Transcript Saving Money

Saving Money
What does it mean to save
money?
 Saving means putting some of your money
away for emergencies and/or short-term (less
than one year) financial goals.
 Money that is saved for an emergency and/or
short-term goals should be placed where there
is very little risk of your money losing its value.
 Because you don’t want to assume too much
risk when saving your money, the rate of
interest that you receive is typically very low.
Continued
 Money that is saved for an emergency and/or a
short-term financial purpose should be easily
and readily accessible.
 We will talk about investing money later in this
unit.
 We will see that investing money is typically for
longer-term financial goals and involves
greater financial risk than putting money in
savings. However, investing money can also
lead to much greater potential financial
rewards.
Continued
 It is important to understand that the amount of time
that you have until you need your money is crucial
when deciding whether that money should be saved or
invested.
 The shorter the time period that you have until you
need the money the more likely that putting your
money in savings and avoiding risk is the appropriate
course of action.
 The longer the time period that you have until you need
the money the more likely that investing your money is
the appropriate course of action. This is because you
do not need the money immediately so you can
assume more risk and potentially earn a greater rate of
return.
 We will study risk and return in more detail when we
talk about investing money.
Pay Yourself First Rule
(Savings)
 This is arguably the most important financial
rule that we will talk about in personal finance.
 Whenever you receive money you should
immediately put a certain amount into an
account that you will set aside to use later to
meet your short-term financial goals.
 We will talk more about the “Pay Yourself First
Rule” when we talk about investing money for
longer term financial goals.
Types of Savings
Instruments
 On the next few slides we are going to
talk about some of the most common
places where people save their money.
These include:
 Savings Accounts
 Money market accounts
 Certificates of deposit
Savings Accounts
 Regular bank or credit union savings accounts
are the most common places where people
save their money.
 These are also typically the first banking
product that people use.
 The money in savings accounts is guaranteed
by the federal government (up to $250,000).
 Because there is virtually no risk associated
with a bank or credit union savings account,
the rate of interest paid is very low.
Savings Accounts
Continued
 The money is easily accessible and can
be withdrawn at any time with no penalty.
 There is typically a very low minimum
balance that is required to open and
maintain a savings account at a bank or
a credit union.
Money Market Accounts
 These operate similarly to a savings account and are
offered by both banks and credit unions. One of the
key differences is that you typically have limited check
writing privileges.
 Money market accounts typically pay slightly higher
interest rates than regular savings accounts. The
difference is that money market accounts usually have
a much higher minimum balance required to open and
maintain the account.
 Money market accounts at banks and credit unions are
also insured by the government.
Certificates of Deposit
(CD)
 A certificate of deposit is an agreement
between the saver and the bank or credit
union.
 The bank or credit union pays interest on the
money in the CD for an agreed upon amount of
time.
 The longer the term, the higher the interest rate
that is paid.
 The primary drawback to a certificate of
deposit is that some of the earned interest is
forfeited if the money is withdrawn before the
agreed upon time.
Interest from Banks
 We will talk more in detail about all of the
services that banks provide at a later
date.
 However, it is important for us to
understand the reasons that banks pay
customers interest on the money that
they have in their savings accounts,
money market accounts, and their
certificates of deposit.
Continued
 Banks pay interest to customers for the usage of their
money.
 Banks will take the majority of these deposits (banks
must keep a percentage of these deposits as reserves)
and loan them out to other customers for mortgages,
cars, school loans, businesses, etc…
 The interest charged for these loans is greater than the
interest that is paid to customers on their savings,
money market accounts, and certificates of deposit.
 This is the primary way that banks make money.
Final Words About Savings
Accounts
 Individuals should use savings accounts, money
market accounts, and/or certificates of deposit to save
for emergencies and/or short-term financial goals.
 The money is safe and will be there when you need it.
 The interest rates paid on these accounts is typically
much lower than what you would receive by investing
your money. That is why it is appropriate to invest your
money for longer-term financial goals.
 Also, the interest rates paid on these accounts typically
does not keep pace with the rate of inflation.