Savings and Investing Why Save 8.1. What do you dream of achieving in your lives? What do you dream of achieving in your lives? How do you think you will

Savings and InvestingSavings and Investing

Why SaveWhy Save8.18.1

•What do you dream of What do you dream of achieving in your lives? achieving in your lives?

•How do you think you will How do you think you will make those dreams come make those dreams come true?true?

•What is your definition of What is your definition of discipline? Is this a good or discipline? Is this a good or bad thing?bad thing?

•What are three of your What are three of your financial goals?financial goals?

Benefits of SavingBenefits of Saving

• Why is saving considered a trade-off?Why is saving considered a trade-off?– When you save, you trade spending now When you save, you trade spending now

for the ability to spend in the future!for the ability to spend in the future!– Some future expenses are anticipated Some future expenses are anticipated – Some expenses aren’t foreseenSome expenses aren’t foreseen


• Save for the unexpectedSave for the unexpected– AccidentsAccidents– Lost and stolen itemsLost and stolen items– RepairsRepairs– Lose your job?Lose your job?


• Save for opportunitiesSave for opportunities– Take advantage of unexpected Take advantage of unexpected

opportunities that may arise!opportunities that may arise!

• Save for major purchasesSave for major purchases– Start saving now!Start saving now!– Home theater, car, houseHome theater, car, house


• Save for flexibilitySave for flexibility– Flexibility with life choicesFlexibility with life choices– Choose to quit a job you don’t likeChoose to quit a job you don’t like– Rent an apartment you likeRent an apartment you like

• Save to achieve your goalsSave to achieve your goals– Long terms goals involve large amounts Long terms goals involve large amounts

of moneyof money

Saving StrategiesSaving Strategies

• Pay yourself firstPay yourself first– Deposit some of your paycheck as you Deposit some of your paycheck as you

pay your billspay your bills– Consider a “fixed expense!”Consider a “fixed expense!”– Leave it in the bankLeave it in the bank


• Save by the numbersSave by the numbers– If you don’t earn the same amount from If you don’t earn the same amount from

week to weekweek to week•Save a certain percentage of your take-Save a certain percentage of your take-

home pay (net pay) each weekhome pay (net pay) each week

•No matter what!No matter what!


• Reward yourselfReward yourself– Every once in a whileEvery once in a while– Small rewardsSmall rewards

• Saving and self-controlSaving and self-control– Remember your goals!Remember your goals!


• Automatic savingAutomatic saving– Payroll deductionsPayroll deductions

•Automatically authorize employer to deduct Automatically authorize employer to deduct a specified amount from your paychecka specified amount from your paycheck

•Deposited into savings or checking accountDeposited into savings or checking account


• Automatic savingAutomatic saving– Checking account transfersChecking account transfers

•Authorize bank to transfer a certain amount Authorize bank to transfer a certain amount each month from checking to savingseach month from checking to savings

Savings Institutions and Savings Institutions and AccountsAccounts

8.28.2

Savings InstitutionsSavings Institutions

• FourFour basic types of financial basic types of financial businesses for depositing your businesses for depositing your savingssavings– Commercial banksCommercial banks– Savings banksSavings banks– Savings and loan associationsSavings and loan associations– Credit unionsCredit unions


• Commercial banksCommercial banks– Probably what you think of when you think Probably what you think of when you think

“bank”“bank”– Serves individuals and businessesServes individuals and businesses

• Wide variety of accounts, loans, other financial Wide variety of accounts, loans, other financial servicesservices

• Offers savings and checking accounts, consumer and Offers savings and checking accounts, consumer and business loans, investment servicesbusiness loans, investment services

– Largest savings institutions in the U.S.Largest savings institutions in the U.S.– Main source of loans for businessesMain source of loans for businesses


• Commercial banksCommercial banks– Harris BankHarris Bank– Fifth-Third BankFifth-Third Bank– LasalleLasalle Bank Bank– Charter National BankCharter National Bank

http://www4.harrisbank.com/

https://www.53.com/wps/portal/!ut/p/kcxml/04_Sj9SPykssy0xPLMnMz0vM0Y_QjzKLN4t3NwDJgFhuAfqRaCI-qCIG8Y5wgSB9b31fj_zcVP0A_YLc0NCIckdFAMMvuO0!/delta/base64xml/L3dJdyEvd0ZNQUFzQUMvNElVRS82XzZfRzY!

http://www.lasallebank.com/about/about_us.html

http://www.lasallebank.com/about/about_us.html

http://www.charternationalbank.com/


• Savings banksSavings banks– Owned by their depositorsOwned by their depositors– Depositors earn dividends instead of interestDepositors earn dividends instead of interest

• Dividend is a share of the company’s profitsDividend is a share of the company’s profits

• Amount of dividend depends on the size of your depositAmount of dividend depends on the size of your deposit

• Earning dividends is just like earning interest in a Earning dividends is just like earning interest in a commercial bank!commercial bank!

– Most exist in the northeastMost exist in the northeast– Originally established to loan small amounts of Originally established to loan small amounts of

money to consumersmoney to consumers


• Savings and loan associationsSavings and loan associations– Became popular during the Great DepressionBecame popular during the Great Depression

• Commercial banks lost money on consumer loans, so Commercial banks lost money on consumer loans, so they began to specialize in business loansthey began to specialize in business loans

• Consumers found it difficult to get financial services Consumers found it difficult to get financial services from commercial banksfrom commercial banks

• Consumers turned to savings and loan associationsConsumers turned to savings and loan associations

– Specialize in lending money to consumers to Specialize in lending money to consumers to buy homesbuy homes

– Owned by depositorsOwned by depositors


• Savings and loan associationsSavings and loan associations– Citizens Savings and Loan AssociationCitizens Savings and Loan Association– Yakima Federal Savings and Loan AssociYakima Federal Savings and Loan Associ

ationation– First Federal Savings and Loan AssociatiFirst Federal Savings and Loan Associati

onon

http://www.citizensfsb.com/

http://www.yakimafed.com/

http://www.yakimafed.com/

http://www.ffpahomebankingonline.com/mission.html

http://www.ffpahomebankingonline.com/mission.html


• Credit UnionsCredit Unions– Offer memberships to people who share a Offer memberships to people who share a

common bondcommon bond•Profession, company, church, labor unionProfession, company, church, labor union

– Not for profit!Not for profit!•Exist to provide saving and lending services Exist to provide saving and lending services

to membersto members

– Usually pay higher interest to depositorsUsually pay higher interest to depositors– Usually charge lower interest to Usually charge lower interest to

borrowersborrowers


• Credit unionsCredit unions– Premier Credit UnionPremier Credit Union– State Employees’ Credit UnionState Employees’ Credit Union– Pentagon Federal Credit UnionPentagon Federal Credit Union

http://www.mycu.org/

http://www.ncsecu.org/

https://www.penfed.org/index.asp


• Deposit insuranceDeposit insurance– Financial institutions can fail—just like Financial institutions can fail—just like

other businessesother businesses– Savings institutions are insured by federal Savings institutions are insured by federal

agenciesagencies– FDIC: Federal Deposit Insurance CompanyFDIC: Federal Deposit Insurance Company– SAIF: Saving Association Insurance FundSAIF: Saving Association Insurance Fund– NCUSIF: National Credit Union Share NCUSIF: National Credit Union Share

Insurance FundInsurance Fund

Savings AccountsSavings Accounts

• Savings accountsSavings accounts– Offered by any savings institutionOffered by any savings institution– Deposit moneyDeposit money– Earn interest on your depositsEarn interest on your deposits– Withdraw your money at any timeWithdraw your money at any time

• Interest ratesInterest rates– The higher the balance, the higher the The higher the balance, the higher the

interest rate!interest rate!

Saving OptionsSaving Options

8.38.3

CD’sCD’s Money Money MarketMarket

Corporate Corporate BondsBonds

Government Government BondsBonds

Stocks and Stocks and Mutual FundsMutual Funds

Minimum Minimum LengthLength

Yes – months to Yes – months to years (specified years (specified period of time)period of time)

NoNo

(Flexible)(Flexible)Yes – 1 to 30 Yes – 1 to 30

yearsyearsYes – 5 yearsYes – 5 years NoNo

Initial Initial DepositDeposit

Minimum Minimum amount. Larger amount. Larger than Savings than Savings

Account.Account.

Usually $1,000Usually $1,000

$1,000 or more$1,000 or more Yes – Lending Yes – Lending money to a money to a

specific specific corporation for corporation for

a period of time. a period of time. Usually issued Usually issued

in $1,000 & in $1,000 & $5,000$5,000

Yes – Lending Yes – Lending money to money to

government for government for a period of time. a period of time. Usually issued Usually issued in $25 - $5,000in $25 - $5,000

—1/2 of face —1/2 of face value.value.

Mutual Funds Mutual Funds $500 - $10,000$500 - $10,000

InterestInterest FixedFixed - Higher - Higher than Savingsthan Savings

Longer the CD, Longer the CD, higher the ratehigher the rate

Good & BadGood & Bad

Based on Based on market. market.

Higher than Higher than savings, but, savings, but,

lower than CD’slower than CD’s

Fixed interest Fixed interest rate –Stated on rate –Stated on Bond, generally Bond, generally semiannually. semiannually. Usually higher Usually higher

than CD’sthan CD’s

Fixed interest Fixed interest rate – generally rate – generally semiannually. semiannually. Usually higher Usually higher

than CD’s. than CD’s. Lower than Lower than

corporate bondscorporate bonds

Return depends Return depends on the marketon the market

InsuredInsured Yes – Most up to Yes – Most up to $100,000$100,000

Yes – Up to Yes – Up to $100,000$100,000

NoNo Backed by Backed by government. government.

Almost risk free.Almost risk free.

NoNo

PenaltiesPenalties Yes – Yes – Substantial fine Substantial fine

for early for early withdrawalwithdrawal

Yes – Yes – Transaction, Transaction,

below minimum below minimum balance, Not for balance, Not for

withdrawalwithdrawal

No – You can No – You can sell it to another sell it to another

investor investor anytimeanytime

3 months 3 months interest if interest if

cashed before 5 cashed before 5 years.years.

NoNo

RiskRisk SafeSafe SafeSafe Can VaryCan Vary SafeSafe Can vary – High Can vary – High RiskRisk

NotesNotes Longer the time, Longer the time, the higher the the higher the interest rateinterest rate

Guaranteed rate Guaranteed rate of return for the of return for the

time of CDtime of CD

Rates vary, Rates vary, banks make banks make short term short term

investmentsinvestments

LiquidLiquid

Bonds are Bonds are repaid at repaid at

maturity. You maturity. You can sell them at can sell them at anytime. Does anytime. Does

not give you not give you ownership in ownership in the company the company like stocks.like stocks.

Investors should Investors should consider consider

whether the whether the bond will be bond will be

repaid at repaid at maturity and maturity and whether gov’t whether gov’t agency will be agency will be

able to pay able to pay interest until interest until

maturitymaturity

Greatest chance Greatest chance for gains but no for gains but no guarantee for guarantee for

return.return.

Savings BondsSavings Bonds

Annual Percentage Rate Annual Percentage Rate (APR)(APR)

• APR is the annual rate of APR is the annual rate of interestinterest without taking into account the without taking into account the compoundingcompounding of interest within that of interest within that year. year.

• APR = Periodic Rate x Number of APR = Periodic Rate x Number of Periods in a YearPeriods in a Year

http://www.investopedia.com/terms/i/interest.asp

Annual Percentage Yield Annual Percentage Yield (APY)(APY)

• Truth in Savings Act (1993)Truth in Savings Act (1993)– Banks must report the APY for their Banks must report the APY for their

accountsaccounts– APY is the actual interest rate an APY is the actual interest rate an

account paysaccount pays– All banks required to figure this rate the All banks required to figure this rate the

same waysame way•Easy for consumers to compare accounts!Easy for consumers to compare accounts!

Annual Percentage Yield Annual Percentage Yield (APY)(APY)

•APY = (1 + periodic rate) APY = (1 + periodic rate) # periods -# periods -11

•ExampleExample– A high-yield money market account that A high-yield money market account that

pays 0.5% per month with pays 0.5% per month with monthlymonthly compoundingcompounding

– APY = (1 + .005) APY = (1 + .005) 12 – 12 – 11– APY = .0617 or 6.17%APY = .0617 or 6.17%

APR vs APYAPR vs APY

• APR in usually seen in relation to APR in usually seen in relation to loans, and APY in relation to interest loans, and APY in relation to interest bearing accounts. bearing accounts.

• For example, a For example, a credit cardcredit card company might charge company might charge 1% interest each month; therefore the APR would 1% interest each month; therefore the APR would equal 12% (1% x 12 months = 12%). This differs equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound from APY, which takes into account compound interest. The APY for a 1% rate of interest interest. The APY for a 1% rate of interest compounded monthly would be [(1 + 0.01)^12 – compounded monthly would be [(1 + 0.01)^12 – 1= 12.68%] 12.68% a year. If you only carry a 1= 12.68%] 12.68% a year. If you only carry a balance on your credit card for one month's period balance on your credit card for one month's period you will be charged the equivalent yearly rate of you will be charged the equivalent yearly rate of 12%. However if you carry that balance for the 12%. However if you carry that balance for the year, your effective interest rate becomes 12.68% year, your effective interest rate becomes 12.68% as a result of the compounding each month. as a result of the compounding each month.

Simple and Compound Simple and Compound InterestInterest

8.48.4

How many years would it take How many years would it take to double your money at to double your money at

8% interest?8% interest?Divide the interest rate into 72!

72/8 = 9 years to double your money!

Rule of 72Rule of 72Simple InterestSimple Interest

Compound InterestCompound Interest

InterestInterest

• The way your bank calculates The way your bank calculates interest helps determine how fast interest helps determine how fast your savings will grow!your savings will grow!

• Money you deposit is called the Money you deposit is called the principalprincipal

The Rule of 72The Rule of 72

• To find the To find the number of yearsnumber of years required required to to double your moneydouble your money at a at a given given interest rateinterest rate::– Assuming the interest is compounded Assuming the interest is compounded

annuallyannually– Divide the interest rate into 72Divide the interest rate into 72

•72/Interest72/Interest


• Try this!Try this!– Beginning investment = $5,000Beginning investment = $5,000– Interest rate = 1.75%Interest rate = 1.75%– How long to double your money?How long to double your money?

• 41 years!41 years!– 72/1.75 = 41.14 years72/1.75 = 41.14 years


• Try this!Try this!– You borrow $1,000 from a friend that is You borrow $1,000 from a friend that is

going to charge you 6.5% interest on going to charge you 6.5% interest on the loanthe loan

– If you make no payments, how long will If you make no payments, how long will it take before the loan doubles?it take before the loan doubles?

• 72/6.5 = 72/6.5 = 11 years11 years the loan the loan doublesdoubles to $2,000to $2,000


• One more!One more!– You make an investment of $1,500 in a You make an investment of $1,500 in a

CD earning 2.75% interestCD earning 2.75% interest– How long will it take for your investment How long will it take for your investment

to double?to double?

• 72/2.75 = 72/2.75 = 26 years26 years


• Run it backwards!Run it backwards!• If you want to double your money in six years:If you want to double your money in six years:

– Divide 6 into 72 to find the interest rate requiredDivide 6 into 72 to find the interest rate required

• 72/6 = 12 percent

12% interest is required to double your money in six years!!!


• One more backwards!One more backwards!– If you want to double a $5,000 If you want to double a $5,000

investment in 5 years, what interest do investment in 5 years, what interest do you need to be paid??you need to be paid??

• 72/5 = 14% interest needed!72/5 = 14% interest needed!

Simple InterestSimple Interest

• Interest is paid Interest is paid one time a yearone time a year– End of year on the average balance in a End of year on the average balance in a

savings accountsavings account


• You deposit $500 in an account that You deposit $500 in an account that pays 4% (.04) simple interestpays 4% (.04) simple interest

• At the end of the year, how much At the end of the year, how much does the bank pay you?does the bank pay you?

• $500 * .04 = $20 interest$500 * .04 = $20 interest

• $500 principal + $20 interest = $520$500 principal + $20 interest = $520


• You have $1,250 to deposit into a You have $1,250 to deposit into a savings account at the given simple savings account at the given simple interest rates per yearinterest rates per year

• In each case, how much would you In each case, how much would you have in your account at the end of have in your account at the end of the year?the year?


DepositDeposit RateRate InterestInterest New New Principal Principal After 1 After 1 yearyear

$1,250$1,250 3.25%3.25% $40.63$40.63 $1,293.63$1,293.63

$1,250$1,250 4.5%4.5% $56.25$56.25 $1,306.25$1,306.25

$1,250$1,250 5%5% $62.50$62.50 $1,312.50$1,312.50

Simple Interest FormulaSimple Interest Formula

• Interest = Principal * Rate * TimeInterest = Principal * Rate * Time– I = PrtI = Prt– Time is in years!Time is in years!

• If time is given in months, convert to If time is given in months, convert to percent of a yearpercent of a year

•Five months = .42 (5/12)Five months = .42 (5/12)

Simple Interest in MonthsSimple Interest in Months

• January (1)January (1)– .08.08

• February (2)February (2)– .17.17

• March (3)March (3)– .25.25

• April (4)April (4)– .33.33

• May (5)May (5)– .42.42

• June (6)June (6)– .5.5

• July (7)July (7)– .58.58

• August (8)August (8)– .67.67

• September (9)September (9)– .75.75

• October (10)October (10)– .83.83

• November (11)November (11)– .92.92

• December (12)December (12)– 11


• Interest paid on the principal Interest paid on the principal and and also on previously earned interestalso on previously earned interest– Assuming that the interest is left in the Assuming that the interest is left in the

account!account!


• Interest can be Interest can be compoundedcompounded– Annually (1)Annually (1)– Semiannually (2)Semiannually (2)– Quarterly (4)Quarterly (4)– Monthly (12)Monthly (12)– Daily (365)Daily (365)

• The more often The more often interest is interest is compounded, the compounded, the more interest your more interest your money earns!money earns!

Compound AnnuallyCompound Annually

• You put $1,000 in a savings account that You put $1,000 in a savings account that earns 6% interest annuallyearns 6% interest annually

• Figure the interest compounding it at Figure the interest compounding it at the end of each yearthe end of each year

PrincipalPrincipal InterestInterest TotalTotal

Year 1Year 1 $1,000$1,000

Year 2Year 2

Year 3Year 3

Compound Annually Compound Annually KeyKey

• You put $1,000 in a savings account that You put $1,000 in a savings account that earns 6% interest annuallyearns 6% interest annually

• Figure the interest compounding it at the Figure the interest compounding it at the end of each yearend of each year


Year 1Year 1 $1,000$1,000 6060 1,0601,060

Year 2Year 2 1,0601,060 63.6063.60 1123.601123.60

Year 3Year 3 1123.601123.60 67.4267.42 1191.021191.02

Compounding FrequentlyCompounding Frequently

• To calculate interest compounded more To calculate interest compounded more than once a year, than once a year, dividedivide the annual the annual rate by the # of times during the year rate by the # of times during the year the interest will be compoundedthe interest will be compounded

• If the annual rate is 6 percent and the If the annual rate is 6 percent and the interest is compounded semiannually interest is compounded semiannually (2)(2)– Divide the rate by 2Divide the rate by 2– 6% / 2 = 3% (.03)6% / 2 = 3% (.03)

Compounding SemiannuallyCompounding Semiannually

• You put $1,500 in a savings account that You put $1,500 in a savings account that earns 4% interest compounded earns 4% interest compounded semiannuallysemiannually


½ Year 1½ Year 1 $1,500$1,500

End Year End Year 11

½ Year 2½ Year 2


Compounding Semiannually Compounding Semiannually KeyKey• You put $1,500 in a savings account that earns You put $1,500 in a savings account that earns

4% interest compounded 4% interest compounded semiannuallysemiannually


½ Year 1½ Year 1 $1,500$1,500 3030 15301530


15301530 30.6030.60 1560.601560.60

½ Year 2½ Year 2 1560.601560.60 31.2131.21 1591.811591.81


1591.811591.81 31.8431.84 1623.651623.65

Compounding QuarterlyCompounding Quarterly

• You put $2,500 in a savings account that You put $2,500 in a savings account that earns 8% interest compounded earns 8% interest compounded quarterlyquarterly


Year 1, Year 1, Q1Q1

$2,500$2,500 5050 25502550


25502550 5151 26012601


26012601 52.0252.02 2653.022653.02


2653.022653.02


54.1254.12 2760.202760.20


55.2055.20 2815.402815.40

Compounding MonthlyCompounding Monthly

• You put $500 in a savings account that You put $500 in a savings account that earns 6% interest compounded earns 6% interest compounded monthlymonthly


Month 1Month 1 $500$500 2.502.50 502.50502.50

Month 2Month 2 502.50502.50 2.512.51 505.01505.01

Month 3Month 3 505.01505.01

Month 4Month 4 2.542.54 510.08510.08

Month 5Month 5 2.552.55 512.63512.63

Month 6Month 6 515.19515.19

Compounding DailyCompounding Daily

• Use Compound Interest Table, page Use Compound Interest Table, page 274274– $800 deposit$800 deposit– 6% interest6% interest– Compounded dailyCompounded daily– How much will you have in eight years?How much will you have in eight years?– How much How much interestinterest have you earned? have you earned?

What’s the Big Deal?What’s the Big Deal?

• Calculate the Calculate the simple interestsimple interest you would earn you would earn on $15,000 deposited for one year at 10% on $15,000 deposited for one year at 10% interestinterest

• Calculate the interest you would earn on Calculate the interest you would earn on $15,000 deposited for one year at 10% $15,000 deposited for one year at 10% interest that is interest that is compounded dailycompounded daily for one for one yearyear– Use chart on page 274Use chart on page 274

• What is the difference between simple and What is the difference between simple and compound interest?compound interest?

Documents

Savings and Investing Why Save 8.1. What do you dream of achieving in your lives? What do you dream of achieving in your lives? How do you think you will