Savings Options, Features and Plans Section 2 Notes Chapter 10 Unit 4: Savings and Investing

Selecting a Savings Plan: Liquidity ◦ Definition: How quickly you can turn savings into cash when you want it Safety ◦ Safe from loss ◦ FDIC Convenience ◦ Location ◦ Services offered Interest Rate (earning potential/yield) ◦ You want to earn as much interest rate as you can on your deposit, while maintaining the degree of liquidity, safety and convenience you want Fees and restrictions ◦ Withdrawal restrictions, minimum balance, service charges and fees, etc.

Savings Options Types of savings accounts: ◦ Passbook account  Depositor receives a booklet in which deposits, withdrawals and interest are recorded.  Average interest rate is lower at banks and savings and loans than at credit unions.  Funds are easily accessible.

Savings Options Types of savings accounts: ◦ Statement account  Basically the same as a passbook account, except depositor receives monthly statements instead of a passbook.  Accounts are usually accessible through 24-hour automated teller machines (ATMs).  Interest rates are the same as passbook account.  Funds are easily accessible.

Savings Options Benefits Higher liquidity Trade-offs Lower interest rate Types of savings accounts: Interest-earning checking account o Combines benefits of checking and savings. o Depositor earns interest on any unused money in his/her account.

Certificate of Deposit (CD) What they are and how do they work: Definition: A deposit earns a fixed interest rate for a specified length of time For example: 5% for 6 months A CD requires a minimum deposit CDs are less liquid than savings accounts Has a set maturity date  Maturity Date = the date on which an investment becomes due for payment

Benefits of Certificate Deposits: No risk Simple No fees Offers higher interest rates than savings accounts. Trade-offs Restricted access to your money Withdrawal penalty if cashed before expiration date (penalty might be higher than the interest earned) Certificate of Deposit (CD)

Types of Certificates of Deposit 1. Rising-rate CDs: higher rates at various intervals, such as every six months. 2. Stock-indexed CDs: earnings based on the stock market. 3. Callable CDs: higher rates and long-term maturities, as high as 10–15 years. However, the bank may “call” the account after a stipulated period, such as one or two years, if interest rates drop. 4. Global CDs: combine higher interest with a hedge on future changes in the dollar compared to other currencies. 5. Promotional CDs: attempt to attract savers with gifts or special rates.

Money Market Accounts What are they and how do they work: Definition: a deposit account offered by a bank, which has a relatively high rate of interest and typically requires a higher minimum balance to earn interest or avoid monthly fees Checking/savings account. Interests rates on money market accounts go up and down with the stock market Can access your money from an ATM, a teller, or by writing up to three checks a month.

Money Market Accounts Benefits: Immediate access to your money. Average yield (rate of return) higher than regular savings accounts. Trade-offs: Usually requires a minimum balance of $1,000 to $2,500. Limited number of checks can be written each month.

How many years will it take to double my money? If you want to find the number of years, divide 72 by the rate of return. Example: You are earning 3% on your money. How long will it take to double the rate of return? 72 divided by 3 = 24 years If saved $10,000 it would take 24 years for it to earn an additional $10,000.

What interest rate do I need to double my money? If you want to find the rate of return, divide 72 by the number of years in which you want your money to double. Example: You want to double your money in 24 years. What rate must your investment earn? 72 divided by 24 years = 3% At 3% your money will double in 24 years.

Save Regularly! Direct Deposit  Paycheck into your bank account  Money is available in your account faster  Can have portion of or all of paycheck put into your savings Automatic payroll deductions  Having a certain amount withheld from your paycheck and deposited into your savings account Participate in payroll savings plans  Money is taken out of each paycheck and deposited in a bank or credit union or used to buy government savings bonds