HOW TO FINANCE YOUR LIFE

Financial Literacy

Savings Accounts

Saving – The process of setting money aside for a future date instead of spending it today.

Not intended to be used for every day purchases

Intended to be a safe place to keep money to be used at a later date for a major purchase.

Gives a little EXTRA return on money deposited

Savings Accounts

The goal of saving is to provide funds for: Emergencies Short-term goals Investments

Save first, then invest with a sufficient amount of $.

Savings Accounts

Investing – The process of setting money aside to increase wealth over time and accumulate funds for long-term financial goals such as retirement.

Have you ever tried to save up money for something?

Savings Accounts

Deposit – Money you put into your savings account

Withdrawal – Money taken out of your saving account

Savings Accounts

Interest – Money paid back to you by the bank for being able to use your money

Interest is that something EXTRA, that is a larger benefit than a checking account.

Interest is a result of the banks using your money while it is in your account

Savings Accounts

The bank pays interest on the amount of money in your savings account

Interest Rate – percentage you are paid for your money.

Rates may vary from month to monthInterest can be paid:

Annually– once a year 12% Semi-annually – twice a year 6% Monthly – once a month 1% Quarterly – four times a year 3%

Savings Accounts

Account Balance – Total amount of money that is in your account

Account Balance = Amount deposited + Interest payment

Interest Payment = Interest Rate x Beginning Account Balance

Beginning Account Balance = Ending account balance from the previous month

Savings Accounts

If you had $1000 in a savings account. The annual interest rate is 7%Compounded Monthly

What is the monthly Interest Payment?What is the Account Balance?

Bell Ringer

1. If you had $1000 in a savings account with an annual interest rate of 12% compounded monthly.

What is the monthly Interest Payment?What is the Account Balance?

2. If you had $1800 in a savings account with an annual interest rate of 7% compounded quarterly.

What is the Interest Payment?What is the Account Balance?

3. What is the monthly interest rate if the annual interest rate is 24%

Savings Accounts

Compounding of Interest – When money is earned on the total amount in the account. Including the initial deposit and interest already

credited to the account

The more often the interest is compounded, the more money is gained through interest payments

Savings Accounts

You have $100 in your savings account at the beginning of the month. The bank pays you 6% interest on this account each year; interest is paid each month. Assuming you make no deposits or withdrawals over the next month, how much interest will you earn during the month? Monthly rate = 6/12 = 0.5% = .005 Beginning Balance = $100 Interest Payment = $100 x .005 = $0.50 Account Balance = $100 + $0.50 = $100.50

Savings Account

How much money will be gained after Month 2, 3…

Month 2 Beginning Balance = $100.50 Monthly rate = 6/12 = 0.5% = .005 Interest Pmt = $100.50 x .005 = $0.51 Account Balance = $100.50 + $0.51 = $101.01

Month 3 Beginning Balance = $101.01 Interest Pmt = $101.01 x .005 = $0.51 Account Balance = $101.01 + $0.51 = $101.52

Savings Account

You have the opportunity to put your money in one of two savings accounts. $100 dollars in each account. Account 1 compounds interest monthly at a rate of 4%. Account 2 compounds annually at a rate of 4%.

Account 1 Beginning Balance = $100 Interest Rate = Monthly = 4/12 = .33% = .0033 Interest Pmt = $100 x .0033 = $0.33 Account Balance = $100.33

Account 2 Beginning Balance = $100 Interest Rate = annual = 4% = .04 Interest Pmt = $100 x .04 = $4 Account Balance = $104

Savings Account

Account 1 will compound throughout the year.

We will start Microsoft Excel in February.

Savings Accounts

Future Value – how much a set amount of money will be worth in the future

Think back to interest payments $1000 today is worth $1040 in one year with 4%

interest compounded annually.

FV = PV x interest rate FV = $1000 x .04 FV = $1040

Savings Accounts

Present Value – The value of money right now, today $1040 in one year is still worth $1000 today at a rate

of 4% annually.

PV = FV / rate PV = $1040 / .04 PV = $1000

Checking Accounts

Learning to maintain a checking account is a necessary skill to master before living independently.

Checking Accounts are meant to be a place to keep money for short times before it is spent.

Typically banks offer little to NO interest on checking accounts.

Checking Accounts

Checks – Written order specifying the amount of money to be paid and the name of the person or company who should receive the funds.

Should be written in pen so no changes can be made

Checking Accounts

Checks may be written to pay for: Utilities Rent Mortgage Payments Food Clothing Other expenses

Each box of checks will be deducted from the checking account total.

Checking Accounts

Checking Account Balance may be recorded on the check register.

May be changed in two ways; Increase – Deposit/Credit Decrease – Debit

Deposit/Credit is money put into your account Debit is a withdrawal from your account

Checking Accounts

Check Register

For credits/deposits Record the date and amount of deposits

For checks/debits Record the date, check number, payee, and amount of

each check written

Checking Account

You should balance your checkbook frequently.

Balance – compare the amount of money in an account, to the net of credits and debits against the account at that time.

Account Balance = Start of month account balance + Total amt of

deposits made during month – Total amt of checks/debits during month.

Checking Accounts

At the end of the month, the bank will send you a banking statement, which includes the:

statement balance – how much money you have in your checking account as of the statement date

All debits and credits made before statement date

Checking Account

If your beginning balance was $1000 dollars.You wrote 3 checks for $100 each.You wrote 4 checks for $50 each.You deposited a check for $500 into your

account.

What is your ending balance?

Checking Accounts

Beginning Balance = $1000$1000 - $100(3) - $50(4) +$500$1000 - $300 - $200 +500 = $1000

Ending Balance = $1000

Checking Accounts

Instead of writing a check, people may prefer to use a debit card : A card that allows the user to withdraw money from a

bank account to get cash or make a purchase

When using a debit card, you will be asked to enter a Personal Identification Number (PIN) Four digit code required to use the debit card to verify

identity

Checking Accounts

Electronic Funds Transfer (EFT) The movement of funds using the computer systems,

telephones, or electronic terminals

Examples Direct Deposit - Automatic transfer of your paycheck

from your employers account to your checking account.

Automatic payment of an ongoing monthly bill such as power or cable bill

Checking Accounts

Online Banking Allows account holders to access their account

information, view transaction history, and perform banking transactions via the internet

62 % of people bank online.

Advantages Available 24 hrs a day, 7 days a week regardless of bank

hours. No checks have to be written Transactions are automatic Service is free to account holders

Checking Accounts

What will happen when you write a check and there is not enough money in your account to cover it? Online banking could save you from forgetting a

transaction and overdrawing.

What will be the result?

Checking Accounts

Overdrawn Having a negative balance in your account resulting in

a BOUNCED CHECK Check written without available funds to cover the

amount

Overdraft Penalty A fee to cover the cost of processing your bounced

check Commonly $20-$25 at most banks

Checking Accounts

Overdraft Protection Arrangement with the bank to cover checks so they will

not bounce

Examples: Automatically transferring money from another account at

the same bank to cover the short account Setting a specific limit to overdraft to Lending you the amount of money you have overdrafted

In all of these cases, the bank may still charge a fee for this service.

Checking Accounts

Read all the fine print when selecting a checking account

Look out for accounts that have Hidden fees a high minimum account balance

The amount of money you must keep in the account to avoid service charges or qualify for interest on an interest bearing account An account that earns interest Usually a high minimum account balance and a low

interest rate

Checking Accounts

Look for accounts that offer: Free checks ATM fee reimbursement Online Bill Pay Email Statements Overdraft Protection Special Account starters for Students

Monday Assignment

Check register

Figure interest payments with annual payments compounded monthly