Introduction to Saving

Saving Basics• Savings is the portion of current income

not spent on consumption.

• Recommended to have a minimum of 3-6 months salary saved

Reasons People Should Save• Emergencies –minimum of three to six months of salary

– illness– losing a job– replacing a large item such as a washing machine

• Expenses –money that is paid out for needs and wants• Future Purchases

– college education– new car– down payment on a home

• Investing- the purchase of assets with the goal of increasing future income

• Giving- charity, gifts

Why People Don’t Save• current consumption needs and wants

aren’t met• do not know how much they need to be

saving • Money in savings accounts earns poor

interest rates• Don’t need emergency money because

they have credit easily available• Have adequate insurance and job security

Saving vs. Investing• Saving

– Savings accounts are more liquid than investment accounts• Liquidity- how quickly and easily an asset can be

converted into cash

– Generally get a low interest rate, often barely meeting inflation• Inflation- steady rise in the general level of prices

Interest

• Interest – the amount of money that is either gained or lost

• Interest rate – the percentage used annually to calculate the total interest either gained or lost

Saving vs. Investing cont.• Investing

– The purchase of assets with the goal of increasing future income

– Investments are not as liquid as savings– Rate of return, or annual return on an

investment, including appreciation and dividends or interest

• usually higher than savings account

– Don’t start until saving plan in place

“Pay Yourself First”• Put money away into a savings account

or investment BEFORE you pay other bills or use for spending.

70-20-10 Rule• Spend 70% of money you earn

• Save 20% of money you earn

• Invest 10% of money you earn

Depository Institutions

• Commercial Bank

• Credit Union

• Savings and Loan Association

Commercial Bank

• Commercial Banks – Usually the largest depository institutions – Considered full-service depository institutions

because offer a wide variety of services and products

• Available to a variety of consumers

• Examples – Wells Fargo, US Bank, Chase Bank

Credit Union

• Credit Unions – Non-profit cooperative depository institution

• Owned by members who share a common bond

• Examples – Rocky Mountain Credit Union, Teachers Federal Credit Union

Savings and Loan Association (S&Ls)

• Savings and Loan Association– Focus on providing loans and mortgages

• Customers must have a savings account with them

• Examples – American Federal Savings Bank, Pioneer Federal Savings & Loan.

Types of Insurance

• Federal Deposit Insurance Corporation (FDIC)– Federal government agency which protects

depository institution accounts– $100,000 basic accounts– $250,000 on retirement accounts

• National Credit Union Administration (NCUA)– Provides insurance for credit unions

Banking Services

Common Services Offered

• Checking account – May or may not be interest bearing

• Savings account

• An account in which money is typically deposited to earn interest– Interest bearing

Interest Accounts

• Earning– Stock – Certificate of deposit– Money market account– Savings Bond

• Bearing– Credit cards – loans

Additional Services Which May Be Offered

• Safe-deposit box – A secured box in a bank to be used for valuable and

important personal items

• Financial counseling – Information and advice is given to customers to help

make financial decisions

Bank Critic• Go to your banks website• Look at

– Checking account• Do you make interest?• Is there a way to make interest?• Do you pay fees?

– Savings account• Interest rate?• What could you do to raise the interest rate?• Fees?

• Write a summary of your banks benefits and how you could better use your bank to make more money with your money.

Cash Management Tools

Five types: Checking Account Savings Account Money Market Deposit Account Certificate of Deposit Savings Bond

Checking Account$ Tool used to transfer funds deposited into an

account to make a cash purchase.

$ Checking accounts may be non-interest or interest earning.

$ Features may include: Minimum balance requirements; Charge transaction fees; Limited number of checks

written monthly. Reduces the need to carry large amounts of

cash.

Checking Account

Savings Account

Savings Account$ Account to hold money not spent on

consumption.$ Have a lower interest rate than other

cash management tools$ May have minimum balances

Money Market Deposit Account

Money Market Deposit Account$ A combination savings/investment plan in

which money is used to purchase safe, liquid, securities

$ - EXAMPLES: CD’s, Government Securities

minimum balance requirement tiered interest rates- amount of interest

earned depends on the account balance$For example: a balance of $10,000

will earn a higher interest rate than a balance of $2,500.

Money Market Deposit Account continued

$ limited to three to six transactions each month

$ Features of may include: Minimum amount required to open the

account often $1,000

balance falls below a specified amount earn a lower interest rate

Certificate of Deposit (CD)

$ Certificate of Deposit (CD) A deposit that earns a fixed interest rate

for a specific length of time Interest rates vary depending upon

specified time length.$The longer the length, the higher the

interest rate.

Certificate of Deposit continued

$ Features may include: Range from seven days to eight years in

length; Minimum deposits range from $100-

$100,000; If funds are withdrawn before the expiration

date, penalties are assessed; Different types to fit your needs

Standard- fixed Flexible- can add money and withdraw on

occasion free of charge

Savings Bonds

• A registered, non-transferable bond issued and backed by the U.S. Government

• "the All American Investment" • easy way to save money safely • get a good market return• Rates change every May and November

based on either current market rates or inflation.

Savings Bond• Can buy from bank, through payroll

deductions or from Federal Reserve• Two types

• I Bond- • state and local income tax exempt • federal income tax can be deferred • If cashes in before five years

• subject to a 3-month earnings penalty

• earn interest for as long as 30 years

Savings Bonds

• Series EE Savings Bond• Earn fixed rate of return• Buy for 50% of face value• Minimum $50 bond- Max $10,000 per year• $50 bond

– Buy for $25– When mature you receive $50

• 20 years to maturity

– Government tracks bond by SS#

Liquidity How quickly and easily an asset can be

converted into cash. $ Investors should:

Invest in both liquid and non-liquid tools. Liquid assets are important for

emergencies when cash must be quickly accessed.

$ Cash management tools are protected by the U.S. Government against loss.

Liquidity

Liquidity

Checking Account Most Liquid

Savings Account

Money Market Deposit AccountCertificate of Deposit

Savings Bond Least Liquid

Low Risk

These five cash management tools are low risk: Insures the funds so the consumer

does not lose money on the investment.

However, they have lower interest rates.$Causes low returns

The End