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Saving for the Future

Saving for the Future. Chapter 10 . Lesson 10.1. Savings Goals and Institutions. I. Why You Should Save. A. To provide for future needs, both expected and unexpected B. Short-Term Needs--savings 1. Emergencies—unemployment, sickness, accident, death in the family

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Saving for the Future

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  1. Saving for the Future Chapter 10

  2. Lesson 10.1 • Savings Goals and Institutions

  3. I. Why You Should Save A. To provide for future needs, both expected and unexpected B. Short-Term Needs--savings 1. Emergencies—unemployment, sickness, accident, death in the family 2. Vacations—short weekend trips or longer 3. Social Events—weddings, family gatherings, sports events 4. Major Purchases—car, appliances, furniture, remodeling.

  4. C. Long-Term Needs-- investments 1. Home Ownership—down payment, closing costs 2. Education—pays off in higher income potential; for yourself or children 3. Retirement—Social Security only a supplement to retirement savings. 4. Investing—Invest savings above covering daily expenses and emergencies. Invest in stocks, bonds, mutual funds, real estate, to make your money grow faster. Can be risky.

  5. D. Financial Security 1. Save for peace of mind—don’t have to worry about how to pay when needs arise 2. How much can you save? Depends on a. Discretionary income—what you have left over after bills are paid b. Importance of saving to you c. Your anticipated needs and wants d. Your will power, or ability to give up present spending to provide for your future

  6. II. How Your Money Grows A. Principal—the amount of money deposited • Interest—amount the financial institution pays the saver for use of his/her money C. Compound Interest—interest computed on the original principal plus accumulated interest

  7. Interest Compounded Annually D. The more often interest is compounded, the greater your earnings

  8. E. Many financial institutions use computers to compound daily interest F. Rate of Return (Yield)—the percentage of increase in the value of your savings due to interest G. Law requires all finan. institutions to tell consumers annual percentage yield (APY) so you can compare yields on different accounts

  9. III. Where You Can Save A. Commercial Banks 1. Widest variety of banking services 2. Insured by FDIC, protects depositors from bank failure up to $100,000 per account

  10. B. Savings Banks (Mutual Savings Banks)—only 500 in Northeast US 1. Savings Accounts 2. Loans on Real property--Insured by FDIC C. Savings and Loan Associations (S&Ls) 1. Primary--Lend money for home mortgages 2. Checking and savings accts-- Insured by FDIC

  11. D. Credit Unions 1. Not-for-profit organizations for members of employee groups 2. Higher interest rates on savings, and lower rates on loans 3. NCUA insures accounts 4. Owned by members—savings account called share account

  12. E. Brokerage Firms 1. Buy and sell different types of securities—stocks and bonds issued by corporations or the government 2. Stocks represent ownership 3. Bonds represent debt, or a loan 4. Investors buy and sell securities through a stockbroker, who works for a brokerage firm

  13. Lesson 10.2 • Savings Options, Features, and Plans

  14. I. Savings Options A. Regular savings account 1. Major advantage is liquidity—the ability of an asset to be converted into cash quickly 2. Tradeoff for high liquidity is lower interest 3. Usually has debit or ATM card

  15. B. Certificate of Deposit (CD) or time deposit 1. Deposit that earns a fixed interest rate for a specified length of time 2. Requires minimum deposit

  16. C. Money Market Account 1. Combination savings-investment plan in which money deposited is used to purchase safe, liquid securities 2. Accounts with brokerage firms are not insured, some banks are (FDIC) 3. Generally considered safe because securities backing these funds are very stable 4. Interest rates vary with stock market, usually higher than savings accounts, minimum deposit, restrict # of checks you can write

  17. II. Selecting a Savings Plan—tradeoff between liquidity, safety, yield A. Liquidity 1. Keep some money in regular savings-- Can get it quickly, without penalty 2. CDs impose penalty if you withdraw early

  18. B. Safety 1. Most insured by FDIC or NCUA 2. Bank deposits almost always safer that the stock market

  19. C. Convenience—location, drive-up windows, ATMs D. Interest-Earning Potential—shop around for best APY E. Fees and Restrictions—be sure to understand

  20. III. Saving Regularly A. Direct Deposit—paycheck directly into bank, put some in savings B. Automatic Payroll Deductions 1. Have a certain amount withheld from your paycheck 2. Payroll Savings Plans The End!

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