Saving for the Future

10.1 Growing Money: Why, Where,and How

10.2 Savings Options, Features,and Plans

CH10

Chapter 10

Lesson 10.1

Growing Money:Why, Where, and How

GOALS

Describe different purposes of saving.

Explain how money grows through compounding.

List and describe the financial institutions where you can save.

Chapter 10

Why You Should SaveThe best reason to save money is to

provide for future needs, both expected and unexpected.

Saving regularly will help you meet your short-term and long-term needs.

THREE REASONS TO SAVE

1.EMERGENCY

2.Large Purchases

3.Wealth Building

EMERGENCY FUND

“Rainy Day Fund” Money (saved) to cover unexpected emergencies Unemployment, Sickness (Deductible), Accident,

Repairs to car/appliances, or death in the family Should save 3 to 6 months of expenses HIGH SCHOOL AGE EMERGENCY FUND = $500

Money is far enough away from your “spending money”… but close enough to get it in case of emergency

BEST SPOT for this = Savings Account

LiquidityLiquidity is a measure of how quickly you

can get your cash without loss of valueUsually low interest rateBut, NO Penalty for taking your cash when you

NEED IT!The need for liquidity will vary, based on your

age, health, family situation, and overall wealth.

Should your EMERGENCY Fund be “liquid”?

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Short-term NeedsShort-term needs are expenses

beyond your regular monthly items.Usually you will have to pay for these

things out of savings.Examples of short-term needs include

the following:EmergenciesVacationsSocial eventsRepairsMajor purchases

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Long-term NeedsLong-term needs are expenses

that are costly and require years of planning and saving.Typically over 5 years

Examples of LONG TERM SAVINGS GOALS

Home ownership (10 – 20 % of TOTAL house price for Down Payment)This will lower your monthly payment

RETIREMENT“If you could do anything you wanted all day long

and you didn’t have to work…what would you do?

The total amount of money you will need to maintain your standard of living without working.

INVESTING: Buying Stocks, bonds, mutual funds real-estate,

to grow your wealth. (Calculated Risk)

Saving for CollegeEducation/COLLEGE71% of college grads have student loan debt and the average for 4 year degree is over $30,000

Work: Part time during college. Pay as you goADVANTAGE? DISADVANTAGE?Less Loans/Less Debt Takes longer to finish

Scholarships: Free Money paid directly to college you attend (You don’t pay this back!!!!)More than $4 BILLION in unclaimed scholarships

per yearNot academic or athletic scholarships

Grants/Work-studyMoney from GOVT you do not have to pay back (Must

meet criteria)

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Financial Security

Peace of mind comes from knowing that when needs arise, you will have adequate money to pay for them.

The amount of money you save depends on:The amount of your discretionary or disposable

incomeThe importance you attach to savingsYour anticipated needs and wantsYour willpower

READING ASSIGNMENTRead Chapter 10 Section 1 (Page 222-225)

Define/outline remaining concepts

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How Money GrowsThe amount of money you deposit into a

savings account is called the principal.

For the use of your money, the financial institution pays you money called interest.

Interest represents earnings on principal. As principal and interest grow, more interest

accumulates. This is known as compound interest, or interest

paid on the original principal plus accumulated interest.

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Annual Percentage Yield (APY)

Annual percentage yield (APY) is the actual interest rate an account pays, stated on a yearly basis with the compounding included.

Because all financial institutions must calculate APY the same way, you can use APY to easily compare the yields on different accounts.

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Compounding Interest Annually

YearBeginning Balance

InterestEarned (6%)

EndingBalance

1 $100.00 $6.00 $106.00

2 $106.00 $6.36 $112.36

3 $112.36 $6.74 $119.10

The Year 1 ending balance is the Year 2 beginning balance.

The Year 2 ending balance is the Year 3 beginning balance.

The 6% interest rate stays the same, but the interest earned increases each year. SLI

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Where to SaveCommercial banks

Savings banks

Savings and loan associations

Credit unions

Brokerage firms

Online accounts

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Lesson 10.2

Savings Options, Features,and Plans

GOALS

Explain the features and purposes of different savings options.

Discuss factors that influence selection of a savings plan.

Describe ways to save regularly.

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Savings OptionsOnce you have decided to establish a savings

program, you need to know about the different savings options available to you.

You may want to deposit money in several types of accounts, because each can contribute to your overall plan in different ways.

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Regular Savings AccountA regular savings account has a major

advantage—high liquidity. Liquidity is a measure of how quickly you can get

your cash without loss of value.A regular savings account is said to be very liquid

because you can withdraw your money at any time without penalty.

The tradeoff for high liquidity, however, is a lower interest rate.

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Certificate of DepositA certificate of deposit (CD), or time

deposit, is a deposit that earns a fixed interest rate for a specified length of time.

A CD requires a minimum deposit.

You must leave the money in the CD for the full time period. If you take out any part of your money early, you

will pay an early withdrawal penalty.A CD has a set maturity date, which is the date

on which an investment becomes due for payment. SLI

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Chapter 10

Money Market AccountA money market account is a type of

savings account that offers a more competitive interest rate than a regular savings account.

There are two different kinds of money market accounts: Money market deposit account Money market fund

On average, money market funds will pay a higher interest rate than money market deposit accounts. SLI

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Selecting a Savings PlanLiquidity

Safety

Convenience

Interest-earning potential (yield)

Fees and restrictions

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LiquidityLiquidity is how quickly you can turn savings

into cash when you want it.

The need for liquidity will vary, based on your age, health, family situation, and overall wealth.

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SafetySafety 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.

Most financial institutions are insured by a government agency, the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA).

Deposits in banks, no matter what type, are almost always safer than investments in the stock market. SLI

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ConvenienceLocations

Services offered

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Interest-Earning Potential (Yield)

You want to earn as much interest as you can on your deposit, while maintaining the degree of liquidity, safety, and convenience you want.

Shop around for the best APY in your area for the type of account you want.

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Fees and RestrictionsDifferent accounts and institutions have

different rules.

Before you open an account, be sure to understand the withdrawal restrictions, minimum balances, service charges, fees, and any other requirements.

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Saving RegularlySaving regularly will help you meet all of

your financial goals.

It is important not just to save but to save regularly.

Over time, and with compounding interest, your savings can grow into a substantial sum.

There are ways to make regular saving easier, including direct deposits and payroll deductions. SLI

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Direct DepositWith direct deposit, your net pay is

deposited electronically into your bank account.

You receive a nonnegotiable copy of your check and stub, notifying you of the amount deposited directly into your account

You can have your automatic deposit split between accounts, with some going into savings and some going into checking to cover your bills. SLI

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Automatic DeductionsAutomatic deductions represent money you

have authorized your bank or other organization to move from one account to another at regular intervals.

With a payroll savings plan, you authorize your employer to make automatic deductions from your paycheck each pay period.

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Collecting Coins and CashSome people find it convenient to set aside their

spare change and money left over each day or week.

Setting aside small amounts of change each day will lead to large sums over time.

It’s surprising how pennies can add up to make dollars!

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Compounding with Additional Deposits

YearBeginning Balance Deposit

InterestEarned (5%)

EndingBalance

1 $0.00 $100.00 $5.00 $105.00

2 $105.00 $100.00 $10.25 $215.25

3 $215.25 $100.00 $15.76 $331.01

4 $331.01 $100.00 $21.55 $452.56

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$205.00 + 10.25 = $215.25

$205.00 × 0.05 = $10.25

$105.00 + $100.00 = $205.00