Savings Accounts

Chapter 5

Purpose of Savings Account?

• To accumulate money for future use• To plan for future needs and wants

Examples of Savings – For. . .

Those Rainy Day Emergencies

That Special Trip

Shopping Trips

Playing Santa Hunting Trips or buying that

perfect gun

The Engagement ring

What are your savings for?

Savings Accounts• Demand deposit account • May have some restrictions – On how quickly or easily the money can be

withdrawn• Pay interest at a low rate• Liquidity– Easy access to money

Computing Interest• Principal – Sum of money set aside on which interest is paid

• Simple interest– Interest is computed on the principal once in a

certain period– Interest is not added to principal– Simple interest = P R T

Computing Interest• Compound Interest– Interest earned is added to the principal

Year Beginning Balance Rate Qrt 1 Qrt 2 Qrt 3 Qrt 4 Ending

Balance1 $100 .015 $1.50 $1.52 $1.55 $1.57 $106.14

2 $106.14 .015 $1.59 $1.62 $1.64 $1.66 $112.65

• Simple Interest formula• Interest = P R T

• Compound Interest• Interest = P R• Interest = (P + I) * R

• FV function

Computing Interest Review

Saving Options• CD• Money Market accounts• US Savings Bonds• IRAs

CDCertificate of Deposit

• Has nothing to do with music• Time deposit rather than a demand deposit• Money set aside for a fixed time• Take out early – penalties

Money Market Accounts

• Pays the market rate of interest on money deposited

• Minimum usually required ($1000 or $5000)

US Savings Bonds

• Discount bond issued by the federal government

• You pay less than face value for bond

IRAsIndividual Retirement Arrangement• Retirement savings• Deposit money into account during working

ages• Taxed when money is taken out

Meeting Financial Goals

• How long do you have to save?• What interest rate can you earn?• How much money do you want to save?• Rule of 72– Divide annual interest rate by 72– Answer equals # of years to double investment– Example: $50 invested at 6%• $100 in 12 years (72/6 = 12)

Savings

It will make a difference