Chapter 10

Saving for the future

Savings Goals and Institutions.Saving options, features and plans.

Lesson 10.1

Savings Goals and Institutions

Describe different purposes of saving. Explain how money grows through compounding

interest. List and describe the financial institutions where you

can save.

Why You Should Save

Short-term needsEmergencies

Long-term needsHome ownershipEducationRetirement Investing

Financial security

Why Save

76% of Americans live paycheck to paycheck

Emergencies – dip into savings vs credit cardFurnace goes outCar insuranceLose job

Save 3-6 months of $ for bills

Pay Yourself First

vs. discretionary income – save after you pay bills

Automatic Deposit into SavingsSave $100 per paycheck OR10% per paycheckIf you don’t have it, you won’t spend it

Where You Can Save

Commercial banks – corporated financial services (loans, deposits, tradingHSBC Bank, Bank of America

Savings banks – main purpose to store savings for private depositorsOverseas

Where can you Save

Savings and loan associations – similar to credit unions

Credit unions – owned by the depositors -Educational Credit Union, Kellogg Credit

UnionBrokerage firms – buying and selling of

securities (CDs)Charles Schwab, Fidelity

Factors to consider

Liquidity – how quickly can you get money outSafety – able to get money backConvenience – where you find and get

access toInterest-Earning potential (Yield) – how much

money you can makeHigher the interest yield the better

Fees and Restrictions – Minimum balance, transaction fee

Saving Options

Regular savings accountHigh liquidityLower interestFree to make withdrawals and depositsService fees may applyCan use ATM/Debit cards

Saving Options

Certificate of Deposit (CD)Earns a fixed interest rate for a specified

length of timeRequires a minimum depositHigher interest rate then regular savingsMust leave money in for the entire timeHas a set maturity date-the date the

investment becomes due for payment

Saving Options

Money market account Combination savings-investment plan Interest rates go up and down with the stock market Money is used to purchase safe, liquid securities Offered by banks and brokerage firms Money can be deposited/withdrawn at any time with

no fee Usually not insured

Saving Regularly

Ways to SaveMust spend less money than you take inDirect DepositAutomatic Payroll Deductions

Types of Interest

Interest is based on interest rate and principal (balance)

Simple interest is calculated on principal only

Compound interest is money earned on the money deposited plus previous interest

Simple Interest

I=Interestp=principalr=interest ratet=number of years

I prt

Example 1 Simple interest

Grace wants to deposit $5000 in a certificate of deposit for a period of two years. She is comparing interest rates quoted by three local banks and one online bank. Write the interest rates in ascending order. Which bank pays the highest interest for this two-year CD?

Example 1 continued

First State Bank:

E-Save Bank:

Johnson City Trust: 4.22%

Land Savings Bank: 4.3%

14 %

4

34 %

8

Simple Interest example 2

Raoul’s Savings account must have at least $500, or he is charged a $4 fee. His balance was $716.23, when he withdrew $225. Will he be charged a fee?

Simple Interest Example 3

Mitchell deposits $1200 in an account that pays 4.5% simple interest. He keeps the money in the account for three years. How much is in the account after three years?

Simple Interest Example 4

How much simple interest does $200 earn in 7 months at an interest rate of 5%?

Simple Interest Example 5

How much principal must be deposited to earn $1000 simple interest in 2 years at a rate of 5%?

Simple Interest Example 6

Derek has a bank account that pays 4.1% simple interest. The balance is $910. When will the account grow to $1000?

Simple Interest Example 7

Kerry invests $5000 in a simple interest account for 5 years. What interest rate must the account pay so there is $6000 at the end of 5 years?

Compound Interest Terms

Annual compounding-once each yearSemiannual Compounding-twice a yearQuarterly compounding-4 times a yearDaily compounding-365 times a year

(366 in a leap year)Crediting is how much an account earns

per month (all the compounding is added up then)

Additional Information

Compound daily and credit monthly is most common produce used by banks today.

APR (annual percentage rate) – annual interest rate for simple interest

APY (annual percentage yield) – annual interest rate that takes the effect of compounding

Compound Interest Formula

B=ending balance p=principal r=interest rate n=number of times

interest is compounded annually

t=number of years

(1 )ntr

B pn

Example 1

Marie deposits $1650 for three years at 3% interest, compounded daily. What is her ending balance?

Example 2

Kate deposits $2350 in an account that earns interest at a rate of 3.1%, compounded monthly. What is her ending balance after five years?

APY/APR

APR-annual percentage rateAPY-annual percentage yield

Banks usually advertise Higher than APR for accounts compounded

more than once per year

Annual percentage yield formula

r= interest rate N=number of times

per year

(1 ) 1nrAPYn

Example 1

Sharon deposits $8000 in a one year CD at 3.2% interest, compounded daily. What is Sharon’s annual percentage yield (APY) to the nearest hundredth of a percent?

Example 2

Barbara deposits $3000 in a one year CD at 4.1% interest, compounded daily. What is the APY to the nearest hundredth of a percent?

Continuous Interest

Infinite or without limiting time

B=ending balanceP=principalE=exponential base (on Calc)r=interest ratet=number of years

rtB Pe

Example 1

Craig deposits $5000 at 5.12% interest, compounded continuously for four years. What would his ending balance be to the nearest cent?

Example 2

If you deposit $1000 at 4.3% interest, compounded continuously, what would your ending balance be to the nearest cent after five years?

Present value

How much money you need now for a certain $ amount later

“Putting money in now will get you how much later”

Present Value of a single depositPeriodic investments are the same

deposits made at regular intervals such as yearly, monthly, biweekly, etc.

Present Value Of A Single Deposit

(1 )ntB

P rn

Example 1

A mom knows that in 6 years, her daughter will attend College. She will need about$20,000 for the first year’s tuition. How much should the mom deposit into an account that yields 5% interest, compounded annually?

Example 2

Ritika just graduated from college. She wants $100,000 in her savings account after 10 years. How much must she deposit in that account now at a 3.8% interest rate, compounded daily, in order to meet that goal?

Present Value Of A Periodic Deposit

( )

(1 ) 1nt

rBnP r

n

Example 1

Nick wants to install central air conditioning in his home in 3 years. He estimates the total cost to be $15000. How much must he deposit monthly into an account that pays 4% interest, compounded monthly, in order to have enough money?

Future Value

What will the future balance be if you deposit money now.

Future Value of the Investment

B - balance at end of investment P - periodic deposits r – interest rate n – number of times compounded t - length of time

B = P ((1 + r/n) nt - 1)) r/n