Chapter 10
Saving for the future
Savings Goals and Institutions.
 Saving options, features and plans.

Lesson 10.1
Savings Goals and Institutions

Describe different purposes of saving.
 Explain how money grows through compounding
interest.
 List and describe the financial institutions where you
can save.
Why You Should Save

Short-term needs


Emergencies
Long-term needs
Home ownership
 Education
 Retirement
 Investing


Financial security
Why Save
76% of Americans live paycheck to
paycheck
 Emergencies – dip into savings vs credit
card

Furnace goes out
 Car insurance
 Lose job


Save 3-6 months of $ for bills
Pay Yourself First
vs. discretionary income – save after you
pay bills
 Automatic Deposit into Savings
 Save $100 per paycheck OR
 10% per paycheck
 If you don’t have it, you won’t spend it

Where You Can Save

Commercial banks – corporated financial
services (loans, deposits, trading


HSBC Bank, Bank of America
Savings banks – main purpose to store
savings for private depositors

Overseas
Where can you Save
Savings and loan associations – similar
to credit unions
 Credit unions – owned by the depositors



-Educational Credit Union, Kellogg Credit
Union
Brokerage firms – buying and selling of
securities (CDs)

Charles Schwab, Fidelity
Factors to consider
Liquidity – how quickly can you get
money out
 Safety – able to get money back
 Convenience – where you find and get
access to
 Interest-Earning potential (Yield) – how
much money you can make
 Higher the interest yield the better
 Fees and Restrictions – Minimum
balance, transaction fee

Saving Options

Regular savings account
High liquidity
 Lower interest
 Free to make withdrawals and deposits
 Service fees may apply
 Can use ATM/Debit cards

Saving Options

Certificate of Deposit (CD)
Earns a fixed interest rate for a specified
length of time
 Requires a minimum deposit
 Higher interest rate then regular savings
 Must leave money in for the entire time
 Has a set maturity date-the date the
investment becomes due for payment

Saving Options

Money market account






Combination savings-investment plan
Interest rates go up and down with the stock market
Money is used to purchase safe, liquid securities
Offered by banks and brokerage firms
Money can be deposited/withdrawn at any time with
no fee
Usually not insured
Saving Regularly

Ways to Save
Must spend less money than you take in
 Direct Deposit
 Automatic Payroll Deductions

Types of Interest
Interest is based on interest rate and
principal (balance)
 Simple interest is calculated on
principal only
 Compound interest is money earned on
the money deposited plus previous
interest

Simple Interest
I  prt
I=Interest
p=principal
r=interest rate
t=number of years
Example 1 Simple interest

Grace wants to deposit $5000 in a
certificate of deposit for a period of two
years. She is comparing interest rates
quoted by three local banks and one
online bank. Write the interest rates in
ascending order. Which bank pays the
highest interest for this two-year CD?
Example 1 continued

First State Bank: 4 1 %
4



E-Save Bank:
3
4 %
8
Johnson City Trust:
4.22%
 Land Savings Bank:
4.3%
Simple Interest example 2

Raoul’s Savings account must have at
least $500, or he is charged a $4 fee.
His balance was $716.23, when he
withdrew $225. Will he be charged a
fee?
Simple Interest Example 3

Mitchell deposits $1200 in an account
that pays 4.5% simple interest. He
keeps the money in the account for three
years. How much is in the account after
three years?
Simple Interest Example 4

How much simple interest does $200
earn in 7 months at an interest rate of
5%?
Simple Interest Example 5

How much principal must be deposited
to earn $1000 simple interest in 2 years
at a rate of 5%?
Simple Interest Example 6

Derek has a bank account that pays
4.1% simple interest. The balance is
$910. When will the account grow to
$1000?
Simple Interest Example 7

Kerry invests $5000 in a simple interest
account for 5 years. What interest rate
must the account pay so there is $6000
at the end of 5 years?
Compound Interest Terms
Annual compounding-once each year
 Semiannual Compounding-twice a year
 Quarterly compounding-4 times a year
 Daily compounding-365 times a year
(366 in a leap year)
 Crediting is how much an account earns
per month (all the compounding is added
up then)

Additional Information
Compound daily and credit monthly is
most common produce used by banks
today.
 APR (annual percentage rate) – annual
interest rate for simple interest
 APY (annual percentage yield) – annual
interest rate that takes the effect of
compounding

Compound Interest Formula





B=ending balance
p=principal
r=interest rate
n=number of times
interest is
compounded
annually
t=number of years
r nt
B  p(1  )
n
Example 1

Marie deposits $1650 for three years at
3% interest, compounded daily. What is
her ending balance?
Example 2

Kate deposits $2350 in an account that
earns interest at a rate of 3.1%,
compounded monthly. What is her
ending balance after five years?
APY/APR
APR-annual percentage rate
 APY-annual percentage yield

Banks usually advertise
 Higher than APR for accounts compounded
more than once per year

Annual percentage yield formula

r= interest rate
 N=number of times
per year
r n
APY  (1  )  1
n
Example 1

Sharon deposits $8000 in a one year CD
at 3.2% interest, compounded daily.
What is Sharon’s annual percentage
yield (APY) to the nearest hundredth of a
percent?
Example 2

Barbara deposits $3000 in a one year
CD at 4.1% interest, compounded daily.
What is the APY to the nearest
hundredth of a percent?
Continuous Interest

Infinite or without limiting time
B  Pe
B=ending balance
 P=principal
 E=exponential base (on Calc)
 r=interest rate
 t=number of years

rt
Example 1

Craig deposits $5000 at 5.12% interest,
compounded continuously for four years.
What would his ending balance be to the
nearest cent?
Example 2

If you deposit $1000 at 4.3% interest,
compounded continuously, what would
your ending balance be to the nearest
cent after five years?
Present value
How much money you need now for a
certain $ amount later
 “Putting money in now will get you how
much later”
 Present Value of a single deposit
 Periodic investments are the same
deposits made at regular intervals such
as yearly, monthly, biweekly, etc.

Present Value Of A Single Deposit
B
P
r nt
(1  )
n
Example 1

A mom knows that in 6 years, her
daughter will attend College. She will
need about$20,000 for the first year’s
tuition. How much should the mom
deposit into an account that yields 5%
interest, compounded annually?
Example 2

Ritika just graduated from college. She
wants $100,000 in her savings account
after 10 years. How much must she
deposit in that account now at a 3.8%
interest rate, compounded daily, in order
to meet that goal?
Present Value Of A Periodic Deposit
r
B( )
n
P
r nt
(1  )  1
n
Example 1

Nick wants to install central air
conditioning in his home in 3 years. He
estimates the total cost to be $15000.
How much must he deposit monthly into
an account that pays 4% interest,
compounded monthly, in order to have
enough money?
Future Value

What will the future balance be if you
deposit money now.
Future Value of the Investment

B - balance at end of investment
 P - periodic deposits
 r – interest rate
 n – number of times compounded
 t - length of time
B = P ((1 + r/n) nt - 1))
r/n