back to table of contents pp. 484-497 chapter 30 savings accounts
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Back to Table of Contents
pp. 484-497
Chapter 30 Savings Accounts
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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:
1.1. NameName reasons for saving money.
2.2. Explain Explain how interest is earned.
continued
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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:
3.3. Identify Identify types of savings accounts.
4.4. Describe Describe savings accounts.
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Why It’s ImportantWhy It’s Important
Savings accounts allow you to put money aside and help make your money grow.
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Key WordsKey Words
savingsopportunity costsimple interestcompound interestpassbook savings accountstatement savings accountcertificate of deposit (CD) continued
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Key WordsKey Words
maturity datemoney market fundmoney market deposit accountFederal Deposit Insurance Corporation
(FDIC)liquidityinflation risk
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Why You Should SaveWhy You Should Save Savings is money put aside for future use.
The amount of money you save depends on how much of your income you’re willing not to spend.
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Why You Should SaveWhy You Should Save When you save money, you are putting off spending money on something now to get something else later.
This is called the opportunity cost, or trade-off.
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Figure30.1 THE AVERAGE NEST EGG
The average retirement account balance is about $41,000.
How much are you willing to save today in order to support your future?
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Major PurchasesMajor Purchases If you purchase items on credit or borrow money to make purchases, you have to pay finance charges.
If you use cash for the purchase, you don’t have to pay those charges.
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EmergenciesEmergencies Experts recommend that you have at least six months of income set aside in case of an emergency.
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Retirement Retirement The three main sources of retirement income are:
• Social security• Retirement plans• Savings
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Retirement Retirement For most people, social security and retirement plans still don’t provide enough money to retire comfortably.
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Retirement Retirement If you put away just $20 per week starting now, by the time you retire you would have $30,000.
With interest earned on a savings account, it could come to several times more than that.
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Fast Review
1. What is a major advantage of saving to buy an item instead of buying it on credit?
2. What are the three main sources of retirement income?
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Introduction to Business, Savings Accounts Slide 16 of 52
Earning Interest on Savings Earning Interest on Savings Interest is like a rental fee for using someone else’s money. Banks use the money in your savings account to lend to other people, so they pay you a rental fee, or interest.
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Simple Interest Simple Interest Simple interest is interest earned only on the money you deposited into your savings account, or the principal.
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Simple Interest Simple Interest The three main factors determining the amount of interest are:
• The amount of savings• The interest rate• Length of time of the account
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Simple Interest Simple Interest If you have a savings account that pays you 5 percent annual interest and $1,000 is in the account for the entire year, you will receive $50 in interest.
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Compound Interest Compound Interest Compound interest is interest earned on both the principal—the money you deposited in your savings account—and any interest you earned on it.
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Compound Interest Compound Interest Compound interest is usually earned daily, monthly, quarterly, or annually.
The more often interest is compounded, the more you make in extra interest.
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Figure30.2 THE POWER OF COMPOUND INTEREST
Compound interest makes your money grow faster when interest is left to accrue.
Which account earned more interest? What is the difference in the account totals after 15 years?
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Fast Review
1. Why do financial institutions pay interest on savings accounts?
2. What is the difference between simple interest and compound interest?
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Types of Savings Accounts Types of Savings Accounts The three basic types of savings accounts are:
• Traditional• Certificates of deposit• Money market
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Traditional Savings Account Traditional Savings Account One type of traditional account is a passbook savings account in which all of the deposits and withdrawals are recorded in a book that the depositor keeps.
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Traditional Savings Account Traditional Savings Account With the 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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Traditional Savings Account Traditional Savings Account The interest rate on traditional savings accounts is usually quite low.
Many banks charge a service fee if the savings account falls below a certain minimum balance.
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Certificate of Deposit Certificate of Deposit A certificate of deposit (CD), requires you to deposit a minimum amount of money in an account for a minimum period of time.
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Certificate of Deposit Certificate of Deposit There is a maturity date for a CD, which is when the money becomes available to you.
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Certificate of Deposit Certificate of Deposit The interest rate on a CD is higher than a regular savings account.
There is a penalty fee if you cash in the CD before the maturity date.
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Money Market Fund Money Market Fund A money market fund is a kind of mutual fund, or pool of money, put into a variety of short-term debt by business and government.
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Money Market Fund Money Market Fund Money market funds are offered by brokerage firms and financial institutions that buy and sell stocks and bonds.
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Money Market Fund Money Market Fund The interest rate on a money market fund varies from month to month.
An advantage is that you can withdraw your money at any time.
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Money Market Fund Money Market Fund The two disadvantages of a money market fund are:
• A high minimum balance• You can only write a limited number
of checks
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Money Market Deposit Account Money Market Deposit Account Banks, savings and loans, and credit unions have their own form of money market fund called a money market deposit account.
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Money Market Deposit Account Money Market Deposit Account One difference between the money market fund and the money market deposit account is that the federal government generally insures the money in a market deposit account.
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Graphic OrganizerTypes of Savings PlansTypes of Savings Plans
Graphic OrganizerGraphic Organizer
TRADITIONALSAVINGS
ACCOUNTS
TRADITIONALSAVINGS
ACCOUNTS
MONEYMARKET
ACCOUNTS
MONEYMARKET
ACCOUNTS
CERTIFICATESOF
DEPOSIT
CERTIFICATESOF
DEPOSIT
U.S.SAVINGSBONDS
U.S.SAVINGSBONDS
SAVINGSSAVINGS
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Introduction to Business, Savings Accounts Slide 38 of 52
Fast Review
1. What happens if you cash in a CD before the maturity date?
2. What is the difference between a money market fund and a money market deposit account?
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Introduction to Business, Savings Accounts Slide 39 of 52
Making an Ethical Decision
1. As a financial planner, would you advise your 67 year-old client to keep his money in secure savings accounts, or transfer his money to high-risk stocks?
2. What if your client was 87 years old?
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Insurance Against Loss Insurance Against Loss Banks, savings and loans, and credit unions all have insurance.
The Federal Deposit Insurance Corporation (FDIC), a government agency, insures bank accounts for up to $100,000.
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Insurance Against Loss Insurance Against Loss Money market funds offered by brokerage firms aren’t federally insured, but most brokerage firms have insurance on their accounts.
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Liquidity Liquidity Liquidity means the ability to quickly turn an investment into cash.
Savings accounts are highly liquid because you can easily withdraw cash from them.
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Inflation Risk Inflation Risk Inflation risk is the risk that the rate of inflation will increase more than the rate of interest on savings.
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Inflation Risk Inflation Risk The interest rates on most savings accounts increase with inflation.
The main risk is with CDs, where you are locked into an interest rate over a long period of time.
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Introduction to Business, Savings Accounts Slide 45 of 52
Costs of Savings Accounts Costs of Savings Accounts Some accounts charge a penalty fee for early withdrawal or if the account balance falls below a certain minimum.
Some accounts charge a fee for each deposit and withdrawal.
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Costs of Savings Accounts Costs of Savings Accounts You have to pay income tax on the interest you earn on savings accounts.
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Fast Review
1. What kinds of savings accounts doesn’t the FDIC insure?
2. In what ways can a savings account cost you money?
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What is the opportunity cost of carefully handling your CD collection?
continued
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If you charge interest on CDs you lend out to your friends, what can you do with the interest you earn?
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A music club says you can have 12 free CDs. First, you have to purchase 5 full-priced CDs. What is the maturity date of the free CDs?
continued
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Introduction to Business, Savings Accounts Slide 51 of 52
When you decide to sell your CD collection for cash, is this an example of liquidity or inflation?
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