1. Let’s Do the Math! Maximizing your Return
Savings
Let’s Do the Math!
Maximizing your Return

2. Opportunity Cost
The value of the next alternative when making a decision
If I did (bought) A instead of B, what would the cost be?
Can have monetary or non monetary value

3. Savings Setting aside money for future use
Discretionary income (aka disposable income): the amount of money left over after all obligations have been met
Gross Pay
Taxes and Deductions
Net Pay - =
Net Pay
Discretionary Income
Bills - =

4. Interest Interest is money paid for the use of someone’s money
Simple Interest
Interest is computed on amount borrowed or saved only
Accumulated interest doesn’t earn interest

5. Simple Interest Calculations
I = P x R x T I – interest P- principal (amount borrowed or outstanding) R- rate, usually expressed as an annual percentage (APR) T – length of time (usually in years) Note: R and T must be in the same units

6. Simple Interest Example
How much interest would you pay on a three year loan of $10,000 at 5% APR?
I = P x R xT
I = 10,000 x .05 x 3
$1,500

7. Manipulating the Formula
What is the APR on a six-month 1,000 loan that costs $50 in interest?
I = P x R X T
R = I/(P x T)
R= 50/(1000 X .5)
R=10%

8. Compound Interest
Interest is computed on the original principal AND the accumulated interest.
For example if you save $100 at 6% and it is compounded annually:
Year
Principal($)
Interest ($)
Total ($) 1
100 6
106 2
6.36
112.36 3
6.74
119.10

9. Calculating Compound Interest
A=P(1+(r/n))nt (Future Value Formula)
A= Accumulated principal + Interest
R = APR
T = time
N = number of compounding periods
For example 6% for 2 years, compounded quarterly =
A = 100(1+(.o6/4))4*2 = $119.56
Earn $19.56 in interest

10. Making Comparisons @ 3 Years
Simple Interest : I=100*.06*3=18.00 Interest Compounded Annually: $19.10 Interest Compounded Quarterly: $19.56
Quarter
Principal ($)
Interest ($)
Total ($) 1
100
1.5
101.5 2
1.52
103.02 3
1.55
104.57 4
1.57
106.14 5
1.59
107.73 6
1.62
109.34 7
1.64
110.98 8
1.66
112.65 9
1.69
114.34 10
1.72
116.05 11
1.74
117.79 12
1.77
119.56

11. Annual Percentage Yield
APY (rate of return) percent increase in savings due to interest
APY = APR with simple interest
APY > APR with compound interest
APY will increase as the number of compounding periods increases
APY = Interest/(Principal * Time)*100

12. Calculating APY
What is the APY on $100 savings for 3 6% under simple interest, compounded annually or quarterly
Simple interest: APY=APR=6%
Compounded Annually:
APY = Interest/(Principal * Time)*100
APY = 19.10/(100*3)*100 = 6.36%
Compounded Quarterly
APY = 19.56/(100*3)*100 = 6.52%

13. Savings Products
Savings products are purchased at a bank or similar financial institution
There is a trade off between liquidity and rate of return
Liquidity is the ease of conversion to cash
The less liquid the higher the return
Investment – use of savings to earn a financial return
Investments usually contain an element of risk

14. Savings Account Highly liquid Demand account
Low, usually fixed rate of interest
Can be linked to checking account and accessed via an ATM
FDIC insured (if purchased through a bank)

15. Certificate of Deposit (CD)
Time deposit
Earns a fixed rate of interest for a specific term (3 months to 2 years)
Maturity date – date on which interest comes due for payment
Redeem for cash or renew
Automatic renewal option
Check for change in interest rate
Steep penalty for early withdrawal
FDIC insured

16. Money Market Account Liquid investment account
Deposits are invested in safe, liquid securities
Variable rate of return
Generally low
Minimum balance requirements
Account limitations may include:
Min. $ per check, max # of checks
Not FDIC insured

17. Establish a Savings Plan
Determine a specific dollar amount or percentage of income to invest each pay period
Automatic payments take the pain out of saving
You don’t miss what you don’t see
Direct Deposit
Payroll Deduction