Chapter 4 Saving

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Chapter 4 Saving
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Reasons to save

• Emergency fund
• First priority after needs are met
• Should be approximately 2-3 months of expenses
• Where to keep money is based on your discipline
  level
• Large purchases
• New Car, Home, Childs Education
• Figure out your values and spend on those
• Wealth building
• Investing, Retirement,
• Consistency is the key

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Accounts for saving

• Checking
• Demand deposit- it can be withdrawn at anytime
• Very liquid- Checks, ATM
• Average interest rate .4
• Online accounts pay more

• NOW- negotiable order of withdrawal
• Like checking but must maintain a minimum balance
• Can have additional fees/penalties
• May pay higher monthly interest rates .5-.75

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Accounts for saving

• Savings Account
• Liquid but no check writing capabilities
• Less transactions
• IR .9

• Money Market Deposit Account (MMDA)
• Maintain minimum balance
• Offer limited check writing privileges
• IR.9

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Certificates of Deposit

• Contract between an individual and financial
  institution that specifies the length of time the
  person will leave a deposit with the bank at a
  specified rate
• Slightly less liquid
• 3mo, 6mo, 1 year, 3, year, 5 year,
• IR- 1 year.9 5 year 2.3

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FDIC Insured

• Federal Deposit Insurance Corporation
• Established in 1933 because of the Great
  Depression
• Covers checking, saving, MMDA, CDs
• standard insurance amount- 250,000 per
  depositor, per insured bank, for each account
  ownership category
• Fractional reserve banking

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Savings bonds

• Issued by the US Department of Treasury
• You loan the amount to the US govt
• Come in eight values 50, 75, 100, 200, 500,
  1,000, 5,000 and 10,000

• IR depends on series and year but is around 1.5
• Historically 0-5

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Places to Save Money

• Banks
• Brick and Mortar- have branches, tellers, higher
  expenses
• Online, Internet only- can offer higher rates
  (Capital One 360)

• Credit Unions
• member-owned financial cooperative
• serve- people, not profit
• Use different terminology but have similar
  products
• Video

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Fees associated with banking

• Minimum Balance Fees
• Non-Direct Deposit Fees
• Overdraft-Bounced Check Fees
• ATM withdrawal fees
• Check Image Service Fee

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Brokerage Houses/Firm

• facilitates the buying and selling of financial
  securities
• serve a clientele of investors who trade public
  stocks and other securities
• research the markets to provide appropriate
  recommendations
• Can sometimes be combined with a bank
• Fidelity, Schwab, Capital One 360
• Commission based

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Historical Interest Rates

• Checking and Savings accounts .75-2
• CDs- 1.5-4
• Treasury Bills .15-4
• Municipal Bonds 4-6
• Corporate Bonds 6-8
• Stocks 8-12
• Mortgages 6-10
• Todays Rates are extremely low, Why??

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Compound Interest- Rule of 72

• Compound interest- paid on your principal and
  interest
• Compounding frequency is important
• Use the annual percentage yield (APY)- the
  interest rate that takes compounding frequency
  into account

• Rule of 72- uses annual compounding
• Divide 72 by your interest rate to find the
  number of years it will take for your money to
  double