Chapter 10 Saving for the Future 10 1

Chapter 10 Saving for the Future 10. 1 Growing Money: Why, Where, and How 10. 2 Savings Options, Features, and Plans © 2010 South-Western, Cengage Learning

Lesson 10. 1 Growing Money: Why, Where, and How GOALS n Describe different purposes of saving. n Explain how money grows through compounding. n List and describe the financial institutions where you can save. Chapter 10 © 2010 South-Western, Cengage Learning 2

Why You Should Save n The best reason to save money is to provide for future needs, both expected and unexpected. n Saving regularly will help you meet your short-term and long-term needs. Chapter 10 © 2010 South-Western, Cengage Learning 3

Short-term Needs n Short-term needs are expenses beyond your regular monthly items. n Usually you will have to pay for these things out of savings. n Examples of short-term needs include the following: n Emergencies n Vacations n Social events n Repairs n Major purchases Chapter 10 © 2010 South-Western, Cengage Learning 4

Long-term Needs n Long-term needs are expenses that are costly and require years of planning and saving. n Examples: n Home ownership n Education n Retirement n Investing Chapter 10 © 2010 South-Western, Cengage Learning 5

Financial Security n Peace of mind comes from knowing that when needs arise, you will have adequate money to pay for them. n The amount of money you save depends on: n The amount of your discretionary or disposable income n The importance you attach to savings n Your anticipated needs and wants n Your willpower Chapter 10 © 2010 South-Western, Cengage Learning 6

How Money Grows n The amount of money you deposit into a savings account is called the principal. n For the use of your money, the financial institution pays you money called interest. n Interest represents earnings on principal. n As principal and interest grow, more interest accumulates. n This is known as compound interest, or interest paid on the original principal plus accumulated interest. Chapter 10 © 2010 South-Western, Cengage Learning 7

Annual Percentage Yield (APY) n Annual percentage yield (APY) is the actual interest rate an account pays, stated on a yearly basis with the compounding included. n Because all financial institutions must calculate APY the same way, you can use APY to easily compare the yields on different accounts. Chapter 10 © 2010 South-Western, Cengage Learning 8

Compounding Interest Annually Year 1 2 3 Beginning Balance $100. 00 $106. 00 $112. 36 Interest Earned (6%) $6. 00 $6. 36 $6. 74 Ending Balance $106. 00 $112. 36 $119. 10 n The Year 1 ending balance is the Year 2 beginning balance. n The Year 2 ending balance is the Year 3 beginning balance. n The 6% interest rate stays the same, but the interest earned increases each year. Chapter 10 © 2010 South-Western, Cengage Learning 9

Where to Save n Commercial banks n Savings and loan associations n Credit unions n Brokerage firms n Online accounts Chapter 10 © 2010 South-Western, Cengage Learning 10

Lesson 10. 2 Savings Options, Features, and Plans GOALS n Explain the features and purposes of different savings options. n Discuss factors that influence selection of a savings plan. n Describe ways to save regularly. Chapter 10 © 2010 South-Western, Cengage Learning 11

Savings Options n Once you have decided to establish a savings program, you need to know about the different savings options available to you. n You may want to deposit money in several types of accounts, because each can contribute to your overall plan in different ways. Chapter 10 © 2010 South-Western, Cengage Learning 12

Regular Savings Account n A regular savings account has a major advantage—high liquidity. n Liquidity is a measure of how quickly you can get your cash without loss of value. n A regular savings account is said to be very liquid because you can withdraw your money at any time without penalty. n The tradeoff for high liquidity, however, is a lower interest rate. Chapter 10 © 2010 South-Western, Cengage Learning 13

Certificate of Deposit n A certificate of deposit (CD), or time deposit, is a deposit that earns a fixed interest rate for a specified length of time. n A CD requires a minimum deposit. n You must leave the money in the CD for the full time period. n If you take out any part of your money early, you will pay an early withdrawal penalty. n A CD has a set maturity date, which is the date on which an investment becomes due for payment. Chapter 10 © 2010 South-Western, Cengage Learning 14

Money Market Account n A money market account is a type of savings account that offers a more competitive interest rate than a regular savings account. n There are two different kinds of money market accounts: n Money market deposit account n Money market fund n On average, money market funds will pay a higher interest rate than money market deposit accounts. Chapter 10 © 2010 South-Western, Cengage Learning 15

Selecting a Savings Plan n Liquidity n Safety n Convenience n Interest-earning potential (yield) n Fees and restrictions Chapter 10 © 2010 South-Western, Cengage Learning 16

Liquidity n Liquidity is how quickly you can turn savings into cash when you want it. n The need for liquidity will vary, based on your age, health, family situation, and overall wealth. Chapter 10 © 2010 South-Western, Cengage Learning 17

Safety n Safety of principal means that you are guaranteed not to lose your savings deposit, even if the bank or other financial institution fails and goes out of business. n Most financial institutions are insured by a government agency, the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA). n Deposits in banks, no matter what type, are almost always safer than investments in the stock market. Chapter 10 © 2010 South-Western, Cengage Learning 18

Convenience n Locations n Services offered Chapter 10 © 2010 South-Western, Cengage Learning 19

Interest-Earning Potential (Yield) n You want to earn as much interest as you can on your deposit, while maintaining the degree of liquidity, safety, and convenience you want. n Shop around for the best APY in your area for the type of account you want. Chapter 10 © 2010 South-Western, Cengage Learning 20

Fees and Restrictions n Different accounts and institutions have different rules. n Before you open an account, be sure to understand the withdrawal restrictions, minimum balances, service charges, fees, and any other requirements. Chapter 10 © 2010 South-Western, Cengage Learning 21

Saving Regularly n Saving regularly will help you meet all of your financial goals. n It is important not just to save but to save regularly. n Over time, and with compounding interest, your savings can grow into a substantial sum. n There are ways to make regular saving easier, including direct deposits and payroll deductions. Chapter 10 © 2010 South-Western, Cengage Learning 22

Direct Deposit n With direct deposit, your net pay is deposited electronically into your bank account. n You receive a nonnegotiable copy of your check and stub, notifying you of the amount deposited directly into your account n You can have your automatic deposit split between accounts, with some going into savings and some going into checking to cover your bills. Chapter 10 © 2010 South-Western, Cengage Learning 23

Automatic Deductions n Automatic deductions represent money you have authorized your bank or other organization to move from one account to another at regular intervals. n With a payroll savings plan, you authorize your employer to make automatic deductions from your paycheck each pay period. Chapter 10 © 2010 South-Western, Cengage Learning 24

Collecting Coins and Cash n Some people find it convenient to set aside their spare change and money left over each day or week. n Setting aside small amounts of change each day will lead to large sums over time. n It’s surprising how pennies can add up to make dollars! Chapter 10 © 2010 South-Western, Cengage Learning 25

Compounding with Additional Deposits Year 1 2 3 4 Beginning Balance $0. 00 $105. 00 $215. 25 $331. 01 Deposit $100. 00 Interest Earned (5%) $5. 00 $10. 25 $15. 76 $21. 55 Ending Balance $105. 00 $215. 25 $331. 01 $452. 56 $105. 00 + $100. 00 = $205. 00 × 0. 05 = $10. 25 $205. 00 + 10. 25 = $215. 25 Chapter 10 © 2010 South-Western, Cengage Learning 26