Chapter 12

Chapter 12
Section 12.1
The Role of Saving
• Objectives
– Explain the benefits of saving;
– Distinguish between saving and investing; and
– Explain reasons for saving.
Benefits of Saving
Saving - means setting aside present income for future
Benefits of Saving
Allows you to accumulate money for future
To earn income
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.
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
Reasons for Savings Continued
•Future Purchase – do not use credit cards
Pay interest on credit card
Savings earns interest
Savings has a wait period so you spend money
•Financial Goals – family life cycle
•Retirement – start when you’re young
Section 12.2
Your Savings Plan
• Objectives
– Explain steps for reaching savings goals; and
– Describe ways to establish a successful
savings habit.
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
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 goals
Set aside reasonable amounts ($10 / per week)
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
Check off-list
Chart progress
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
Pay Yourself First
Set aside money for savings first, then spend what is left
Set amount and stick to it
If income varies, set a percentage
Automatic Savings
•Automatic transfers
•Direct deposit
•Payroll deductions – employee authorizes a specific
amount to be deducted from each paycheck and put
into a savings plan
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 12.3
Earning by Saving
• Objectives
– Distinguish between simple and compound
– Explain the significance of annual
percentage yield; and
– Analyze how time impacts the growth of
Calculating Interest
•How often is interest paid and how is the interest
calculated made?
Monthly, Quarterly
Stated interest = annual rate
Example = 3% interest, paid monthly, Each
month, you’re paid 0.25%
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
More often the better
What account would you choose?
One that earns 8.25% simple interest or one that earns 8%
interest compounded daily.
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
8.25% simple interest APY is 8.25%
8% interest compounded daily APY is 8.33%
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 Compounding
First 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
Rule of 72
How 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 Rates
Small Amounts Grow Large
When saved regularly and put into an interestearning account, small amounts can add up!
Section 12.4
Savings Options
•Explain factors affecting the choice of savings
•Identify and compare various savings options
Factors in Choosing Savings Options
Safety and risk
Insured (FDIC or NCUA)
Check individual account options (small print)
Services that are not insured
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
Factors in Choosing Savings Options Continued
Required to deposit a certain amount to open
Maintain a certain minimum balance
Limited to number of transactions you can make
Research helps choose account that meets your needs
•Fees & service charges
Monthly maintenance
Falls below minimum balance
Basic Savings Option
– higher interest rate more restrictions
Savings Accounts – most liquid, minimum balance is
lower, fewer restrictions and fees, interest paid is
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
Basic Savings Option
Money Market Accounts - type of savings account
which deposits are invested by the financial
institution to yield higher earnings
Higher interest, more restrictions, minimum
deposit = $2500
Check writing option, few
Withdrawals limited
Do not confuse with money market funds – form of
mutual fund not FDIC protected
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 years
early withdrawal penalty
longer term higher rate
rate locked in until end of term
cash in or renew at current interest rate
automatically renew unless you notify the Financial
Institution by certain date
minimum can rage from $1000 to $100,000
Basic Savings Option
Savings Bonds - nontransferable debt certificates issued
by U.S. Treasury
Loaning money to federal government
Safe, no risk of losing money
Interest earned is exempt from state and local taxes
Federal income tax can be deferred until bond is
cashed in or stops earning
3 types of savings bond (page 312)
Series EE
Series HH
Series I