savings banking & finance. why do customers save? define savings goals explain how interest is...
TRANSCRIPT
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Savings
Banking & Finance
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Why Do Customers Save?
• Define savings goals• Explain how interest is earned
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Savings: portion of income that is not spent.
Short-Term Savings Goals• < year to accomplish• For products that are safe
and don’t charge fees• Liquidity: ability of a
financial asset to be quickly converted to cash
• Interest: amount charged to borrow money
Long Term Savings Goals• > year to accomplish• Ex: buying a house, retiring,
paying for college• Higher interest rates more
important• Liquidity not as important
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Savers’ PrioritiesCharacteristics Priorities
Short-term savings goals (< year)
Long-term savings goals (>year)
Safety X X
Liquidity X
Convenience X
Interest earned X
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Interest Earned
• Banks used customer’s deposit (transfer of money into the bank) to earn more money for itself
• Initial deposit (principal) earns interest
• Compound interest: interest paid on interest.
• Uses accrued interest (amount added to the principal at regular time periods)
• APY—Annual Percentage Yield: Rate of return on investment for 1 year
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Calculating Interest
Year One
$500 (initial deposit) + $25 (5% interest earned after one year) = $525 (balance after one year)
Year Two
$525 (principal + accrued interest) + $26.25 (5% interest earned after one year) = $551.25
[$500 (principal) + $51.25 (accrued interest)] - $500 (initial deposit) = $51.25 (interest earned after two years at 5%)
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Compound Interest
F = P(1+r)t
F = final amountP = principalr = rate of interestt = # of times compounded
Without making any additional deposits, the customer’s money grows significantly.
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Checkpoint 7.1(Underline/Highlight Proof in Text)
1. How long does it take to achieve a short-term goal?
2. What factors are most important to savers with short-term goals?
3. What factor is most important to savers with long-term goals?
4. Name the fee a bank pays to use a customer’s money.
5. How often is interest compounded at most banks?
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Bellringer: 5 minutes Journal Entry (short answer)
• Have you ever tried to save your money to purchase something?
• How did you decide how much money to save?
• How much money did you have to save?• Did you have to adjust any of your
spending habits to save the money?• Overall, how successful were you in saving
for this goal?
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Savings Products• Identify the types and
characteristics of savings accounts.
• Describe the characteristics of a certificate of deposit.
• Explain the difference between savings accounts and certificates of deposit.
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Lights . . . Camera . . . Action!
• Video: Savings (BizKid$)• 3-2-1 Review of the Video (3 things
learned, 2 things of interest, 1 question)
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Savings Accounts• A deposit account at a depository institution
that pays interest to the account holder• Low rate of interest• Add/withdraw money at any time
FDIC protected up to $250,000
Good for long term?No.
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Types of Savings Accounts
Passbook Savings• Traditional savings account• Passbook: a small book kept
by the account owner• Are we still using these?
No.• Transactions are now mailed
and e-mailed.• Can also be viewed at
ATMs.
Online Savings Accounts• Opened/used without
visiting physical location• All communication is done
through the Internet or mail.
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Types of Savings Accounts cont’d
Custodial Accounts• Managed by an adult for a
minor younger than 18 or 21.
• Requirements depend on state laws
• Custodian must approve all transactions
Money Market Accounts• Pays a higher interest rate
than traditional savings accounts.
• Bank uses this money to buy a variety of financial products
• Restrictions on the number of withdrawals—why?!
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Feature Description
ATM fee Customers may be charged if they use ATM of another bank
Insured balance Certain amount in an account owner’s balance, in each bank, is insured by FDIC
Limited # of transactions
Transactions per a given period are limited
Linked accounts Connects the savings account to another account
Minimum balance lowest amount of money needed to keep an account open. Banks will often charge fees if balance drops below this amount.
Minimum deposit to open account
Lowest amount of money that can be used to open an account ($25 or more)
Monthly fee Amount paid to the bank for account maintenance, often waived if account doesn’t fall below minimum balance
Online banking Allows account owner to access account information and make financial transactions on the Internet
Transaction fee Amount paid to the bank every time a transaction is made
Savings Accounts – Features and Fees
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Bellringer: Word Study
Pictorial Representation
Textbook Definition
Real World Connection
Contextual Paragraph
Liquidity
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Individual Activity
• Create a list of things to consider when choosing a savings account.
• Refer to the slide “Savings Accounts Features and Fees”
• Research “savings accounts features and fees” on the Internet.
• Record anything you need to add or remove to/from your list.
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Certificates of Deposit (CD)
• For long term goals• Requires specific
amount of money to be held on deposit for a specific amount of time
• aka time deposit or fixed deposit
• When fixed term expires, the CD is mature
• After this time, owner can withdraw without paying a penalty or fee for breaking account terms
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CDs
• Higher interest rate than savings account• FDIC insured• Length of deposit is fixed
• Specified amount needed to purchase• fee charged if withdrawal
made before date of maturity
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Terms, Amounts, and Interest Rates
• Interest rate paid based on:– Amount deposited– Length of time– Competitors’ interest rates
» Usually require deposit of at least $1,000» Some banks offer 1-month, shortest 6 months» 2011, 6-month paid .55% (more than .01% on
savings)
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Jumbo CDs
• For large amount of money, usually $100,000 or more
• Interest rates are higher• Just like regular CDs
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Passbook
Online Custodial
Money Market
CD Jumbo CD
Characteristics
Interest Rates
Low Low Low Medium High Highest
Amount Any amount
Any amount
Any amount
Minimum balance
Fixed Fixed
Time Period
Short term
Short term
Short term
Short term
Fixed Fixed
Access Any time
Any time Any time Limited None None
Savings Vehicles
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Checkpoint 7.2(Underline/Highlight Proof in Text)
1. Name 3 characteristics of a savings account.
2. What is the main advantage of an online savings account?
3. Why does a money market account earn more interest than a passbook savings account?
4. Why is a CD also known as a time deposit or a fixed deposit?
5. How is a jumbo CD different from a regular CD?
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Bellringer
• What is wealth?
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Bellringer
• Why is it important to start thinking about retirement early?
• Describe the difference between a 20 and 40-year retirement investment with the same interest rates and contribution amounts.
• How much more can an individual save if he or she starts saving at a young age?
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Retirement Accounts
• Explain why it is necessary to save money for retirement
• Describe the characteristics of an IRA•Differentiate among employee
options for retirement planning
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Saving for Retirement
Expectations• Retirement: person’s
withdrawal from active participation in a job or business.
Historical Solutions• Social security: federal
program that includes financial benefits intended to supplement retirement savings for Americans
• Amount depends on income of retiree while working
• Pension (defined benefit plans): fixed sum of money a company provides for its retired employees for years of service
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Individual Retirement Account (IRAs)
• Savings account in which income taxes are deferred on some deposits and all interest until all or part of the balance is withdrawn at retirement age.
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To open a traditional IRA, must meet two legal requirements:
• Customer or the spouse must have taxable compensation that year
• Customer cannot be 70 ½ years old by the end of the year the account is opened
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IRAs
• Compensation: wages and financial benefits earned by working– Includes salary and income earned by owning a
business– Does not include interest earned or income that
cannot be taxed
• Contributions = deposits• Distributions = withdrawals
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IRAs
• Account holder must begin receiving cash from the IRA by April 1 the year after reaching the age of 70 ½ years.
• If taken before age 59 ½ , a 10% penalty will be paid to the IRS.
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Retirement Accounts Providedby Employers (defined contribution plans)
Simplified Employee Pension (SEP)• Retirement plan established
by a business for its employees or owners
• Self-employed can set up for themselves
• Tax deductible• Cost to administer is low• 25% of salary is legal limit
of contribution ($49,000)
3-Step Process• Execute formal written
agreement to provide SEP for eligible employees
• Provide specific information to each eligible employee
• Each eligible employee must have an SEP IRA set up by the business or the employee
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Retirement AccountsSIMPLE IRA Plans
• IRA-based plan for small employers
• No more than 100 employees
• No other retirement plan• Employer matches
employee contribution up to 3% max
• Contributions made to all employees
• Withdraw within first 2 ½ years, pay add’l tax
Traditional 401(k) Plan
• Enables employees to make tax-deferred or taxed contributions through payroll deductions.
• Employers not required to contribute
• Lesser of 100% of employees compensation or legal maximum amount ($11,500)
• Distribution before 59 ½, taxed add’l 10%
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Roth IRA• Similar to traditional IRA• Contributions not deducted from your
income• You can withdraw money if you are 59 ½
and it’s been open for at least 5 years• Taxed when earned• Can continue contributions
past 70 ½• Can withdraw to buy a
home
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Checkpoint 7.3(Underline/Highlight Proof in Text)
1. Historically, how did individuals pay for retirement?
2. What is the main difference between a traditional IRA and a Roth IRA?
3. Why does a company provide benefits?
4. How does a business qualify to provide a SIMPLE IRA?
5. When can an employee make an early withdrawal from his or her 401(k)?
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Opening and Maintainingan Account
• Explain the process of opening a new account
• Describe the process of maintaining an account
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Bellringer
• Consider what information might be necessary to open a savings account.
• What other types of accounts are you familiar with?
• How does opening and maintaining a savings account compare to these other types of accounts?
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Review these Terms . . . Where have you heard them?
• Account holder• Deposit slip• Remote deposit
capture• statement
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Opening an Account
Complete an Application
• Social security number . . . WHY?
• Driver’s license or State ID• Contact information• Opening deposit
Depositing an Opening Amount
• Usually cash• Generally held by bank for a
few days• What does this mean for the
account holder?
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Maintaining an AccountDepositing Funds
• Deposit slip: fill out to make a deposit and to record deposit information
• Remote deposit capture: scan checks for deposit electronically
Withdrawing Funds• Fill out withdrawal slip to
withdraw funds• Where can you do this?
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Maintaining an AccountUnderstanding a Bank
Statement• Statement: shows all
activity during the covered time period.
• Usually a month• What does this include?
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Complete Online Activity
• Go to classroom website, “My Links”, “Economics …”, “Managing a Savings Account”
All remaining time will be usedto complete your Chapter 7 Test Packet.
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Checkpoint 7.4Answer in complete sentences and submit.
1. What is the basic process for opening an account?
2. Why is security information collected on an account application?
3. Why does a financial institution record a customer’s Social Security number?
4. What information is reported on a deposit slip?
5. How long is the time period usually covered by a bank statement?
Bellringer
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BELLRINGER
• The sooner you are seated and quiet, the sooner we can begin the film analysis assignment.