Savings Accounts Chapter 30 10262020 1 Savings is

Savings Accounts Chapter 30 10/26/2020 1

Savings is money put aside for future use. A personal budget is not complete without a plan for regular savings n Save for: Major purchases n Emergencies n Retirement n 10/26/2020 2

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 10/26/2020 3

Interest n Earn interest on savings accounts n How interest is calculated: Simple Interest n Compound Interest n 10/26/2020 4

Simple interest Interest earned only on the money you deposited into your savings account. n 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 n 10/26/2020 5

Compound interest Interest earned on both the deposit and interest you earned on it. n Interest on interest n n Which is better? Simple interest or compound interest? n compound 10/26/2020 6

Types of Savings Accounts Traditional Savings Accounts n Certificate of Deposit n Money Market Fund n Money Market Deposit Account n 10/26/2020 7

Traditional Savings Accounts n Passbook savings account n n All of the deposits and withdrawals are recorded in a book that the depositor keeps Statement savings account n All of the activity in the account is recorded on a statement that is sent to the person who has the account 10/26/2020 8

n Interest rates on traditional savings accounts are usually quite low 10/26/2020 9

Certificate of Deposit Requires you to deposit a minimum amount of money in an account for a minimum period of time n CD has a maturity date which is when the money becomes available to you. n Penalty for early withdrawal n 10/26/2020 10

Money Market Fund n n n 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 10/26/2020 11

Advantages and Disadvantages of Savings Accounts n Federal Deposit Insurance Corporation (FDIC) - A government agency that insures bank accounts Bank accounts are insured for up to $100, 000 n Money market accounts offered by brokerage firms are not federally insured n 10/26/2020 12

n 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 n Savings accounts are highly liquid because you can easily withdraw cash from them n Even CDs which have a penalty for early withdrawal are considered liquid. n 10/26/2020 13

n Inflation 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 n Main risk is with CDs, where you are locked into an interest rate over a long period of time 10/26/2020 14

n Costs associated with having a savings account Penalty fee for early withdrawal n Fee if account balance falls below a minimum n Fees charged for each deposit and each withdrawal n Interest earned is taxable n 10/26/2020 15

Book Work (Take the worksheet to finish this) Fast Review Page 487 #’s 1 -2 n Fast Review Page 490 #’s 1 -2 n Fast Review Page 492 #’s 1 -2 n Fast Review Page 493 #’s 1 -2 n Using Business Key Words Page 494 #’s 1 -13 n 10/26/2020 16