Saving For Your Future
Chapter 10 Notes
Money Management
Financial Security
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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
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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
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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:
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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.
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For Example: Home Ownership,
college education for kids, new car,
and retirement.
More reasons people save
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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.
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Another reason to save is to
ensure enough money for retirement.
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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…
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The amount of money you
will save will vary according
to several factors:
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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
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The amount of money
deposited is called the
principal.
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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
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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
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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
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Commercial Banks – banks like Bank One and US Bank.
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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.
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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
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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
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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:
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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
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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…).
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Money may be deposited or withdrawn without
a fee. Interest is usually compounded daily.
Interest rates vary so shop around. Here are
some examples:
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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
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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
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It is important not just to save but to save
regularly!
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PAY YOURSELF FIRST!
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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!
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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!