1. Savings Accounts
Chapter 30
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2. Savings is money put aside for future use.
A personal budget is not complete without a plan for regular savings
Save for:
Major purchases
Emergencies
Retirement
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3. All savings involve some sacrifice
When you save money, you are putting off spending money now to get something later
This is called opportunity cost
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4. Interest Earn interest on savings accounts How interest is calculated:
Simple Interest
Compound Interest
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5. Simple interest
Interest earned only on the money you deposited into your savings account.
For example:
A savings account that pays you 5% annual interest. Balance in the account is $1,000. At the end of one year you will earn $50 on the account.
$1,000 x 5% = $50
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6. Which is better? Simple interest or compound interest?
Interest earned on both the deposit and interest you earned on it.
Interest on interest
Which is better? Simple interest or compound interest?
compound
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7. Types of Savings Accounts
Traditional Savings Accounts
Certificate of Deposit
Money Market Fund
Money Market Deposit Account
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8. Traditional Savings 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
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9. Interest rates on traditional savings accounts are usually quite low
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10. Certificate of Deposit
Requires you to deposit a minimum amount of money in an account for a minimum period of time
CD has a maturity date which is when the money becomes available to you.
Penalty for early withdrawal
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11. Money Market Fund
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.
Interest rate varies from month to month
Main goal is preservation of principal
Used to store money that is currently not invested
Among the safest types of mutual funds
No prepayment penalties
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12. Advantages and Disadvantages of Savings Accounts
Federal Deposit Insurance Corporation (FDIC) - A government agency that insures bank accounts
Bank accounts are insured for up to $100,000
Money market accounts
offered by brokerage firms
are not federally insured
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13. Liquidity – the ability to quickly turn an investment into cash
An investment such as a car or a business is not very liquid because you have to sell it in order to get cash
Savings accounts are highly liquid because you can easily withdraw cash from them
Even CDs which have a penalty for early withdrawal are considered liquid.
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14. Inflation Risk
Risk that the rate of inflation will increase more than the rate of interest on savings.
Inflation is 6%
Savings account earns 4%
You lost money by having it in a savings account
Main risk is with CDs, where you are locked into an interest rate over a long period of time
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15. Costs associated with having a savings account
Penalty fee for early withdrawal
Fee if account balance falls below a minimum
Fees charged for each deposit and each withdrawal
Interest earned is taxable
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16. Book Work (Take the worksheet to finish this)
Fast Review Page 487 #’s 1-2
Fast Review Page 490 #’s 1-2
Fast Review Page 492 #’s 1-2
Fast Review Page 493 #’s 1-2
Using Business Key Words Page 494 #’s 1-13
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