Saving Plan For Financial Security

1. SavingPlan For Financial Security Chapter 8

2. Why Save? • Benefits of Saving • Saving is a trade-off. When you save, you trade spending now for the ability to spend in the future. • Save for the unexpected • You can be sure that your future will include some unexpected expenses. • Accidents happen • If you lose your job or can’t work

3. Why Save? Cont. • Save for Opportunities • Saving can allow you to take advantage of opportunities. • You can buy major things that sometime take more time to finance. Like a car that has gone on sale. • Save on major purchases. • If you want something expensive such as a Plasma TV or a Playstation 3.

4. Why Save? Cont. • Save for flexibility • If you have money saved then you can choose to quit a job you don’t like to take another that may pay less now but has better prospectus. • Save to achieve goals • Like a college education for your children is an enormous expense. • Saving 100 a month can get you there.

5. Power of Compounding at 10%

6. Power of Compounding at 10%

7. Saving Strategies • Pay Yourself First • Put money in your savings account as you pay bills. • If you don’t have this money in your checking account then you are less likely to spend it. • Save by the Numbers. • Some people do not get paid the same week by week. • You could choose to save 10% or 15% of your take home pay.

8. Saving Strategies • Reward yourself • Think of things you like to do that don’t cost lots of money. • Each time you deposit money reward yourself with something. • Saving and Self-Control • If you are saving $20 a week to go on a $400 vacation and you see a jacket that you like that cost $190. If you buy the jacket, then you will not have the money for the vacation.

9. Automatic Savings • Payroll Deductions • One way to save automatically is to authorize your employer to deduct a specified amount from your paycheck and deposit it into your savings account. • Checking Account Transfers • You can authorize your bank to transfer a certain amount each month from your checking account to your savings account.

10. Decision Making Project • What would you want from a savings plan? • List 3 things you would save for. • How long would you be willing to wait for each thing you want.

11. Saving Institutions • Commercial Banks • This type of bank serves individuals and businesses with a wide variety of accounts, loans and other financial services like saving and checking accounts, loans, and some types of investment services. • Savings Banks • This type of financial institution is owned by their depositors. • As owners, depositors earn dividends instead of interest. • A dividend is a share of the company’s profits.

12. Saving Institutions • Savings and Loan Associations • Known as S&L’s. • They became popular during the Great Depression of the 1930’s • These are financial institutions that specialize in lending money to consumers to buy homes. • Like savings banks some S&L’s are owned by their depositors and accept deposits and pay interest or dividends on them. • Today S&L’s offer most of the services that commercial banks offer. • They are relatively small

13. Saving Institutions • Credit Unions • These are financial institutions that offer memberships to people who share a common bond such as people in a particular profession, company, church, or labor union. • Credit unions do not operate for profit. They exist solely to provide saving and lending services to their members. • They pay slightly higher interest rates.

14. Deposit Insurance • A major reason for depositing money in a financial institution is safety. • The FDIC insures most commercial and savings banks. • Deposits in S&L’s are insured by the Saving Association Insurance Fund. • The National Credit Union Share Insurance Fund provides the same protection for deposits in credit union. • Up to $100,000

15. Savings Accounts • These are accounts offered by any savings institution in which you can deposit money. • Some accounts can be opened for as little as $50 to $100. • You will also earn interest on these deposits.

16. Savings Accounts • Interest Rates • One major consideration in selecting a savings account in the interest rate. • If you can keep $1000 dollars in the account then you will get a higher interest rate. • Some account will offer different rates as the balance rises. • Fees and Restrictions • Accounts will differ- amount of withdraws, balance, ATM withdraws.

17. Decision Making Project • Using your local savings institution find these answers: • How many kinds of savings accounts the institution offers • The fees for using each account • Any other terms for using savings accounts at that institution • If the institution sells government bonds, what is the current interest rate.

18. Saving Options • Certificate of Deposit • When you make a deposit in a savings account, your bank doesn't know how long it will have use of this money. • A certificate of deposit (CD) is a deposit in a savings institution that earns a fixed interest rate for a specified period of time. • Banks offer CD’s for various time periods, ranging from a few months to several years.

19. Savings Options • Certificate of Deposit • Interest Rate • Because of your commitment to leave your money for a period of time the bank will pay you a higher interest rate. • Minimum Deposit • They require a minimum deposit as little as $500 or as much as several thousand dollars. • Penalty for Early Withdraw • As much as 3 month’s interest

20. Savings Options • Certificate of deposit • Safety • Most CD’s are insured by the FDIC or other organizations for amounts up to $100,000.

21. Savings Options • Money Market Account • A deposit for which the interest rate changes over time • The bank uses the money to make short-term investments. • When rates go up, the bank makes more and will pay you more for your money market account deposit. • They pay higher interest rates than regular savings accounts.

22. Savings Options • Money Market Account • They require a substantial minimum deposit – often as much as $1000 to $2000 dollars. • The major benefit of a money market account is that you may withdraw your money at any time without penalty. • In most banks, your deposit in a money market account is insured by the FDIC.

23. Savings Options • Annual Percentage Yield • At one time it was hard to compare interest rates. • Some paid interest four times a year others paid every day. • Congress passed the Truth in Savings Act in 1993 • This law required banks to report the annual percentage yield (APY) for their account. • The APY is the actual interest rate an account pays per year.

24. Government Bonds • Government and businesses borrow money by selling bonds. • A bond is a written promise to pay a debt by a specific date. • U.S. Government bonds are almost absolutely safe. They will be paid as long as the United States in a nation.

25. Government Bonds • Treasury Securities • U.S. Treasury securities are usually sold in amounts in amounts of $5000 or more. • These investments are safe and they often pay higher interest rates than CDs. • Three Types of Treasury Securities • Treasury bills have terms of less than one year • Treasury notes have terms that last one to ten years • Treasury bonds have terms that last more than ten years.

26. Savings Bonds • Savings bonds are U.S. Government bonds issued for amounts of $50 to $10,000. • Series EE Savings bonds • Series EE bonds are available in amounts ranging from $50 to $10,000. • The amount printed on a bond is called its face value • When you buy a EE savings bond, you will actually pay only half of its face value. • The government adds interest to your EE bond every 6 months. You must own bond for at least 6 months. • You can cash it in at any bank.

27. Savings Bonds • Series HH Savings Bonds • These are available in larger amounts ranging from $500 to $10,000. • Unlike EE bonds, you cannot buy them with cash. • You can get them only in exchange for EE bonds or other government investments. • HH bonds are acquired for the full amount of the face value. • They have a fixed interest rate. Sent electronically every 6 months.

28. Why Buy Government Bonds • Government bonds are one of the safest investments you can make. • Payment is guaranteed by the government. • They have tax advantages. They are not taxed on the interest like CDs • You do not have to pay state and local taxes. On Series EE you don’t pay federal taxes until you cash the bond. • It is easy to trade bonds for cash

29. Simple Interest • The money you have on deposit in a savings account, CD, or other savings option is called the principal. • Simple interest is interest paid one time a year at the end of the year on the average balance in a savings account.

30. Simple Interest • Suppose you have $750 to deposit into a savings account at the given simple interest rates per year. In each case, how much would you have in your account at the end of the year.

31. Compound Interest • This is interest paid on the principal and also on previously earned interest. • Compound Annually • Year One • $100.00 Principal x .06 • 106.00 end of year • Year two • $106.00 Principal x .06 • $112.36 end of the year

32. Example of Compound Interest