Section 3.3

Savings Accounts

What types of savings accounts do banks offer customers?

How many of you have a saving account?

In your groups, answer the following questions:

1) What banking services are you familiar with?

2) What do you know about them?

3) What is simple interest?

4) What is compound interest?

5) In general, why is compound interest better than simple interest?

Where should you put your money?

• Most banks offer savings accounts, money market accounts, certificates of deposit (CDs), loans, life insurance policies, safe deposit boxes, credit cards, debit cards, and checking accounts.

• Banks provide these services so that they can attract customers and make a profit.

• savings account – an account in which the bank pays interest for the use of the money deposited in the account

• interest – a percentage of the money that is in an account that a bank pays on some accounts

• Banks use the money people deposit to give loans.

• People who borrow money from a bank must pay it back with interest.

• The interest bank customers pay is greater than the interest banks pay for use of a customer’s money.

• This way, the bank is able to pay depositors interest and still make a profit.

• interest rate – the percentage rate that is paid by a bank on money that is in some accounts

• principle – the balance of either the amount of money in an account or the amount borrowed

• There are two types of interest, namely simple interest and compound interest.

• simple interest – interest that is calculated on the principal in an account only, using the simple interest formula I = prt

• Compound interest uses the interest earned to increase the principal and will be discussed further in the next section.

Simple Interest Formula

I = prtwhere:

I = interest

p = principal

r = annual interest rate expressed as a decimal

t = number of years

• remember to move the decimal two places to the left when converting from a percent to a decimal

Is there risk when you put your money in a savings

account?• The Federal Deposit Insurance Corporation (FDIC) guarantees the safety of money in a bank by insuring each depositor for up to a specified amount.

• In October 2008, the amount was raised from $100,000 to $250,000 per depositor per bank depending on the type of account.

• The Dodd-Frank Wall Street Reform and Consumer Protection Act made the higher amount permanent.

• Not all financial products are FDIC insured.

• In general, according to http://fdic.gov/deposit/

“FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.”

• Bank customers should be aware if this amount is changed since the federal government replaces this money if a bank fails.

• Banks offer many forms of savings accounts.

• The most common are statement savings, money market accounts, and certificate of deposit (CD)

• statement savings – an account where a consumer receives a monthly statement showing all activity, including deposits, interest earned, and any fees

• minimum balance – a certain amount of money that must be kept in an account as required by that particular bank

• With certain accounts, a fee is charged for each month the balance falls below the minimum amount.

• Some banks do not pay interest if a savings account falls below the minimum balance.

• money market account – an account that pays a higher interest rate, but usually requires a higher initial deposit and a higher minimum balance requirement, often with a limit on the number of transactions per month

• certificate of deposit (CD) – a certificate that states you have a specific sum of money on deposit and guarantees the payment of a fixed interest rate until maturity, usually seven days to ten years

• maturity – a specified date at which interest is paid on a CD

• Usually, the longer the term is, the higher the interest rate is.

• You cannot make deposits or withdrawals from a CD without a penalty.

• Banks report interest rates as annual rates.

•When you choose a savings account at a bank or which bank to use, compare interest rates and consider penalties, fees, minimum balances, other banking services, and whether or not they are FDIC insured.

• Most banks are FDIC insured.

Interest Rates fordifferent accounts

• Lets find some current interest rates for savings accounts.

http://www.money-rates.com/

• Why do internet accounts like Ally Bank have higher interest rates than traditional accounts like Chase?

Example 1• Grace wants to deposit $5,000 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?

First State Bank: 4 % E-Save Bank: 4 %

Johnson City Trust: 4.22% Land Savings Bank: 4.3%

3

8

1

4

Check Your Understanding

•Write the following five interest rates in descending order (greatest to least):

5.51%, 5 %, 5 %, 5.099%, 5.6%

1

2

5

8

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. What was his balance?

Check Your Understanding

• Mae has $891 in her account. A $7 fee is charged each month the balance is below $750. She withdraws $315. If she makes no deposits or withdrawals for the next x months, express her balance algebraically.

Example 3

• Mitchell deposits $1,200 in an account that pays 4.5% simple interest. He keeps the money in the account for three years without any deposits or withdrawals. How much is in the account after three years?

Check Your Understanding

• How much simple interest is earned on $4,000 in 3½ years at an interest rate of 5.2%?

Example 4

• How much simple interest does $2,000 earn in 7 months at an interest rate of 5%?

Check Your Understanding

• How much simple interest would $800 earn in 300 days in a non-leap year at an interest rate of 5.71%? Round to the nearest cent.

Example 5

• How much principal must be deposited to earn $1,000 simple interest in 2 years at a rate of 5%?

Check Your Understanding

• How much principal must be deposited in a two-year simple interest account that pays 3¼% interest to earn $300 in interest?

Example 6

• Derek has a bank account that pays 4.1% simple interest. The balance is $910. When will the account grow to $1,000?

Check Your Understanding

• How long will it take $10,000 to double at 11% simple interest?

Example 7

• Kerry invests $5,000 in a simple interest account for 5 years. What interest rate must the account pay so there is $6,000 at the end of 5 years?

Check Your Understanding

• Marcos deposited $500 into a 2.5-year simple interest account. He wants to earn $200 interest. What interest rate must the account pay?

3.3 HW

• p.135#2, 3, 5, 6, 8, 9a-g, 11, 14, 17, 18