Savings Banking & Finance
Why Do Customers Save? • Define savings goals • Explain how interest is earned
Savings: portion of income that is not spent. Short-Term Savings Goals Long Term Savings Goals > year to accomplish Ex: buying a house, retiring, paying for college Higher interest rates more important Liquidity not as important • < 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
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
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%)
Compound Interest Without making any additional deposits, the customer’s money grows significantly. F = P(1+r)t F = final amount P = principal r = rate of interest t = # of times compounded
Checkpoint 7.1(Underline/Highlight Proof in Text) • How long does it take to achieve a short-term goal? • What factors are most important to savers with short-term goals? • What factor is most important to savers with long-term goals? • Name the fee a bank pays to use a customer’s money. • How often is interest compounded at most banks?
BellringerJournal 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?
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.
Individual Activity • Create a list of things to consider when choosing a savings account. • Refer to Figure 7-4 in your notes handout. • Research this topic on the Internet. • Record anything you need to add or remove to/from your list.
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 $____________ Good for long term? _____
Types of Savings Accounts Passbook Savings Online Savings Accounts Opened/used without visiting physical location All communication is done through the __________ or __________. • Traditional savings account • __________: a small book kept by the account owner • Are we still using these? __________ • Transactions are now __________ and __________. • Can also be viewed at _____.
Types of Savings Accounts cont’d Custodial Accounts 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?! • Managed by _____________ for a minor younger than 18 or 21. • Requirements depend on state laws • Custodian must approve all transactions
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 __________ • After this time, owner can withdraw without paying a _________ or fee for breaking account terms
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
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)
Jumbo CDs • For large amount of money, usually $__________ or more • Interest rates are __________ • Just like regular CDs
Checkpoint 7.2(Underline/Highlight Proof in Text) • Name 3 characteristics of a savings account. • What is the main advantage of an online savings account? • Why does a money market account earn more interest than a passbook savings account? • Why is a CD also known as a time deposit or a fixed deposit? • How is a jumbo CD different from a regular CD?
Bellringer • What is wealth?
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?
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
Saving for Retirement Expectations 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 • Retirement: person’s withdrawal from active participation in a job or business.
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.
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
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
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.
Retirement Accounts Providedby Employers (defined contribution plans) Simplified Employee Pension (SEP) 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 • 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)
Retirement Accounts SIMPLE IRA Plans 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% • 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
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
Checkpoint 7.3(Underline/Highlight Proof in Text) • Historically, how did individuals pay for retirement? • What is the main difference between a traditional IRA and a Roth IRA? • Why does a company provide benefits? • How does a business qualify to provide a SIMPLE IRA? • When can an employee make an early withdrawal from his or her 401(k)?
Opening and Maintainingan Account • Explain the process of opening a new account • Describe the process of maintaining an account
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?
Review these Terms . . . Where have you heard them? • Account holder • Deposit slip • Remote deposit capture • statement
Opening an Account Complete an Application Depositing an Opening Amount Usually cash Generally held by bank for a few days What does this mean for the account holder? • Social security number . . . WHY? • Driver’s license or State ID • Contact information • Opening deposit
Maintaining an Account Depositing Funds Withdrawing Funds Fill out withdrawal slip to withdraw funds Where can you do this? • Deposit slip: fill out to make a deposit and to record deposit information • Remote deposit capture: scan checks for deposit electronically
Maintaining an Account Understanding a Bank Statement Statement: shows all activity during the covered time period. Usually a month What does this include?
Complete Online Activity • Go to classroom website, “My Links”, “Economics …”, “Managing a Savings Account” All remaining time will be used to complete your Chapter 7 Test Packet.
Bellringer Checkpoint 7.4Answer in complete sentences and submit. • What is the basic process for opening an account? • Why is security information collected on an account application? • Why does a financial institution record a customer’s Social Security number? • What information is reported on a deposit slip? • How long is the time period usually covered by a bank statement?