© 2010 South-Western, Cengage Learning

Chapter

© 2010 South-Western, Cengage Learning

Saving for the Future

10.1 Growing Money: Why, Where,and How 10.2 Savings Options, Features,and Plans

10

© 2010 South-Western, Cengage Learning

Chapter 10

2

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.

© 2010 South-Western, Cengage Learning

Chapter 10

3

Why You Should Save■ The 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.

© 2010 South-Western, Cengage Learning

Chapter 10

4

Short-term Needs

■ Short-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:

■ Emergencies■ Vacations■ Social events■ Repairs■ Major purchases

© 2010 South-Western, Cengage Learning

Chapter 10

5

Long-term Needs

■ Long-term needs are expenses that are costly and require years of planning and saving.

■ Examples:■ Home ownership■ Education■ Retirement■ Investing

© 2010 South-Western, Cengage Learning

Chapter 10

6

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 income

■ The importance you attach to savings

■ Your anticipated needs and wants■ Your willpower

© 2010 South-Western, Cengage Learning

Chapter 10

7

How Money Grows■ The 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.

© 2010 South-Western, Cengage Learning

Chapter 10

8

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.

© 2010 South-Western, Cengage Learning

Chapter 10

9

$119.10$6.74$112.363

$112.36$6.36$106.002

$106.00$6.00$100.001

EndingBalance

InterestEarned (6%)

Beginning BalanceYear

Compounding Interest Annually

■ 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.

© 2010 South-Western, Cengage Learning

Chapter 10

10

Where to Save

■ Commercial banks■ Savings banks■ Savings and loan

associations■ Credit unions■ Brokerage firms■ Online accounts

© 2010 South-Western, Cengage Learning

Chapter 10

11

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.

© 2010 South-Western, Cengage Learning

Chapter 10

12

Savings Options

■ Once 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.

© 2010 South-Western, Cengage Learning

Chapter 10

13

Regular Savings Account■ A 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.

© 2010 South-Western, Cengage Learning

Chapter 10

14

Certificate of Deposit

■ A 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.

© 2010 South-Western, Cengage Learning

Chapter 10

15

Money Market Account

■ A 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.

© 2010 South-Western, Cengage Learning

Chapter 10

16

Selecting a Savings Plan

■ Liquidity■ Safety■ Convenience■ Interest-earning potential

(yield)■ Fees and restrictions

© 2010 South-Western, Cengage Learning

Chapter 10

17

Liquidity

■ Liquidity 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.

© 2010 South-Western, Cengage Learning

Chapter 10

18

Safety■ Safety 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.

© 2010 South-Western, Cengage Learning

Chapter 10

19

Convenience

■ Locations■ Services offered

© 2010 South-Western, Cengage Learning

Chapter 10

20

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.

© 2010 South-Western, Cengage Learning

Chapter 10

21

Fees and Restrictions■ Different 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.

© 2010 South-Western, Cengage Learning

Chapter 10

22

Saving Regularly

■ Saving 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.

© 2010 South-Western, Cengage Learning

Chapter 10

23

Direct Deposit

■ With 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.

© 2010 South-Western, Cengage Learning

Chapter 10

24

Automatic Deductions■ Automatic 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.

© 2010 South-Western, Cengage Learning

Chapter 10

25

Collecting Coins and Cash

■ Some 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!

© 2010 South-Western, Cengage Learning

Chapter 10

26

$205.00 + 10.25 = $215.25

$205.00 × 0.05 = $10.25

$105.00 + $100.00 = $205.00

Compounding with Additional Deposits

$452.56$21.55$100.00$331.014

$100.00

$100.00

$100.00Deposit

$331.01$15.76$215.253

$215.25$10.25$105.002

$105.00$5.00$0.001

EndingBalance

InterestEarned (5%)

Beginning BalanceYear

© 2010 South-Western, Cengage Learning 27

Activity:

■1. Find a bank with the highest interest rate for a savings account. What are the terms?

■2. Find a money market account-what is the interest rate and terms?

■3. Find a C.D. rate-what are the terms?■4. What bank has the most convenient banking? What are the conveniences?

■5. What are you saving for short term? What might be the best way to save?

■6. Long term? What might be the best way to save for this?