Savings Accounts

What is Savings? It is the money put aside for use in the future. Most experts recommend that you put back 10% of your income in savings. Concept of “pay yourself first”

Why should you save? A personal budget isn’t complete without a plan for regular savings. The amount of money you save depends on how much of your income you’re willing not to spend. When you save money, you are putting of spending money now to get something later. Also known as opportunity cost. Choosing between alternatives involves knowing what you gain.

Why do people save money? People set up and maintain a savings plan three major reasons: 1.To make major purchases 2.To provide for emergencies 3.To have income for retirement

Major Purchases, Emergencies, & Retirement… Remember, if you purchase items on credit or borrow money to make a purchase, you have to pay finance charges. It is recommended that you have six months of income set aside in case of an emergency. For most people, social security and retirement plans still don’t provide enough money to retire comfortable. Therefore, start saving early for retirement.

Earning Interest on Savings Simple Interest: interest earned only on the money you deposited into your savings account, or the principal Compound Interest: interest earned on both the principal- the money you deposited in your savings account- and any interest you earned on it

Types of Savings Accounts… Traditional Savings Account Certificate of Deposit Money Market Fund

Traditional Savings Account This account is offered by all of the institutions named previously except brokerage firms. Usually a $100 minimum deposit, is required to open one of these accounts. Passbook Savings Account: all of the deposits and withdrawals are recorded in a book that the depositor keeps Statement Savings Account: all of the activity in the account is recorded on a statement that is sent to the person who has the account

Certificate of Deposit This type of account requires you to deposit a minimum amount of money in an account for a minimum period of time. Usually at least $500. Money Market Fund This is a kind of mutual fund, or pool of money, put into a variety of short-term debt (less than one year) by business and government.

Insurance Against Loss… Banks, savings and loans, and credit unions all have insurance. The Federal Deposit Insurance Corporation is a government agency that insures bank accounts. Insured by the FDIC up to $250,000

Liquidity & Inflation Risk Liquidity: means the ability to quickly turn an investment into cash A general increase in the cost of goods and services is inflation. Inflation Risk: is the risk that the rate of inflation will increase more than the rate of interest on savings

Costs of Savings Accounts… Main advantage of having a savings account is they earn interest, but they also can cost money. Some accounts charge a fee for each deposit and withdrawal. Money you earn in interest on a savings account is also considered income. The result is you have to pay income tax on it.