Transcript Slide 1

Chapter 8
SAVING: PLAN FOR FINANCIAL SECURITY
VOCABULARY FOR THIS CHAPTER
1.
2.
3.
4.
5.
6.
7.
8.
Saving
Commercial Bank
Savings Bank
Credit Union
Savings Account
Certificate of Deposit
Money Market Account
Annual Percentage
Yield
9. Bond
10. Savings Bond
11. Face Value
12. Principal
13. Simple Interest
14. Compound Interest
SAVINGS DO NOW
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1. What are some of the reasons to save?
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2. How can having savings give you flexibility?
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3. Why is rewarding yourself an effective saving
strategy?
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4. How do you think automatic deductions from your
paychecks help you save?

5. Why is it important to having a saving strategy?
8.1
WHY SAVE?
BENEFITS OF SAVING
Saving is a tade-off
 You trade spending now for the ability to spend
in the future
 The purpose of saving is to plan for the future
and expenses you cant foresee
 Expected Vs. Unexpected expenses

SAVE FOR THE UNEXPECTED
Your future will include some unexpected
expenses, it is a way of life
 Accidents happen, things break, and
opportunities arise that you will need $$$$ for
 If you lose your job, your fixed expenses do not
go away

SAVE FOR OPPORTUNITIES

Saving can allow you to take advantage of
unexpected opportunities-Great deal on a car,
vacation, investing, ect

You never know what kind of options you may
have, and saving will allow you to do that
SAVE FOR MAJOR PURCHASES

Major purchases are expensive; homes, cars,
boats all cost a lot of money

Putting a little bit of money away each month
and after gaining interest will help you afford
what you want
SAVE FOR FLEXIBILITY

Having savings can give you more flexibility in
life

You could possibly quit a job you don’t like for
one that pays less, but you enjoy more
SAVE TO ACHIEVE YOUR GOALS
Your life goals will most likely cost a lot of
money
 The sooner you start saving, the better!!!!!!!


What are some of your life span goals?
Saving money is challenging, you must have a plan!
SAVING STRATEGIES
SAVING STRATEGIES

Use the note sheet to take notes on the saving
strategies that we will talk about in class

As we discuss think about which ones will work
for you
STRATEGY #1: PAY YOURSELF FIRST
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Every time you pay your bills or cash a paycheck, make a
deposit into your savings account. (You are paying yourself
just as you pay your bills.)
Consider this deposit to be a ‘required payment’, then leave
it in the bank and don’t touch it.
Since you don’t have this money in hand, you’re less likely to
spend it.
STRATEGY #2 SAVE BY THE NUMBERS
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Certain jobs especially part time jobs make
different amounts of money each pay check
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If you have a job like this instead of saving the
same amount each pay check, save a certain
percent
STRATEGY #3 REWARD YOURSELF
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You will continue your good habit of saving, if
you reward yourself!

Think of things that don’t cost that much
money and reward yourself with them each
time you put money in the bank

Do not go overboard or you will ruin all your
hard work!
STRATEGY #4 CONSIDER YOUR VALUES
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You can decide not to buy an item now to get
something you value later
Example: Suppose you’re saving $20/week to have $400
for a vacation with friends. You see a jacket you love for
$190. If you buy it, you’d be giving up the vacation you
want later for the jacket you want now. If you value the
vacation more, you won’t buy the jacket.
STRATEGY #5 ENROLL IN AUTOMATIC SAVING
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Payroll Deductions
-Many companies will automatically deduct a certain
amount of money from each of your pay check each
month to be put into your savings account. Why is this a
good strategy?

Checking Account Transfers
-You can authorize your bank to transfer a certain
amount of money each month from your checking to
your savings account. Be sure you record these
transactions or your register will be off and you may over
draw
DO YOU REMEMBER…

Why is rewarding yourself an effective saving
strategy?
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What is an effective way to save if you have an
inconsistent income?
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How do personal values affect a savings plan?
8.2
SAVINGS INSTITUTIONS AND ACCOUNTS
IN CLASS ASSIGNMENT: 8.2 AND 8.3
You will be assigned a specific topic to read &
become an expert on. You’ll teach the rest of
the class about your subject area on Friday and
Monday if necessary.
 You can: Write notes on chart paper, create a
PPT presentation, make an interactive class
game, create handouts/notes, design a group
activity, etc. - - you must have some sort of
visual! You will also be responsible for taking
notes on other groups topics-collected and
graded

TOPICS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Commercial Banks
Savings Banks
Savings & Loan Associations
Credit Unions (Not for profit)
Deposit Insurance
Savings Accounts
Interest Rates/Fees & Restrictions
Certificate of Deposit
Money Market Accounts
Annual Percentage Yield
Government Bonds & Treasury Securities
Savings Bonds (EE, HH, I)
8.4
SIMPLE AND COMPOUND INTEREST
INVESTMENTS
LOW RISK INVESTMENTS
HIGH RISK INVESTMENTS
Corporate Bonds
 Mutual Funds
 Stocks
 Real estate (other than primary home)
 Coins and collectibles

WHAT IS INTEREST?
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Interest is money that is paid to you for making
an investment decision.
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The way your bank calculates interest on your
savings will determine how quickly your money
will grow.
SIMPLE INTEREST
PRINCIPAL
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Is the money that you have on deposit in a savings
account, CD or other savings option. (balance)
Interest is calculated on the principal.
 Example: You have $100 in your savings account.
 That means your principal balance is $100.
 You earn 10% interest on your account every month.
 In order to calculate your interest payment you must multiply your
principal balance ($100) by the interest rate (10%). After doing
so, you can easily tell that you will receive $10 in interest income
at the end of the month.
 So, your new principal balance becomes $110 ($100 balance +
$10 interest).
KEY FORMULAS
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YOU MUST REMEMBER AND UNDERSTAND
THESE FORMULAS:
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To Calculate Interest:
-Interest = Principal X Interest Rate
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To Calculate New Principal:
-New Principal = Interest + Beginning Principal
SIMPLE INTEREST
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Simple Interest: Interest paid once a year (at the end
of the year) on the average balance in a savings
account.
It is the amount you earn on your deposits, not on any previous interest
paid.
Example: Following are your monthly account balances for 2008:
At the end of the year, your bank will pay
you 6% in simple interest.
• How much interest will you earn at
the end of the year?
• What will your new principal
balance be?
SIMPLE INTEREST EXAMPLE
1.
2.
3.
Compute the average monthly
account balance:
 Add monthly balances
= $1475
 Divide monthly balances by
12
= $122.92
Multiply the average monthly
account balance by the interest
rate:
$122.92 x 6%= $7.38
Add your interest payment to
your last account balance to get
your new principal balance:
$7.38 + $100 = $107.38
SIMPLE INTEREST PROBLEM
Your bank is going to pay you 10% in simple interest at the end of the year. How
much will they pay you in interest and what will your new principal balance be?
Figure out your average
account balance:
-$760/12 = $63.33
 Figure out your interest
payment:
-$63.33 x 10%= $6.33
 Compute your NEW
principal balance:
-$40 + $6.33 = $46.33
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COMPOUND INTEREST
COMPOUND INTEREST
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Compound Interest: Interest paid on the principal plus any
previous earned interest (which is left in the account).
“Interest on Interest”
Interest can be compounded in several ways:
 Annually – every year
 Semi-Annually – every 6 months
 Quarterly – every 3 months
 Monthly
 Daily
*The more often interest is compounded, the
more interest your money earns!
COMPOUND ANNUALLY
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At the end of year one, you have a $100 principal balance. You earn 10% in
interest, so your principal balance is $110.
At the end of year two, your principal balance is the same $110. You still
earn 10% in interest (which is compounded annually). What is the interest
and your new principal balance?
 $110 x 10% = $11 is the interest
 $11 + $110 = $121 is the new principal balance
What is the interest & principal balance at end of year 3?
 $121 x 10% = $12.10
 $121 + $12.10 = $133.10
What is the interest & principal balance at end of year 4?
 $133.10 x 10% = $13.31
 $133.10 + $13.31 = $146.41
What is the interest & principal balance at end of year 5?
 146.41 x 10% = $14.64
 $146.41 + $14.64 = $161.05
COMPOUND SEMIANNUALLY
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Interest rates are always stated in annual terms. In order to figure out the
semi-annual rate, you have to divide the interest rate by 2.
 Example – 6% interest rate compounded semi-annually= 3% every 6
months
If your principal balance is $100 and you earn 6% interest, compounded
semi-annually, what is your balance at the end of year 1?
 $100 x 3% = $3 interest for first ½ year
 $103 principal balance after 6 months
 $103 x 3% = $3.09 interest for second ½ year
 $106.09 is principal balance after one year
What is the interest & principal balance at end of year 2?
 $106.09 x 3% = $3.18 interest
 $109.27 principal balance after 18 months
 $109.27 x 3% = $3.28 interest
 $112.55 is principal balance after year two
*Note: Compounding semi-annually results in more earned interest as compared to
COMPOUND DAILY
With daily compounding,
your savings will grow the
fastest!!!
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Banks use computer programs to
calculate compound interest –
you can simplify your calculations
by using a compound interest
table.
The table lists the value of one
dollar at several percentage rates,
compounded daily for different
periods of time.
COMPOUND DAILY
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Example 1: Suppose you deposit
$1,000 at 10% compounded
daily. You plan to withdraw the
money in four years. How much
money will you have in your
account after 4 years?
Find the corresponding figure on
the table and multiply it by the
balance.
$1,000 x 1.49 = $1,490
Example 2: You deposit $100 at
6% compounded daily. You plan to
withdraw in five years. How much
money will you have in your
account after 5 years?
$100 x 1.35 = $135
RULE OF 72!!!!
How long will it take for an investment to
double? Use the Rule of 72!
 72 DIVIDED BY the interest rate = the number
of years it will take for money to double in
value.
 Example: If you have $1,000 to invest. How
long will it take to DOUBLE your money with an
8% interest rate?
72/8 = 9 years
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REVIEW!
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Know the benefits of saving your money.
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Know the 5 savings strategies – reward
yourself, savings & values, automatic transfer,
pay yourself first, save by the numbers. Also
keep in mind which one works best for you right
now.
REVIEW

Why do you have a better chance of achieving
long-term financial goals if you start saving
when you’re young?
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Commercial banks vs. Credit unions
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CDs & Bonds (face value)
REVIEW
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Money Market accounts – How are the different
from other financial accounts (CDs, Savings
accounts)? Why does the interest rate change
over time?

Define Principal, Simple Interest & Compound
Interest
REVIEW
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Know ways interest can be compounded (daily,
annually).
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Annual Percentage Yield (APY)—what is it?
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Be able to compute interest compounded
annually, simple interest & new principal
balances.