Saving For Your Future Chapter 10 Notes Money Management Financial Security Financial Security begins when you start SAVING! • Saving means to set aside money for your future! Savings Plans enable you to provide for future needs… both foreseen and unforeseen. The existence of savings, no matter how small, gives you a measure of financial independence. In this chapter you will discover how you can save more efficiently regardless of income! Why you should save The best reason to save some of your income is to provide for future needs, both expected: • House • Car • Vacations • Etc… And unexpected: • Unemployment • Sickness • Accidents • Etc…. Different Reasons People Save Short-term goals – needs often arise that require a bit of cash, above and beyond what was normally budgeted. These needs are typically paid for out of savings: • Examples include emergencies, weekend trips, social events like weddings and birthday parties, major purchases from things wearing out etc… Long-Term Goals – many individuals and families anticipate some major purchases in the future and save to make them possible. • For Example: Home Ownership, college education for kids, new car, and retirement. More reasons people save Probably the best reason to save is the peace of mind that comes from knowing that when short-term needs arise there will be adequate money to pay for them. Another reason to save is to ensure enough money for retirement. • If you set aside some money from each paycheck, you will feel secure knowing that there is money available if and when it is needed. How much you save… The amount of money you will save will vary according to several factors: • • • • The amount of your discretionary income – which is what you have left over after the bills are paid. The importance you attach to savings Your anticipated needs and wants and; Your willpower – or your ability to forgo present spending in order to provide for your future. How much your money grows The amount of money deposited is called the principal. Money paid by the financial institution to the saver for the use of their money is called interest. When interest is computed on the original principal plus accumulated interest, it is called compounded interest. Compounding Interest Albert Einstein called compounding interest the “Eighth Wonder of the World” Compounding can work miracles! The longer you have your money accumulating the better. http://www.moneychimp.com/calculator/compound_interest_calculator.htm For example: Year Beginning Balance Interest Earned (5%) Ending Balance 1 $100.00 $5.00 $105.00 2 $105.00 $5.25 $110.25 3 $110.25 $5.51 $115.36 Where you can save Commercial Banks – banks like Bank One and US Bank. • • • Commercial Banks offer convenience to customers in the form of services to go along with accounts, including ATM’s, Debit Cards, Online Bill Pay, & Direct Deposit. 97% of Commercial Banks are FDIC Insured. That means that the US government guarantees your money is safe (Up to $250,000). Rates differ from bank to bank and the market is very competitive. Compare banks before making a decision! Credit Unions – Credit unions are not-for-profit organizations established by groups of employees in similar occupations who pool their money. • • • Credit Unions generally offer higher interest rates on savings and lower interest rates on loans! They are insured through the National Credit Union Administration for up to $250,000 – just like the FDIC. A savings account at a credit union is often referred to as a share account. Credit union members save their money in the form of shares. Basic services are otherwise fairly similar to commercial banks: ATM Cards, checking accounts, cd’s, money orders, loans, direct deposit, online banking etc… Different Ways to Save Regular Savings Account – opened at your bank or credit Union. The major advantage is high liquidity. • Liquidity refers to assets that can be converted easily into cash without a loss of value. A regular account is said to be liquid because you can withdraw your money at anytime without penalty. • For this reason, a regular account generally pays the least amount of interest. Check out these links for examples: • http://www.bankone.com/answers/BolAnswersDetail.aspx?top=you &segment=PFS&topic=Savings&item=BankOneRegularSavings • http://www.bankofamerica.com/deposits/checksave/index.cfm?tem • plate=save_regular Some regular accounts charge service fees. Avoid these if you can! If all of your interest is eaten up by the fees you’re wasting the power of your money! Ways people save Certificates of Deposit (CD) – represents a sum of money deposited for a set length of time – for example, $500 for six months. • A CD is less liquid than a regular savings account, and requires a minimum amount be deposited. • The rate of interest is usually higher. Click on the following link for examples: • • http://www.capitalone.com/investments/cd/index.php?linkid=WWW_Z _Z_Z_SP1_C2_05_T_SP2 If you withdraw the money before the maturity date – which is the day the CD becomes due -- you usually have to pay a penalty. That is, you will be paid back less than what you put in! More ways people save A money market fund is a combination savings/investment plan in which money deposited is used to purchase certain types of securities (bonds, stocks, mutual funds etc…). • • Money may be deposited or withdrawn without a fee. Interest is usually compounded daily. Interest rates vary so shop around. Here are some examples: • • http://www.bankrate.com/brm/rate/mmmf_mmaratehome99.asp?web=brm&pa rams=MI,285&prodtype=chksav&market=285&product=33&state=MI&sort=7 http://www.metlifebank.com/MoneyMarket.do A minimum balance is usually required and there is often a limit to the number of checks that you can write or withdraws that you can make per month. Factors for you to consider Liquidity – how quickly you can get your cash back. Could be important based on age, health, and family situation. Safety – you want your money to be safe from loss. Is it insured? Convenience – does the plan have the location and services that you want? Interest Earning Potential (Yield) – You want the interest to be as high as possible. Usually the more liquid the deposit the less interest you will earn. Higher earnings result from making the commitment to keep the money there longer. Early Withdraw Penalties – Are there penalties for withdrawing money early? You should always know the answer to that question! Saving Regularly It is important not just to save but to save regularly! PAY YOURSELF FIRST! No savings plan is effective unless you have the willpower to set aside the money. If you’re afraid you don’t have the willpower then set up an automatic payroll deduction for your savings plan! • You can authorize your employer to make automatic deductions from your paycheck each month. That money can be channeled to a payroll savings plan of your choice!