Chapter 10 Saving for the future Savings Goals and Institutions. Saving options, features and plans.
-
Upload
austin-alexander -
Category
Documents
-
view
226 -
download
2
Transcript of Chapter 10 Saving for the future Savings Goals and Institutions. Saving options, features and plans.
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market Money is used to purchase safe, liquid securities Offered by banks and brokerage firms Money can be deposited/withdrawn at any time with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