Savings Accounts
Chapter 5
Purpose of Savings Account?
• To accumulate money for future use• To plan for future needs and wants
Examples of Savings – For. . .
Those Rainy Day Emergencies
That Special Trip
Shopping Trips
Playing Santa Hunting Trips or buying that
perfect gun
The Engagement ring
What are your savings for?
Savings Accounts• Demand deposit account • May have some restrictions – On how quickly or easily the money can be
withdrawn• Pay interest at a low rate• Liquidity– Easy access to money
Computing Interest• Principal – Sum of money set aside on which interest is paid
• Simple interest– Interest is computed on the principal once in a
certain period– Interest is not added to principal– Simple interest = P R T
Computing Interest• Compound Interest– Interest earned is added to the principal
Year Beginning Balance Rate Qrt 1 Qrt 2 Qrt 3 Qrt 4 Ending
Balance1 $100 .015 $1.50 $1.52 $1.55 $1.57 $106.14
2 $106.14 .015 $1.59 $1.62 $1.64 $1.66 $112.65
• Simple Interest formula• Interest = P R T
• Compound Interest• Interest = P R• Interest = (P + I) * R
• FV function
Computing Interest Review
Saving Options• CD• Money Market accounts• US Savings Bonds• IRAs
CDCertificate of Deposit
• Has nothing to do with music• Time deposit rather than a demand deposit• Money set aside for a fixed time• Take out early – penalties
Money Market Accounts
• Pays the market rate of interest on money deposited
• Minimum usually required ($1000 or $5000)
US Savings Bonds
• Discount bond issued by the federal government
• You pay less than face value for bond
IRAsIndividual Retirement Arrangement• Retirement savings• Deposit money into account during working
ages• Taxed when money is taken out
Meeting Financial Goals
• How long do you have to save?• What interest rate can you earn?• How much money do you want to save?• Rule of 72– Divide annual interest rate by 72– Answer equals # of years to double investment– Example: $50 invested at 6%• $100 in 12 years (72/6 = 12)
Savings
It will make a difference