Savings

Banking & Finance

Why Do Customers Save?

• Define savings goals• Explain how interest is earned

Savings: portion of income that is not spent.

Short-Term Savings Goals• < year to accomplish• For products that are safe

and don’t charge fees• Liquidity: ability of a

financial asset to be quickly converted to cash

• Interest: amount charged to borrow money

Long Term Savings Goals• > year to accomplish• Ex: buying a house, retiring,

paying for college• Higher interest rates more

important• Liquidity not as important

Savers’ PrioritiesCharacteristics Priorities

Short-term savings goals (< year)

Long-term savings goals (>year)

Safety X X

Liquidity X

Convenience X

Interest earned X

Interest Earned

• Banks used customer’s deposit (transfer of money into the bank) to earn more money for itself

• Initial deposit (principal) earns interest

• Compound interest: interest paid on interest.

• Uses accrued interest (amount added to the principal at regular time periods)

• APY—Annual Percentage Yield: Rate of return on investment for 1 year

Calculating Interest

Year One

$500 (initial deposit) + $25 (5% interest earned after one year) = $525 (balance after one year)

Year Two

$525 (principal + accrued interest) + $26.25 (5% interest earned after one year) = $551.25

[$500 (principal) + $51.25 (accrued interest)] - $500 (initial deposit) = $51.25 (interest earned after two years at 5%)

Compound Interest

F = P(1+r)t

F = final amountP = principalr = rate of interestt = # of times compounded

Without making any additional deposits, the customer’s money grows significantly.

Checkpoint 7.1(Underline/Highlight Proof in Text)

1. How long does it take to achieve a short-term goal?

2. What factors are most important to savers with short-term goals?

3. What factor is most important to savers with long-term goals?

4. Name the fee a bank pays to use a customer’s money.

5. How often is interest compounded at most banks?

Bellringer: 5 minutes Journal Entry (short answer)

• Have you ever tried to save your money to purchase something?

• How did you decide how much money to save?

• How much money did you have to save?• Did you have to adjust any of your

spending habits to save the money?• Overall, how successful were you in saving

for this goal?

Savings Products• Identify the types and

characteristics of savings accounts.

• Describe the characteristics of a certificate of deposit.

• Explain the difference between savings accounts and certificates of deposit.

Lights . . . Camera . . . Action!

• Video: Savings (BizKid$)• 3-2-1 Review of the Video (3 things

learned, 2 things of interest, 1 question)

Savings Accounts• A deposit account at a depository institution

that pays interest to the account holder• Low rate of interest• Add/withdraw money at any time

FDIC protected up to $250,000

Good for long term?No.

Types of Savings Accounts

Passbook Savings• Traditional savings account• Passbook: a small book kept

by the account owner• Are we still using these?

No.• Transactions are now mailed

and e-mailed.• Can also be viewed at

ATMs.

Online Savings Accounts• Opened/used without

visiting physical location• All communication is done

through the Internet or mail.

Types of Savings Accounts cont’d

Custodial Accounts• Managed by an adult for a

minor younger than 18 or 21.

• Requirements depend on state laws

• Custodian must approve all transactions

Money Market Accounts• Pays a higher interest rate

than traditional savings accounts.

• Bank uses this money to buy a variety of financial products

• Restrictions on the number of withdrawals—why?!

Feature Description

ATM fee Customers may be charged if they use ATM of another bank

Insured balance Certain amount in an account owner’s balance, in each bank, is insured by FDIC

Limited # of transactions

Transactions per a given period are limited

Linked accounts Connects the savings account to another account

Minimum balance lowest amount of money needed to keep an account open. Banks will often charge fees if balance drops below this amount.

Minimum deposit to open account

Lowest amount of money that can be used to open an account ($25 or more)

Monthly fee Amount paid to the bank for account maintenance, often waived if account doesn’t fall below minimum balance

Online banking Allows account owner to access account information and make financial transactions on the Internet

Transaction fee Amount paid to the bank every time a transaction is made

Savings Accounts – Features and Fees

Bellringer: Word Study

Pictorial Representation

Textbook Definition

Real World Connection

Contextual Paragraph

Liquidity

Individual Activity

• Create a list of things to consider when choosing a savings account.

• Refer to the slide “Savings Accounts Features and Fees”

• Research “savings accounts features and fees” on the Internet.

• Record anything you need to add or remove to/from your list.

Certificates of Deposit (CD)

• For long term goals• Requires specific

amount of money to be held on deposit for a specific amount of time

• aka time deposit or fixed deposit

• When fixed term expires, the CD is mature

• After this time, owner can withdraw without paying a penalty or fee for breaking account terms

CDs

• Higher interest rate than savings account• FDIC insured• Length of deposit is fixed

• Specified amount needed to purchase• fee charged if withdrawal

made before date of maturity

Terms, Amounts, and Interest Rates

• Interest rate paid based on:– Amount deposited– Length of time– Competitors’ interest rates

» Usually require deposit of at least $1,000» Some banks offer 1-month, shortest 6 months» 2011, 6-month paid .55% (more than .01% on

savings)

Jumbo CDs

• For large amount of money, usually $100,000 or more

• Interest rates are higher• Just like regular CDs

Passbook

Online Custodial

Money Market

CD Jumbo CD

Characteristics

Interest Rates

Low Low Low Medium High Highest

Amount Any amount

Any amount

Any amount

Minimum balance

Fixed Fixed

Time Period

Short term

Short term

Short term

Short term

Fixed Fixed

Access Any time

Any time Any time Limited None None

Savings Vehicles

Checkpoint 7.2(Underline/Highlight Proof in Text)

1. Name 3 characteristics of a savings account.

2. What is the main advantage of an online savings account?

3. Why does a money market account earn more interest than a passbook savings account?

4. Why is a CD also known as a time deposit or a fixed deposit?

5. How is a jumbo CD different from a regular CD?

Bellringer

• What is wealth?

Bellringer

• Why is it important to start thinking about retirement early?

• Describe the difference between a 20 and 40-year retirement investment with the same interest rates and contribution amounts.

• How much more can an individual save if he or she starts saving at a young age?

Retirement Accounts

• Explain why it is necessary to save money for retirement

• Describe the characteristics of an IRA•Differentiate among employee

options for retirement planning

Saving for Retirement

Expectations• Retirement: person’s

withdrawal from active participation in a job or business.

Historical Solutions• Social security: federal

program that includes financial benefits intended to supplement retirement savings for Americans

• Amount depends on income of retiree while working

• Pension (defined benefit plans): fixed sum of money a company provides for its retired employees for years of service

Individual Retirement Account (IRAs)

• Savings account in which income taxes are deferred on some deposits and all interest until all or part of the balance is withdrawn at retirement age.

To open a traditional IRA, must meet two legal requirements:

• Customer or the spouse must have taxable compensation that year

• Customer cannot be 70 ½ years old by the end of the year the account is opened

IRAs

• Compensation: wages and financial benefits earned by working– Includes salary and income earned by owning a

business– Does not include interest earned or income that

cannot be taxed

• Contributions = deposits• Distributions = withdrawals

IRAs

• Account holder must begin receiving cash from the IRA by April 1 the year after reaching the age of 70 ½ years.

• If taken before age 59 ½ , a 10% penalty will be paid to the IRS.

Retirement Accounts Providedby Employers (defined contribution plans)

Simplified Employee Pension (SEP)• Retirement plan established

by a business for its employees or owners

• Self-employed can set up for themselves

• Tax deductible• Cost to administer is low• 25% of salary is legal limit

of contribution ($49,000)

3-Step Process• Execute formal written

agreement to provide SEP for eligible employees

• Provide specific information to each eligible employee

• Each eligible employee must have an SEP IRA set up by the business or the employee

Retirement AccountsSIMPLE IRA Plans

• IRA-based plan for small employers

• No more than 100 employees

• No other retirement plan• Employer matches

employee contribution up to 3% max

• Contributions made to all employees

• Withdraw within first 2 ½ years, pay add’l tax

Traditional 401(k) Plan

• Enables employees to make tax-deferred or taxed contributions through payroll deductions.

• Employers not required to contribute

• Lesser of 100% of employees compensation or legal maximum amount ($11,500)

• Distribution before 59 ½, taxed add’l 10%

Roth IRA• Similar to traditional IRA• Contributions not deducted from your

income• You can withdraw money if you are 59 ½

and it’s been open for at least 5 years• Taxed when earned• Can continue contributions

past 70 ½• Can withdraw to buy a

home

Checkpoint 7.3(Underline/Highlight Proof in Text)

1. Historically, how did individuals pay for retirement?

2. What is the main difference between a traditional IRA and a Roth IRA?

3. Why does a company provide benefits?

4. How does a business qualify to provide a SIMPLE IRA?

5. When can an employee make an early withdrawal from his or her 401(k)?

Opening and Maintainingan Account

• Explain the process of opening a new account

• Describe the process of maintaining an account

Bellringer

• Consider what information might be necessary to open a savings account.

• What other types of accounts are you familiar with?

• How does opening and maintaining a savings account compare to these other types of accounts?

Review these Terms . . . Where have you heard them?

• Account holder• Deposit slip• Remote deposit

capture• statement

Opening an Account

Complete an Application

• Social security number . . . WHY?

• Driver’s license or State ID• Contact information• Opening deposit

Depositing an Opening Amount

• Usually cash• Generally held by bank for a

few days• What does this mean for the

account holder?

Maintaining an AccountDepositing Funds

• Deposit slip: fill out to make a deposit and to record deposit information

• Remote deposit capture: scan checks for deposit electronically

Withdrawing Funds• Fill out withdrawal slip to

withdraw funds• Where can you do this?

Maintaining an AccountUnderstanding a Bank

Statement• Statement: shows all

activity during the covered time period.

• Usually a month• What does this include?

Complete Online Activity

• Go to classroom website, “My Links”, “Economics …”, “Managing a Savings Account”

All remaining time will be usedto complete your Chapter 7 Test Packet.

Checkpoint 7.4Answer in complete sentences and submit.

1. What is the basic process for opening an account?

2. Why is security information collected on an account application?

3. Why does a financial institution record a customer’s Social Security number?

4. What information is reported on a deposit slip?

5. How long is the time period usually covered by a bank statement?

Bellringer

BELLRINGER

• The sooner you are seated and quiet, the sooner we can begin the film analysis assignment.