The Role of Savings

Benefits of SavingsChapter 12

Benefits of Savings

· Savings: setting aside present income for future use

· Savings can help in two ways:· 1. It allows you to accumulate

money for future use

Benefits of Savings

· 2.Money can be put to work for you by earning interest. Even small amounts saved now will benefit you later

· Savings is closely related to another financial principle

Benefits of Savings

· Investing: committing money for the purpose of making a profit over time.

· Unlike savings it requires you to take risks with your money

· However investing has the potential to earn more.

Benefits of Savings

· Reasons for saving:· 1. Emergencies- no matter how

careful you are, emergencies do happen

· 2. Recurring expenses: bills, birthdays, anything that recurs on a regular basis

Benefits of Savings

· 3. Future Purchases: saving for something you want but do not have the money at present.

· Saving means delaying purchases, many do not wait and use credit

Benefits of Savings

· This can lead to increased spending for three reasons

· 1. Using credit means you may incur finance charges, which increase the cost of the item

Benefits of Savings· 2. You lose the income that

could be earned by keeping cash in your savings account

· 3. While credit makes it easy to buy, saving will give you time to decide if the purchase is right for you.

Benefits of Savings

· Financial Goals: can be different at different stages of your life

· College, marriage, families, are just a few examples

· One that also must be kept in mind is >>>>

Benefits of Savings

· Retirement: you are expected to live well beyond your retirement age. To live comfortably you must prepare and plan ahead

· To do this you will need a plan

Benefits of Savings

· Savings Plan: a step by step approach for putting money aside in savings

Benefits of Savings

· Steps to Saving:· 1. Decide what you are saving

for· 2. Set a specific goal- amount

of money and time frame

Benefits of Savings

· 3. Break your long term goals into short term goal

· Ex: $1000 in 6 months, you must save $42 a week, is that realistic?

· 4. Save regularly and consistently

Benefits of Savings

· Savings amounts must be realistic. Watch your

· Discretionary income: the amount available to spend after taxes and other obligations are paid. (rent, utilities etc)

Benefits of Savings

· Ideas for saving:· 1. Pay yourself first· 2. Automatic savings plan· 3. Direct deposit· 4. Payroll deduction

Benefits of Savings

· 5. Put your money to work for you- in other words put it into an interest bearing account

· 6. Keep savings goal in mind-find ways to remind yourself to keep you motivated toward reaching your goals

Benefits of Savings

· Most importantly!!!

· Stick to your plan and follow through with it

Benefits of Savings

· Accounts can differ in how interest calculations are made Two basic methods

· 1. Simple interest-is interest calculated only on the money you have deposited, not on prior interest earned

Benefits of Savings

· 2. Compound interest- is interest calculated on both the deposits made and prior interest earned. In other words interest is paid on the interest

· Most banks use this method

Benefits of Savings

· APY= Annual percentage yield-this figure tell the consumer the actual annual rate at which interest is earned

Benefits of Savings

· Rule of 72: is a quick way to evaluate an interest rate

· This can be done by dividing 72 by the interest rate. ( APY when interest is compounded)

· The answer is the approximate number of years to double your money

Benefits of Savings

· When choosing a savings plan we must look at options, safety, risk, fees etc. ALSO

· Liquidity-the ease with which savings and investments can be turned into cash

Benefits of Savings· Things to know:· Terms-a period of time which

money must be kept on deposit· Money Market Accounts-deposits

are invested by the bank Higher yields, more restrictions

Benefits of Savings

· Certificates of Deposits-CD

· A certificate issued by bank to indicate that money has been deposited for a certain term

· Will also show interest rate, amount deposited, length of term

Benefits of Savings

· Savings Bonds· Nontransferable debt certificates

issued by the U.S. Treasury· You are loaning money to the

government· Series EE can be purchased for half

the face value