# Lesson 5-2 Savings Accounts

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Lesson 5-2 Savings Accounts
Learning Goals -Discuss the purpose of savings -Explain how you can grow your savings with interest -List and compare savings options and features Lesson 5-2 Savings Accounts

Savings Account What is a savings accounts?
A savings account is a demand deposit account for the accumulation of money in a safe place for future use. Savings accounts pay interest at a low rate. What is the purpose of Savings? Savings helps meet your financial goals. It means you are providing for future needs and wants. Savings account helps you be prepared for emergencies and other unplanned spending. If the money isn’t needed until some time in the future, should invest in something that pays a higher rate of return.

Computing Interest Principal is the sum of money set aside on which interest is paid. It is your original investment. Money earned on the principal is called interest. Simple Interest is interest that is computed on principal once during a certain time period. Compound Interest is interest earned on both principal and previously earned interest.

Computing Interest on \$100 for 1 year
Simple Interest 6% interest rate Interest = x 6% = \$6 New Balance = = \$106 Compound Interest 6% interest rate compounded quarterly 6%/4 = 1.5% End of 1st quarter Interest=100x 1.5%=\$1.50 New Balance = =\$101.50 End of 2nd quarter Interest = x1.5%=1.52 New Balance= =\$103.02 End of 3rd quarter Interest = x1.5%=1.55 New Balance = =\$104.57 End of 4th quarter Interest = x1.5%=1.57 New Balance = =\$106.14

Future Value of Money The future value of money refers to what it will be worth in the future, after interest has compounded. Based two ways: On a single deposit that is left in an account for a long period of time. On a series of deposits that are made over time. To compute future value, you can use future value tables, or you can use a financial calculator that has these tables built into its memory.

Saving a single sum Set aside \$500 and leave it there for ten years at an annual interest rate of 8 percent compounded annually, how much would you have in 10 years.

Saving on a Regular basis
Set aside \$500 per year for ten years at an annual interest rate of 8 percent compounded annually, how much would you have in 10 years.

Rule of 72 Rule of 72 is a quick way for computing how long it will take to double money invested at a given interest rate. To apply the Rule of 72, simply divide the annual interest rate into 72. Ex. – Invest at 6% interest. 72/6 = It would take 12 years for your money to double. If you invested \$1000 now at 6% interest. When you are 30 it would be worth \$2000, when your 42 - \$4000, 54 - \$8000, 66 - \$16,000, 78 - \$32,000

Alternatives to a Savings Account
Methods of Savings Alternatives to a Savings Account Money Market Accounts Certificates of Deposit (CD) U.S. Savings Bonds Individual Retirement Accounts

Money Market Account A Money Market Account is a type of savings account that earns the market rate of interest on the money deposited. When interest rates are rising, a money market account will often earn more than a savings account or CD. When rates are falling, the interest earned may be less than that paid on a CD A minimum balance or \$1000 or \$5000 is often required to open a money market account

Certificates of Deposit (CD)
A CD is a time deposit (rather than a demand deposit) that pays a fixed rate of interest for a specified length of time. CD’s typically pay higher interest rates than a regular savings account. As a time deposit, the funds must be set aside for a fixed period of time. (6 month is minimum). If you withdraw the money before the time limit, you will be penalized with an extra fee. CD’s are a good option if you do not need immediate access to the money.

U.S. Savings Bonds U.S. Savings Bond is a discount bond issued by the federal government that pays a guaranteed minimum rate of interest. Discount means you pay less than face value, or the amount stated on the face of the bond. For example. A \$100 Series EE Savings Bond costs only \$50. The bonds maturity value is the future value which is the face value. As interest is earned on the bond, it will grow to maturity value. An option if you are able to commit your money for a longer period of time. Considered to be a safe form of savings because they are backed by the U.S. government.

Today’s U.S. Savings Bonds
Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference. EE Bonds continue to earn interest for up to 30 years.

U.S. Savings Bonds Interest Rates

Individual retirement accounts (IRA)
An IRA allows individuals to deposit money into an account during their working years and to delay paying taxes on the money and the interest earned until it is withdrawn during retirement. IRA’s can be set up through banks, financial institutions, mutual fund companies, insurance companies, and stockbrockers.