Saving For the Future

 Why should we save? To provide for future needs. Both expected and unexpected. What might happen if you do not set something aside for the unexpected? You will constantly live on the edge of financial disaster.

 What are some short-term needs you could encounter within the next month? Sickness, accident, social events, things that wear out and you need to buy a new one. Do you think you will have the discretionary income to cover these? Discretionary means money left over after you pay your bills.

 Will you have the cash surplus from your paycheck? If not, then how are you going to pay for these unexpected s-term needs? Yes, you could use a credit card. However, your best bet is to have a savings account with enough money in it to cover these needs.

 Now, that we have learned that money in savings helps you meet your unexpected Short-term needs. What about your Long- term needs? Can you name some long-term needs? Retirement, home ownership, education

 Saving money now, will enable you to make larger purchases in the future, invest, and accumulate enough money for a secure retirement.

 Let’s talk about home ownership. Making a larger down payment, will reduce your monthly payments. Many people owning a home a very important part of their future.

 What about education? Do you believe it is important to save for tuition costs?  Education is a Long-term investment that pays off in higher income potential.  Many couples begin preparing and saving for future college costs when their children are young.

 Retirement is an example of another long- term need. Is Social Security meant to provide a comfortable retirement?  No, it is meant only as a supplement to an individual’s own savings.

 Investing is another example of a long-term need.  Should you put your emergency savings in investments?  No, money put in investments should be your extra savings. Your primary savings should be for short-term needs and emergencies.

 What is discretionary income?  It is what you have left over after you have paid all your bills.

 The amount of money you save will depend on what? (according to the book?)  1. your discretionary income  2. the importance you attach to savings  3. your anticipated needs and wants  4. your will power  What do I mean by will power?

 Your ability to give up present spending in order to provide for your future.  The money you initially put in a savings account is called Principal.  The money the bank adds to your money is called what?

 It is called interest.  Compound Interest is interest computed on the original principal plus accumulated interest.  Let’s look at how compounded interest is calculated.

 In this example, interest is compounded annually,  Year Balance Interest (5%) End Balance 1 $100 $5.00 $ $105 $5.25 $ $ ?

 In this example, interest is compounded annually,  Year Balance Interest (5%) End Balance 1 $100 $5.00 $ $105 $5.25 $ $ ?

 In this example, interest is compounded annually,  Year Balance Interest (5%) End Balance 1 $100 $5.00 $ $105 $5.25 $ $ $5.51 ?

 In this example, interest is compounded annually,  Year Balance Interest (5%) End Balance 1 $100 $5.00 $ $105 $5.25 $ $ $5.51 $115.76

 Name some types of institutions that save your money for you?  Commercial banks  Savings Banks (few in number, Neastern)  S & L (Savings and Loans) (home mortgages)  Credit Unions (pooling of $ of similar occupations)  Brokerage Firms (buys & sells securities)

 At a credit union, a savings account is usually called a what?  A Share Account why? Credit union members save their money in the form of “shares” or part ownership in a credit union. (from this pooling of $, they make loans to their members)

 What does the term “securities” refer to? Stocks and bonds issued by corporations or by the government. Do stocks represent ownership or debt? What about bonds?

 Stocks represent ownership because when you purchase stock, you become a part owner of that corporation and it is reflected as equity on their Balance Sheet. (shares outstanding)  Bonds represent debt because when you purchase a bond you are essentially loaning money to a company and it is reflected as a liability on their (the company’s) Balance Sheet. (bonds payable)

 Investors buy and sell securities through a what? (a who?)  A stockbroker (who works for the brokerage firm)

 Once you decide your savings institution.  You have several savings options to choose from. (Regular savings account, certificate of deposits, money market account)  Lets look at these options more in depth.

 HIGH LIQUIDITY What is liquidity? Ability of an asset to be converted into cash quickly. (you can get your cash whenever) ▪ LOWER INTEREST RATE ▪ SOMETIMES YOU CAN GET ATM CARDS THAT ALLOW YOU TO WITHDRAW

 Often called a “time deposit”  Earns a fixed interest rate for a specified length of time. (5% for 6 months)  Interest rate higher than a savings account CAN YOU WITHDRAW YOUR $ ANYTIME? (FEE?) (LIQUIDITY?)

 With CD’s you cannot get your money anytime you want to. If you don’t keep all the money in the CD for the specified amount of time, then you pay a penalty for early withdrawal. (usually in the form of less interest earned)  So, as you can see a CD is not as liquid as a regular savings account.

 In relation to a CD, what is “maturity date”? The date on which an investment becomes due for payment.  (note – within a stated number of days after the maturity date, your certificate will renew automatically. You may prefer to redeem it for cash or purchase a new CD for a different time period).

 Combination savings/investment plan  Money deposited is used to purchase safe, liquid securities  Money can be withdrawn at any time without a fee (yes, very liquid)  Not insured when with brokerage firms.  At banks, some money markets are insured by the FDIC

 However, even without insurance, money markets are generally considered very safe as the money is backed-up by very stable (often backed by short-term less than one year securities issued by U.S. Treasury).

 Interest rates go up and down with stock market  Banks and Brokerages may change their interest rates on these as much as weekly  However, interest rates are typically higher than regular savings  Usually money markets require a minimum balance of $500 or more  Also, may have restrictions on # of cks written

 LIQUIDITY  SAFETY  CONVENIENCE  YIELD (INTEREST EARNING POTENTIAL) (SHOP AROUND)  FEES AND RESTRICTIONS

 DIRECT DEPOSIT – Set your paycheck up so that it will automatically deposit into your checking or savings account  AUTOMATIC PAYROLL DEDUCTION – Have a certain amount of your paycheck deposited into your savings every month automatically.

 What is one major advantage of using a regular savings account versus a certificate of deposit?  Liquidity

 Do interest rates on regular savings accounts go up and down with the stock market?  No,  How about with a Money Market account?  YEs

 Are Money Markets subject to early withdrawal fees?  No What is? Certificate of Deposits

 You will receive the greatest gain on your money when an account is compounding quarterly, daily, annually, or semi-annually?

 Daily  A savings account at a credit union is called a what?  Share account

 What is discretionary income?  What is a stockbroker? What type of institution does he/she work for? Commercial banks, brokerage firms, credit unions?

 What is automatic payroll deduction? Why might this be helpful?

 The date on which a CD is due is called? Maturity Date

 A rate that includes compounding? APY (annual percentage yield) The quality of being easily converted to cash? Liquidity

 Insurance that covers deposits in commercial banks. What is this insurance called? FDIC The date on which a time certificate must be renewed or canceled? Maturity Date

 Money paid for the use of money? Interest When your employer puts your paycheck into your bank account. Direct Deposit

 Interest paid on the principle plus interest already earned Compounded interest The amount of money deposited by a saver? Principal

 Income left over after the bills have been paid? Discretionary Income