Financial Literacy

Financial Literacy How to finance your life

Savings Accounts Saving – The process of setting money aside for a future date instead of spending it today. Not intended to be used for every day purchases Intended to be a safe place to keep money to be used at a later date for a major purchase. Gives a little EXTRA return on money deposited

Savings Accounts • The goal of saving is to provide funds for: • Emergencies • Short-term goals • Investments • Save first, then invest with a sufficient amount of $.

Savings Accounts Investing – The process of setting money aside to increase wealth over time and accumulate funds for long-term financial goals such as retirement. Have you ever tried to save up money for something?

Savings Accounts Deposit – Money you put into your savings account Withdrawal – Money taken out of your saving account

Savings Accounts Interest – Money paid back to you by the bank for being able to use your money Interest is that something EXTRA, that is a larger benefit than a checking account. Interest is a result of the banks using your money while it is in your account

Savings Accounts • The bank pays interest on the amount of money in your savings account • Interest Rate – percentage you are paid for your money. • Rates may vary from month to month • Interest can be paid: • Annually– once a year 12% • Semi-annually – twice a year 6% • Monthly – once a month 1% • Quarterly – four times a year 3%

Savings Accounts • Account Balance – Total amount of money that is in your account • Account Balance = • Amount deposited + Interest payment • Interest Payment = • Interest Rate x Beginning Account Balance • Beginning Account Balance = • Ending account balance from the previous month

Savings Accounts If you had $1000 in a savings account. The interest rate is 7% What is the Interest Payment? What is the Account Balance?

Savings Accounts • Compounding of Interest – When money is earned on the total amount in the account. • Including the initial deposit and interest already credited to the account • The more often the interest is compounded, the more money is gained through interest payments

Savings Accounts • You have $100 in your savings account at the beginning of the month. The bank pays you 6% interest on this account each year; interest is paid each month. Assuming you make no deposits or withdrawals over the next month, how much interest will you earn during the month? • Monthly rate = 6/12 = 0.5% = .005 • Beginning Balance = $100 • Interest Payment = $100 x .005 = $0.50 • Account Balance = $100 + $0.50 = $100.50

Savings Account • How much money will be gained after Month 2, 3… • Month 2 • Beginning Balance = $100.50 • Monthly rate = 6/12 = 0.5% = .005 • Interest Pmt = $100.50 x .005 = $0.51 • Account Balance = $100.50 + $0.51 = $101.01 • Month 3 • Beginning Balance = $101.01 • Interest Pmt = $101.01 x .005 = $0.51 • Account Balance = $101.01 + $0.51 = $101.52

Savings Account • You have the opportunity to put your money in one of two savings accounts. $100 dollars in each account. Account 1 compounds interest monthly at a rate of 4%. Account 2 compounds annually at a rate of 4%. • Account 1 • Beginning Balance = $100 • Interest Rate = Monthly = 4/12 = .33% = .0033 • Interest Pmt = $100 x .0033 = $0.33 • Account Balance = $100.33 • Account 2 • Beginning Balance = $100 • Interest Rate = annual = 4% = .04 • Interest Pmt = $100 x .04 = $4 • Account Balance = $104

Savings Account Account 1 will compound throughout the year. We will start Microsoft Excel in February.

Savings Accounts • Future Value – how much a set amount of money will be worth in the future • Think back to interest payments • $1000 today is worth $1040 in one year with 4% interest compounded annually. • FV = PV x interest rate • FV = $1000 x .04 • FV = $1040

Savings Accounts • Present Value – The value of money right now, today • $1040 in one year is still worth $1000 today at a rate of 4% annually. • PV = FV / rate • PV = $1040 / .04 • PV = $1000

Savings Accounts • Discount Factor – The amount that $1 at some point in the future is worth today • Divide: Present Value / Future Value • Divide $1000 by $1070 and get 0.9345 • This means that 93.4 cents today is worth one dollar in a year.

Savings Accounts • The Rule of 72 – a formula designed to help people estimate how long it will take to double their money at a certain expected interest rate • Divide: 72 / Annual Interest rate • This will ESTIMATE the amount of years it will take to double your money

Savings Account • $1000 at an annual rate of 4% • 72 / 4 = 18 • It will take approximately 18 years to double the money.

Savings Account • What about $500 at an annual rate of 5%? • 72 / 5 = 14.4 • It will take 14.4 years to double your money.

Checking Accounts Learning to maintain a checking account is a necessary skill to master before living independently. Checking Accounts are meant to be a place to keep money for short times before it is spent. Typically banks offer little to NO interest on checking accounts.

Checking Accounts • Checks – Written order specifying the amount of money to be paid and the name of the person or company who should receive the funds. • Should be written in pen so no changes can be made

Checking Accounts • Checks may be written to pay for: • Utilities • Rent • Mortgage Payments • Food • Clothing • Other expenses • Each box of checks will be deducted from the checking account total.

Checking Accounts • Checking Account Balance may be recorded on the check register. • May be changed in two ways; • Increase – Deposit/Credit • Decrease – Debit • Deposit/Credit is money put into your account • Debit is a withdrawal from your account

Checking Accounts • Check Register • For credits/deposits • Record the date and amount of deposits • For checks/debits • Record the date, check number, payee, and amount of each check written

Checking Account • At the end of each month, you should balance your checkbook. • Balance – compare the amount of money in an account, to the net of credits and debits against the account at that time. • Account Balance = • Start of month account balance + Total amt of deposits made during month – Total amt of checks/debits during month.

Checking Accounts • At the end of the month, the bank will send you a banking statement, which includes the: • statement balance – how much money you have in your checking account as of the statement date • All debits and credits made before statement date

Checking Account If your beginning balance was $1000 dollars. You wrote 3 checks for $100 each. You wrote 4 checks for $50 each. You deposited a check for $500 into your account. What is your ending balance?

Checking Accounts Beginning Balance = $1000 $1000 - $100(3) - $50(4) +$500 $1000 - $300 - $200 +500 = $1000 Ending Balance = $1000

Checking Accounts • Instead of writing a check, people may prefer to use a debit card : • A card that allows the user to withdraw money from a bank account to get cash or make a purchase • When using a debit card, you will be asked to enter a Personal Identification Number (PIN) • Four digit code required to use the debit card to verify identity

Checking Accounts • Electronic Funds Transfer (EFT) • The movement of funds using the computer systems, telephones, or electronic terminals • Examples • Direct Deposit - Automatic transfer of your paycheck from your employers account to your checking account. • Automatic payment of an ongoing monthly bill such as power or cable bill

Checking Accounts • Online Banking • Allows account holders to access their account information, view transaction history, and perform banking transactions via the internet • 62 % of people bank online. • Advantages • Available 24 hrs a day, 7 days a week regardless of bank hours. • No checks have to be written • Transactions are automatic • Service is free to account holders

Checking Accounts • What will happen when you write a check and there is not enough money in your account to cover it? • Online banking could save you from forgetting a transaction and overdrawing. • What will be the result?

Checking Accounts • Overdrawn • Having a negative balance in your account resulting in a BOUNCED CHECK • Check written without available funds to cover the amount • Overdraft Penalty • A fee to cover the cost of processing your bounced check • Commonly $20-$25 at most banks

Checking Accounts • Overdraft Protection • Arrangement with the bank to cover checks so they will not bounce • Examples: • Automatically transferring money from another account at the same bank to cover the short account • Setting a specific limit to overdraft to • Lending you the amount of money you have overdrafted • In all of these cases, the bank may still charge a fee for this service.

Checking Accounts • Read all the fine print when selecting a checking account • Look out for accounts that have • Hidden fees • a high minimum account balance • The amount of money you must keep in the account to avoid service charges or qualify for interest on an interest bearing account • An account that earns interest • Usually a high minimum account balance and a low interest rate

Checking Accounts • Look for accounts that offer: • Free checks • ATM fee reimbursement • Online Bill Pay • Email Statements • Overdraft Protection • Special Account starters for Students

Monday Assignment Check register Figure interest payments with annual payments compounded monthly

Financial Literacy