourself the following questions:
• How quickly do you need the money?
• What is the best option for borrowing?
• Will you be able to borrow?
• Do I need a deposit?
• Is it worth the risk of borrowing?
58
1.5
PERSONAL SAVING AND BORROWING
What Type of Finance is Best?
It depends on:
• Amount of money needed
• How quickly the money is needed
• How high the rate of interest is (cost of credit)
• How long you need to repay the loan
It is important to match the source of finance with its use.
!
Avoid money lenders! They charge a
very high interest rate.
59
1.5
PERSONAL SAVING AND BORROWING
Places to Save and Borrow
An Post
• Deposit accounts, savings bonds, national instalment savings, prize bonds
Banks
• Deposit accounts (receive interest); current accounts (usually no interest)
• Overdraft (on current account); loans, mortgages
Building Societies
• Deposit accounts (receive interest); current accounts (usually no interest)
• Mortgages
Credit Unions
• Deposit accounts (receive interest)
• Loans
60
1.5
PERSONAL SAVING AND BORROWING
WORKING WITH OTHERS
Carefully read through the Working With Others section on pages 79
and 80.
Then, working in pairs, investigate
the various saving and borrowing
#04AFEF
options suggested in order to complete the tables and answer the
questions.
Page
79-80
61
1.5
PERSONAL SAVING AND BORROWING
1. Give an example of a time when you would decide to save rather
than borrow. Give reasons for your choice.
2. Give an example of a time when you would decide to borrow rather
than save. Give reasons for your choice.
62
1.5
PERSONAL SAVING AND BORROWING
1.5
PERSONAL SAVING AND BORROWING
Key Words
• APR
• Interest
• Borrowing
• Investment
• CAR
• Loan
• Collateral
• Mortgage
• Credit card
• Overdraft
• Creditworthy
• Pension fund
• Debit card
• Risk
• DIRT
• Saving
• Financial Institutions
• Shares
• Guarantee
64
1.5