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Chapter 10

Saving for the Future

Savings Goals and InstitutionsSavings Options, Features, and Plans

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Why You Should Save

Short-term needs – a year or lessLong-term needs – over a year

Home ownershipEducationRetirementInvesting

Financial security

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How Your Money Grows

PrincipalInterestCompound interest – the more interest is compounded, the more money you will make.Annual percentage yield (APR)

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Compounding Interest Annually

Beginning Interest EndingYear Balance Earned (5%) Balance

1 $100.00 $5.00 $105.002 105.00 5.25 110.253 110.25 5.51 115.76

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Compounding Interest Quarterly

Quarterly Compounding Annual Interest Rate = 6%

Beginning Quarterly Quarterly Interest Ending

Year Balance Interest Q1 Q2 Q3 Q4 Balance

1 $100.00 .015 $1.50 $1.52 $1.55 $1.57 $106.142 106.14 .015 1.59 1.62 1.64 1.66 112.653 112.65 .015 1.69 1.72 1.74 1.77 119.57

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Where You Can Save

Commercial banksSavings banksSavings and loan associationsCredit unionsBrokerage firms

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Savings Options

Regular savings accountHigher liquidity – easy to get your cash out whenever you need it.Lower interest rate

Certificate of deposit (CD)Maturity date – the day to cash it inPenalty for early withdrawal

Money market account – a type of savings account

Minimum balance, limited withdrawals of $Variable interest rate

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Selecting a Savings Plan

Liquidity – the ease of getting your cash outSafetyConvenienceInterest-earning potential (yield)Fees and restrictions

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Saving Regularly

Direct deposit Automatic payroll deductions – out of your paychecks – can go to stocks, 401K, savings, etc.

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Compounding Interest and Making Additional Deposits

Beginning Interest Ending

Year Balance Deposits Earned (5%) Balance

1 $ 0.00 $100.00 $ 5.00 $105.002 105.00 100.00 10.25 215.253 215.25 100.00 15.76 333.014 331.01 100.00 21.55 452.56