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Chapter 4 Saving

Chapter 4 Saving. Reasons to save. Emergency fund First priority after needs are met Should be approximately 2-3 months of expenses Where to keep money is based on your discipline level Large purchases New Car, Home, Child’s Education Figure out your values and spend on those

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Chapter 4 Saving

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  1. Chapter 4 Saving

  2. Reasons to save • Emergency fund • First priority after needs are met • Should be approximately 2-3 months of expenses • Where to keep money is based on your discipline level • Large purchases • New Car, Home, Child’s Education • Figure out your values and spend on those • Wealth building • Investing, Retirement, • Consistency is the key

  3. Accounts for saving • Checking • Demand deposit- it can be withdrawn at anytime • Very liquid- Checks, ATM • Average interest rate= .4% • Online accounts pay more • NOW- negotiable order of withdrawal • Like checking but must maintain a minimum balance • Can have additional fees/penalties • May pay higher monthly interest rates= .5%-.75%

  4. Accounts for saving • Savings Account • Liquid but no check writing capabilities • Less transactions • IR= .9% • Money Market Deposit Account (MMDA) • Maintain minimum balance • Offer limited check writing privileges • IR=.9%

  5. Certificates of Deposit • Contract between an individual and financial institution that specifies the length of time the person will leave a deposit with the bank at a specified rate • Slightly less liquid • 3mo, 6mo, 1 year, 3, year, 5 year, • IR- 1 year=.9% 5 year= 2.3%

  6. FDIC Insured • Federal Deposit Insurance Corporation • Established in 1933 because of the Great Depression • Covers checking, saving, MMDA, CD’s • standard insurance amount- $250,000 per depositor, per insured bank, for each account ownership category • Fractional reserve banking

  7. Savings bonds • Issued by the US Department of Treasury • You loan the amount to the US gov’t • Come in eight values: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000 • IR depends on series and year but is around 1.5% • Historically 0-5%

  8. Places to Save Money • Banks • Brick and Mortar- have branches, tellers, higher expenses • Online, Internet only- can offer higher rates (Capital One 360) • Credit Unions • member-owned financial cooperative • “serve- people, not profit” • Use different terminology but have similar products • Video

  9. Fees associated with banking • Minimum Balance Fees • Non-Direct Deposit Fees • Overdraft-Bounced Check Fees • ATM withdrawal fees • Check Image Service Fee

  10. Brokerage Houses/Firm • facilitates the buying and selling of financial securities • serve a clientele of investors who trade public stocks and other securities • research the markets to provide appropriate recommendations • Can sometimes be combined with a bank • Fidelity, Schwab, Capital One 360 • Commission based

  11. Historical Interest Rates • Checking and Savings accounts .75-2% • CD’s- 1.5-4% • Treasury Bills .15-4% • Municipal Bonds 4-6% • Corporate Bonds 6-8% • Stocks 8-12% • Mortgages 6-10% • Today’s Rates are extremely low, Why??

  12. Compound interest- paid on your principal and interest Compounding frequency is important Use the annual percentage yield (APY)- the interest rate that takes compounding frequency into account Rule of 72- uses annual compounding Divide 72 by your interest rate to find the number of years it will take for your money to double Compound Interest- Rule of 72

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