S AVINGS

S AVINGS V I NVESTING Part 1

A S AVINGS P LAN A Savings Plan is a strategy for using money to reach important goals and to advance your financial security. Money is a limited resource Every decision to spend or save money has an opportunity cost The money you spend today, cannot meet tomorrow’s needs and wants The opportunity cost of current spending is reduced future spending power. What are you willing NOT to spend now.

B UDGET FOR SAVING Creating a savings plan is Pay yourself first – set amount of money you put into savings each month Budget for savings – put savings in your spending plan Use direct deposit – money goes right into bank and automatically transfer to savings Let your savings grow – leave money in account to earn interest over time Reduce spending; increase saving – keep a spending log and reduce what you buy

M AXIMIZING S AVINGS Maximize your savings by considering total amount deposited interest rate time span of deposit interest type: simple interest or compound interest frequency of compounding continued

Differences Between Saving and Investing Now that you know how important it is to pay yourself first you must decide what to do with that money. Stashing it in a drawer is not only not safe, but it also is not doing you any good. In other words, your money is not making money for you.

A S AVINGS A CCOUNT A savings account is designed for accumulating money for future use. What people usually do to meet short-term goals. Money is safe in a savings account. Money usually earns a small amount of interest. It’s also easy to get to (high liquidity). Liquidity – refers to the ease with which an asset can be converted into cash without losing value

I NVESTING Setting money aside for longer-term goals. In the long run, investments can earn a lot more than you can usually make in a savings account.

S AVINGS VS. I NVESTING - RECAP  Savings  Safe, less risk  Less return on investment  Meet Shorter Term Goals  Savings Accounts, CD’s, Money Market Accounts  Investing  Greater Degree of risk  Chance of greater return on investment  Bonds, Mutual Funds, Stocks, Real Estate, Retirement Plans, Commodities

R EASONS TO S AVE Major purchases Emergencies Retirement

E MERGENCIES Experts recommend that you have at least 8 months of income set aside in case of an emergency. Worse yet, 28 percent of respondents had less than two weeks' worth of expenses in savings.

R ETIREMENT Social Security Retirement Plans Savings The three main sources of retirement income are:

Advantages of Starting to Save Early!

T YPES OF A CCOUNTS Part 2

S AVINGS C HOICES The Truth in Savings Act requires financial institutions to provide information about costs and interest-earning accounts in uniform terms helps consumers compare savings products and make informed decisions continued

S AVINGS C HOICES Info financial institutions must provide: minimum required to open an account interest rate annual percentage yield (APY) and effective period minimum deposit, time requirements, other terms of APY description of fees, conditions, and penalties continued

T YPES OF S AVINGS A CCOUNTS Interest-bearing savings account pay interest allow you to make regular deposits and withdrawals No set maturity date continued

T YPES OF S AVINGS A CCOUNTS Regular savings accounts also called basic savings account pay interest allow you to make deposits and withdrawals usually offer lowest interest earnings, but most liquidity continued

T YPES OF S AVINGS A CCOUNTS Online-Only Savings Accounts Interest banks that provide only online service low overhead costs allow them to pay higher interest rates on savings higher yield is the primary advantage of online- only accounts Disadvantages No personal relationships with tellers Must communicate online or on phone Lag time for deposits and withdrawals to clear Difficult accessing accounts if system goes down

High-Yield Savings Accounts account pays higher interest rates than passbook and statement accounts bank requires higher initial deposits higher minimum balance number of times you can make withdrawals are limited

T YPES OF S AVINGS A CCOUNT Money Market Deposit Accounts Pay higher interest rates than savings accounts Are liquid Require higher minimum balances than savings accounts Offer limited check-writing and money-transfer privileges

O THER S AVING O PTIONS Certificate of Deposit A certificate of deposit (CD) pays interest rates higher than other savings earns more interest the longer you agree to hold a CD is not liquid: early withdrawal penalties

U.S. Savings Bonds Buyers of U.S. savings bonds loan money to the government On a specified date, the government repays the loan with interest continued

T YPES OF U.S. S AVINGS B ONDS I Bonds - pay a fixed interest rate determined by the Secretary of Treasury (plus a semiannual inflation add-on rate) EE Bonds - earn fixed interest rates based on market yields of Treasury Notes Tax benefits if used to finance education; can also defer income tax on interest earnings

C ALCULATING I NTEREST AN O THER S AVINGS C ALCULATIONS Part 3

E ARNING I NTEREST Simple Interest- earning interest on the principal only Compound Interest- Earning interest on interest and principal Compound interest is usually earned daily, monthly, quarterly, or annually. The more often the money compounds- the more you will make! Annual Percentage Yield (APY) – the rate of yearly earnings from an account, including compound interest

S IMPLE I NTEREST Simple interest is interest earned only on the money you deposited into your savings account, or the principal.

S IMPLE I NTEREST The amount of savings. The interest rate. Length of time of the account. The three main factors determining the amount of interest are:

S IMPLE I NTEREST If you have a savings account that pays you 5 percent annual interest and $1,000 is the account the entire year, you will receive $50 in interest. Principal x Rate x Time (yrs) = Interest $1,000 x.05 (5%) x 1 = $50 interest

C OMPOUND I NTEREST Compound interest is interest earned on both the principal—the money you deposited in your savings account—and any interest you earned on it. You are earning interest on interest.

C OMPOUND I NTEREST Compound interest is usually earned daily, monthly, quarterly, or annually. The more often interest is compounded, the more you make in extra interest.

C OMPOUND I NTEREST $100 in savings that earns 10 percent a year $100 x 10% = $10 At the end of year 1, you will have $110. $100 + $10 = $110 At the end of year two you will have $121. $110 x 10% = $11 $110 + $11 = $121

C ALCULATING C OMPOUND I NTEREST

The Power of Compound Interest Compound interest makes your money grow faster when interest is left to accrue.

R ULE OF 72 Use Rule of 72 to estimate the amount of time or interest needed to double savings continued

R ULE OF 72 To find the number of years to double savings, divide 72 by interest rate How many years to double your money at an 8% interest rate 72/8 = 9 years Note- Use the WHOLE NUMBER for Interest Rate 72 Interest Rate = Years Needed to Double Investment

R ULE OF 72 To find the annual interest rate needed to double savings, divide 72 by number of years.. What interest rate do I need to double money money in 10 years 72/10 = 7.2 years72 Interest Rate Required = Years Needed to Double Investment

S AVINGS AND I NTEREST  Power of interest lies in the COMPOUNDING  Interest Compounding once a year  The future of $ After 1 year at 5% interest:  $100 x.05 = 5  $ After 2 year at 5% interest:  105 x.05 = 5.25  After 3 year at 5% interest:  x.05 = 5.51 

C OMPOUND I NTEREST  P is the principal (the money you start with, your first deposit)  r is the annual rate of interest as a decimal (5% means r = 0.05)  T is the amount of Time (YEARS)  n is the number of times per year  A is how much money you've accumulated after n years, including interest.  If the interest is compounded once a year:  A = P(1 + r)^t

C ONSIDER I NFLATION AND T AXES Your earnings and the interest earned on your savings are taxed Your rate of savings MUST be higher than the inflation rate to make it a good investment. continued

C ONSIDER I NFLATION AND T AXES By reducing or deferring taxes on savings, you accumulate more money over time Minimize taxes by putting money into tax- exempt or tax-deferred savings Tax Exempt – refers to earnings that are free of certain taxes, such as saving accounts for education. Tax-deferred – refers to a type of savings in which taxes on principal an/or earnings are not due until the funds are withdrawn, such as retirement funds

Inflation and taxes reduce the value of savings Due to inflation, goods and services bought with future savings will cost more than they do today you need a savings plan that pays an interest rate higher than today’s rate of inflation If you put all your money in the savings at 1% interest and the rate of inflation (rise in the cost of prices) is 3% you LOSE Money due to being able to buy less! continued