Copyright 2007 Thomson South-Western

Unit Two

Savings & Budgeting

Chapter 1: Savings AccountsKey Terms

• Saving• Investing• Deposit• Withdrawal• Interest• Interest rate

• Account balance• Compounding of interest• Future value• Present value• Discount factor• Rule of 72

Slide 3

The Purpose of Savings

• Saving means accumulating money to use for future needs

• A savings account– Is a time deposit in a bank or other financial

institution– Is a safe way to set aside money – Typically pays interest– May have some restrictions on how quickly or

easily the money can be withdrawn

5-2 Savings Accounts

Purpose of Savings Accounts

Definition Goal

• The process of setting money aside for a future date instead of spending it

• Provide funds for emergencies

• Short-term goals • Investments

Pay yourself first 10%

Investing

• The process of setting money aside to increase wealth over time and accumulate funds for long-term financial goals such as retirement

Savings Accounts

Provides you with a secure place to store your cash while earning a little something extra call interest.

Interest is money paid to you by the bank for being able to use your money (+)

Deposit put in money into your savings account (+)Withdrawal take out money from your savings

account (-)Accounts at banks are insured by the Federal Deposit

Insurance Corporation (FDIC). This insurance is for up to $100,000 per depositor per bank.

Savings Options

• Certificates of deposit• Money market accounts• Individual retirement arrangements (IRAs) • U.S. savings

bonds

5-2 Savings Accounts

The TreasuryDirect Web site provides information on savings bonds.

Source: TreasuryDirect, http://www.treasurydirect.gov (accessed April 27, 2006).

Compare and Contrast THREE savings accounts

1.Name of bank?2. Is there a student savings account?3. Is there a minimum balance required?4. Is a debit card included?5.What is the minimum age to start an

account?6.What is the address of the closest branch to

your house?7.Would you use this bank? Why?

Types of Savings accountspassbook account Depositor receives a booklet in which deposits, withdrawals, and interest are

recorded. Average interest rate is lower at banks and savings and loans than at credit

unions. Funds are easily accessible.statement account Basically the same as a passbook account, except depositor receives monthly

statements instead of a passbook.

Accounts are usually accessible through 24-hour automated teller machines (ATMs).

Interest rates are the same as passbook account. Funds are easily accessible.interest-earning checking account Combines benefits of checking and savings. Depositor earns interest on any unused money in his/her account.

Types of Certificates of Deposit1. Rising-rate CDs with higher rates at

various intervals, such as every six

months.

2. Stock-indexed CDs with earnings

based on the stock market.

3. Callable CDs with higher rates and

long-term maturities, as high as 10–15

years. However, the

bank may “call” the account after a

stipulated period, such as one or two

years, if interest rates drop.

4. Global CDs combine higher interest with

a hedge on future changes in the dollar

compared to

other currencies.

5. Prombotional CDs attempt to attract

savers with gifts or special rates.

Money Market Accounts

what they are and how they work Checking/savings account. Interest rate paid built on a complex structure that varies with size of

balance and current level of market interest rates.

Can access your money from an ATM, a teller, or by writing up to three-six checks a month.

benefits Immediate access to your money. (liquidity) trade-offs Usually requires a minimum balance of $1,000 to $2,500. Limited number of checks can be written each month. Average yield (rate of return) higher than regular savings accounts.

Certificates of Depositwhat they are and how they work Bank pays a fixed amount of interest for a fixed amount of money during a

fixed amount of time.benefits No risk Simple No fees Offers higher interest rates than savings accounts.trade-offs Restricted access to your money Withdrawal penalty if cashed before expiration date

(penalty might be higher than the interest earned)

Choosing a savings accountfactors that determine the dollar yield on an account:

Interest rate (also called rate of return, or annual yield)• All money earned comes from this factor.

the following factors reduce money earned and can even turn it into a loss:

Fees, charges, and penalties• Usually based on minimum balance requirements, or transaction fees.

Balance requirements• Some accounts require a certain balance before paying any interest.• On money-market accounts, most banks will pay different interest rates for different size balances. (Higher balance earns a higher rate.)

Balance calculation method• Most calculate daily. Some use average of all daily balances.

Slide 14

Purpose of Budgeting

• Budget – A spending and saving

plan– Based on expected

income and expenses– Allows you to compare

financial resources with financial needs

4-2 Budgeting

A budget can be created using a spreadsheet.

Slide 15

Four Steps to Building a Budget

• Estimate income• Plan savings• Estimate expenses

– Variable expenses– Fixed expenses

4-2 Budgeting

Eating at a fancy restaurant is entertainment, a variable expense.

• Balance the budget

Slide 16

Personal Budget

4-2 Budgeting

Slide 17

Budget Analysis

• Income, savings, and expenses will not be exactly as budgeted

• Differences between planned and actual amounts are called variances– Favorable variances– Unfavorable variances

• Looking at variances can help you budget better in the future

4-2 Budgeting

Slide 18

Budget Variances Report

4-2 Budgeting

Why are these variances favorable/unfavorable?

Interest Payments

• Interest rate is the percentage you are paid for your money and can vary from month to month

• Account balance is the total amount of money that is in the account at a given point in time.

Federal Reserve System

• Is the central bank of the United States • Seeks to provide the nation with safe, flexible,

and stable monetary and financial systems

Slide 21

Computing Interest

• Money deposited in a savings account typically earns a set rate of interest– Simple interest

5-2 Savings Accounts

SIMPLE INTEREST

Interest (I) = Principal (P) x Rate (R) x Time (T)

Interest = $1,000 x 6% annual rate x 6 months

$30 = $1,000 x 0.06 x 0.5

Pay yourself first (a little can add up)

A little can add up!

Save this each week … at % interest … in 10 years you’ll have

$7.00 5% $4,720 14.00 5% $9,440 21.00 5% $14,160 28.00 5% $18,880 35.00 5% $23,600

You can buy … two fast food meals or one movie ticket (and a candy bar) or save $7.00 this week.

You can buy … two small cheese pizzas or one large pepperoni pizza, delivered or one new CD or save $14.00 this week.

What can you give up to save for your financial goals?

Slide 23

Computing Interest

– Compound interest

5-2 Savings Accounts

$119.57$1.77$1.74$1.72$1.690.015$112.653

$112.65$1.66$1.64$1.62$1.590.015$106.142

$106.14$1.57$1.55$1.52$1.500.015$100.001

Ending Balance4321Rate

Beginning BalanceYear

Quarterly Interest

QUARTERLY COMPOUNDINGAnnual Interest Rate 6%

.Why do interest payments increase over time? .How long do you think it takes to double your money over time?

Slide 26

Meeting Financial Goals

• When choosing a savings option, consider– The amount to save– The length of time you will save– The interest you can earn

• Use the Rule of 72 to estimate how long it will take the money to double at a certain interest rate

5-2 Savings Accounts

Monetary Policy

• Key interest rates are controlled by the Fed – Discount rate– Federal funds rate– Prime rate

• The Fed sells and buys U.S. government securities in open-market transactions– Government bills (Treasury bills)– Treasury notes– Treasury bonds

Monetary Policy

• The Fed plays a major role in operating the country’s payment systems – Reserve banks act as a clearinghouse for checks – Checks may be deducted from your account in a

single business day

• The Fed regulates the banking industry– All interstate banks must be Fed members– Intrastate banks are also subject to Fed rules

Commercial Bank vs Credit Union – Part 1

1. Credit Union (general information)

2. Overview of Credit Unions

3. How Banks Work

4. Credit Union Definition

5. Bank Definition Slide 29

Complete the Bank vs Credit Union Venn Diagram using the websites listed below (one per group)

Commercial Bank vs Credit Union – Part 2

• Locate Local Banks (Enter “banks” in the place for name and enter your zip code)

• Locate Local Credit Unions ; General Credit Union Information

• Locate ONE BANK and ONE CREDIT UNION in this area (using web sites above)

• Fill this information in to the Criteria for Choosing a Bank or Credit Union worksheet.

Slide 30

Commercial Bank vs Credit Union – Part 3

• Complete the Bank Criteria worksheet (one per group)

• Present your group’s findings to the class

Slide 31