Savings will put you in the drivers seat

Lesson Objectives Identify “emergencies, goals and irregular

expenses” as the three categories of savings

Explore the eight saving strategies presented

Identify the Truth in Savings Act and define the term “annual percentage yield” (APY)

Explain the benefits of interest compounding and calculate compound interest.

Lesson Objectives List three benefits of depositing savings

in an FDIC insured account Use the Rule of 72 to determine savings

outcomes. Compare different types of savings

products. Discuss how investing money is

different from saving money

Reasons for Saving Money Emergencies-put aside 6–8 months of

living expenses, to be used in case of job layoff, illness, or other “SHIFT HAPPENS”

Irregular or seasonal expenses-such as holiday spending, replacement or purchase of big ticket items

Financial Goals- such as retirement, home ownership, college and technical training

8 Saving Strategies to Help You Save

Focus on reaching a “SMART” goal

Use the “Pizza Principle” Motivate yourself Pay yourself first Comparison shop before

you buy Examine your spending

habits Begin today and save

regularly Direct Deposit your savings

into a savings account

Review Major Vocabulary Terms and concepts Pay yourself first- Put at least 10% of

your pay away in a savings account FDIC-Federal Deposit Insurance

Corporation ensures deposits up to 250,000

Interest - money paid regularly at a particular rate for the use of money lent

Review Major Vocabulary Terms and concepts Compound interest rate - Interest figured

on money deposited plus interest at a specified rate.

Rule of 72. A method used to estimate the amount of time or interest it will take for savings to double in value.

Truth in Savings Act-Law established in 1991, requires financial institutions to provide information about costs and interest-earning accounts in uniform terms. Helps consumers compare savings products and make informed decisions.

Vocabulary Terms and concepts annual percentage yield (APY) -The

rate of yearly earnings from an account, including compound interest.

Liquidity –Refers to how quickly and conveniently you can retrieve your money from an investment, and at what cost if any.

How to Chose the Right Savings Account for you? Look for Financial Institutions that are

insures with the FDIC or NCUA (National Credit Union Association)

Compare APR (interest rate) to ensure maximum growth

Determine the liquidity of your savings- Do you want to be able to take the money out without penalty? (The longer you promise to keep it in a savings account the better the higher the interest rate.)

Ask customer service representatives

Basic Types of Accounts Savings Accounts- offer liquidity in

exchange for lower interest rates A Certificate of Deposit (CD)- Offer

higher interest rates in exchange for less liquidity. You make a contract with the financial institution to leave a certain amount of money on deposit for an agreed about period of time.

Money Market Accounts offer you a higher interest and liquidity in exchange for maintaining a high minimum balance.

continued

Investing for Future Long-Term Goals is different from saving because the risk is higher with the possibility of earning even more money.

Stocks-Shares or small pieces of a company that can be purchased

Mutual Funds – Allow you to pool your money with other investors to purchase many different stocks, bonds, or other assets held by the fund.

Bonds – Are long term loans issued by the government, company, or local authority usually used to finance things such as schools, construction, and development.

continued

Investing for Future Long-Term Goals

Real Estate- purchasing property such as homes, apartments, complexes, land, or buildings usually takes longer to purchase and sell than many other investments

Precious Metals and Collections-Gold, silver, jewelry, antiques, and other collectibles

continued

How to Choose the Right Savings Account for you? Maximize your savings by considering

total amount deposited interest rate time span of deposit interest type: simple interest or

compound interest frequency of compounding

Compare rates

Calculating Compound Interest1. Multiply the deposit amount by the

annual interest rate2. Divide Step 1 answer by rate of

compounding3. Add Step 2 answer to deposit amount

to get new balance with interest

continued

Calculating Compound Interest

Calculating compound interest (problem one) Jacob opens an online only savings

account and deposits $50 each month. The annual interest rate is 2.5 percent. Interest is compounded monthly. What is the account balance after 5 months?

Calculating compound interest (problem one)

Month- EVERY MONTH ADD FIFTY DOLLARS to balance

Step 1 Multiply the deposit amount by the annual interest rate

Step 2Divide Step 1 answer by rate of compounding

Step 3Add Step 2 answer to deposit amount to get new balance with interest

I. Opening balance 0 add $50.00

$50.oo x 2.5%50 x .025 = $1.25

$1.25 / 12 = .10 $50.00 + .10 = $50.10

2. $50.10 + $50.00 =$100.10

$100.10 x .025 = $2.50

$2.50 /12 = .21 $100.10 + .21 = $100.31

3.$100.31 +$50.00 =$150.31

$150.31 x . 025 = $3.76

$3.76 / 12 = .31 $150.31 + .31 =$150.62

4$150.62 + $50.00= $200.62

$200.62 x . 025 = $5.02

$5.02 / 12 = .42 $200.62 + .42 =$201.04

5 $201.04 + $50.00 = $251.04

$251.04 x .025 =$6.28

$251.04 /12 = .52

$251.04 + .52 =$251.56

Challenge yourself then check with your partner James opened a savings account and deposited $1,525.00. The interest rate is 2.73 percent and interest is compounded quarterly. How much interest will her deposit earn her after one year?

Don’t PANIC …

There are calculators to help! http://

www.bankrate.com/cd.aspx?ic_id=calc_savings_bank-rates_globalnav

http://www.mathsisfun.com/money/compound-interest.html

Rule of 72 Use Rule of 72 to estimate the amount

of time or interest needed to double savings

To find the number of years to double savings, divide 72 by interest rate

To find the annual interest rate needed to double savings, divide 72 by number of years

continued

Rule of 72 How long will it take $1000

deposited at a 4% interest rate to double in value?

Find the annual interest rate you need to double your savings if your savings was in an account for 20 years

continued

Rule of 72 72 divided by 4 is 18; in 18 years your

$1,000 will be worth approximately $2,000

72 divided by 20 is 3.6; your savings must be in an account paying 3.6% for it to double in 20 years

Central Ideas of the ChapterA savings plan is an essential

piece of an overall financial program.

Compound interest helps your savings grow over time.