Independent living chapter 12 review

What happens with the annual percentage yield?

Differences in whether or how often interest is calculated can make it difficult to compare one account with another such as whether to choose a 8.25% simple interest or a 8% compound interest daily. For this you'll world use the annual percentage yield which will tell you the annual rate at which interest is earned including the effects of compounding and assumes that interest remains in the account rather than being withdrawn. With simple interest the APY is the same as the stated interest rate. 8.25%=8.25%. With compound interest daily, 8%=8.33% that means if you left $100 on deposit, you'd earn $8.33 in interest.

What is calculating interest?

Different accounts differ in how often interest is paid to you. Some are monthly, others are quarterly when interest earned is added to your account balance. That stated interest rate is the annual rate. If monthly the calculation is based on 1/12 of the annual rate. Accounts can different in how interest calculation is made.

What are the 5 reasons for saving?

Emergencies, recurring expenses, future purchases, financial goals, and retirement

Replacing an appliance when you least expect it is one reason for having a ___ fund.

Emergency

What's included with fees and service charges?

Find out any fees that apply to your account such as charges for ATM transactions, monthly maintenance fees for handling your account, or fees for your account falling below the minimum balance. This can help you avoid unpleasant surprises.

What is the key to being successful at saving money?

Having a savings plan

What's included with liquidity?

If there's emergencies or recurring expenses you want the ability to withdraw money whenever you need it, also known as liquidity. Some accounts are highly liquid where you can withdraw from them on the spur of the moment while others have a fixed term where if you withdraw money before the end of that term, you must pay a penalty set by the bank such as 3 or 6 months interest.

Why should you avoid withdrawing money from a CD before the end of its term?

If you do, you must pay a substantial penalty such as 6 months interest.

The federal reserve system may raise and lower key ____ rates to balance the rate at which consumers spend and save.

Interest

What is compound interest?

Interest calculated on both deposits made and prior interest earned also known as interest paid on the interest. Interest can be compounded daily, monthly, yearly or as frequently as the institution chooses. More frequent is better as long as interest earned is left in the account to grow. For example if you deposit $50 for 5% interest .4% is multiple monthly. If another $50 is added, .4% is multiplied to $100.20. Interest can be calculated daily but paid monthly meaning it's calculated daily, but you don't receive it until the end of the month.

What is simple interest?

Interest calculated only on the money you've deposited not on prior interest earned. For example if you deposit $50 at a 5% annual rate, each month will be .4%. Each month the bank takes the sum of the deposit minus withdrawals and multiple the figure by .4% the result is added to the balance. If you add another $50, the .4% gets multiplied to $100.

Summarize the two ways saving can help you

It allows you to accumulate money for future purchases and it can be put to work by earning income since it can earn interest when put into a financial institution.

What are the 2 ways saving can help you?

It allows you to accumulate money for future purchases by setting aside a few dollars every week until you have enough to buy the sports equipment you want. It's delayed spending. Or Money that you can save can be put to work in earning income by depositing it in a financial institution and be paid interest in return. Even small amounts when saved regularly can earn money for you.

Why/how should you stick to your plan?

It may be a challenge to make the rest of your money last until the next payday. You may have to adjust your spending habits when you start a new savings plan. Resist the temptation to dip into your savings unless absolutely necessary and keep your goals in mind to help you succeed.

What's included with retirement?

It takes a long time for people to build up enough money to live comfortably when they retire. Most people need a large fund built up through savings and investments to meet their expenses after they stop working. You should start saving for this once you have a full time job for when you no longer want or be able to work.

What is the rule of 72?

It's a quick way to evaluate an interest rate where you divide 72 by the interest rate or APY and the answer is the number of years it will take to double your money. If the APY is 6%, you divide 72/6=12 which means if you deposited $1000 it will take 12 years for the balance to reach $2000. It can also be used if you have a set time period in mind. If you deposit $200 and want $400 in 8 years, you divide 72/8=9 which means you'll need to find a bank with a 9% interest rate.

What's included with taxes?

Most times, you pay income tax on the interest you earn from a savings account. Some accounts offer tax advantages tho. For example, the interest you earn on US savings bonds aren't subject to state and local taxes. These advantages let you keep more of the money you earn

What are savings bonds?

Nontransferable debt certificates issued by the US treasury. When you buy a bond, you're loaning money to the federal government which eventually pays you back with interest. They're safe forms of savings because they're backed by the federal government meaning there's no risk of losing money. The interest earned is exempt from state/local income taxes but is subject to federal income tax which can be deferred or postponed until the bond is cashed in or stops earning interest.

What's the simple principle that guides a successful savings plan? What does it mean?

Pay yourself first. This means setting aside part of your income for savings first, then spending what's left.

You might have to ___ money before you can invest it.

Save

What's included with financial goals?

Save for goals that occur at different stages of life such as college fees and the expenses of living away from home, buying a car, starting a family, or travel funds.

What's included with recurring expenses?

Save for things like monthly phone bills by setting aside small amounts from your weekly income and you'll have the money on hand when the bill arrives each month. You can also use this plan for purchasing gifts for family/friends on birthdays/holidays or as you get older, for real estate taxes and insurance premiums.

What's included with future purchases?

Save for things you want but don't have the money for such as a new jacket or guitar. Saving for an item means delay the purchase until you have the money. Most people don't choose to wait. They choose credit instead which can lead to increased spending in the long run.

____ for an item means delaying your purchase until you have the money.

Saving

What is the difference between saving and investing?

Saving is to put aside money for some anticipated future need. It can earn money as a bonus, there's no risk of losing your money, and you can withdraw it whenever you like. Investing is committing money for the purpose of making a profit over time. It's used to make money grow in the long run and requires taking risks and you might not have easy access to it. But it has the potential to earn more for you

What are the basic savings options?

Savings accounts, money market accounts, certificates of deposits, and savings bonds

What are factors in choose savings options?

Savings/risks, liquidity, earnings, taxes, restrictions, and fees/service charges

What are the 3 types of savings bond the federal government issues?

Series EE, Series HH, and Series I

What are the 2 types of calculations?

Simple and compound interest

Explain the difference between simple interest and compound interest.

Simple interest is interest calculated only on the money you've deposited, not the prior interest earned. Compound interest is interest calculated on both deposits made and prior interest earned.

What's a tip for considering your budget?

Start small if you need to since how much you save instead important as developing the habit of saving consistently. The sooner you develop that habit, the more your savings will build over time.

Why should you consider your budget?

The amount you save must be realistic and leave enough money to pay your daily expenses or else it'll be hard to stick to your plan and you'll need to revise your savings goals to fit within your budget.

What are savings accounts?

The most liquid savings options where the minimum balance is usually lower than for other forms of savings with fewer restrictions and fees but the interest laid is usually lower too. Deposits in the past were handled by a bank teller in a passbook brought by the customer. Today, they're made at ATM machines, by phone, or online by computers. Most customers receive a statement at the end of the month that lists deposits, withdrawals, and interest earned

Which is the most liquid savings option? What is one drawback of this option?

The ordinary savings account is the most liquid and a drawback is that there's nothing stopping you from accessing it to withdraw money. Also, the interest paid is generally lower.

What's in a family budget?

The percentage of income that can go towards savings varies depending on the family's discretionary income. Large family with small income has difficulty saving even a small percentage of their earnings where necessary expenses such as housing and food take up a relatively large proportion of the family's income leaving less available for savings. In contrast a two income couple without children may be able to save a relatively large percentage of their income.

Why do you need to check on the safety of individual accounts offered by a financial institution?

These places will offer services that aren't insured which will carry more risks and are usually considered investments rather than savings plans

What are the long term effects of compounding?

They can increase over time. If 2 families put $5000 into a savings account, one with a 4% simple interest and the other with 4% compounded daily, at the end of a year, the second family has $4 more than the first. After 20 years, the second family would $2,127 more than the first. This shows the "magic of compound interest.

What kind of restrictions might a money market account have?

They require a higher minimum opening deposit of $2500, there's a limited number of check, and limited withdrawals and transfers.

What are 2 benefits of buying savings bonds?

They're backed by the government meaning there no risk of losing money and there's interest earned on savings bonds that is exempt from state and local taxes.

Why are people advised to have an emergency fund?

This way, they'll have money set aside in case of loss of income or unexpected major expenses

What does the rule of 72 tell you?

To divide 72 by the interest rate/APY or number of years and he answer will be the number of years or the interest rate needed until you double your money.

How much money should be in an emergency fund?

Use the rule of thumb: 3-6 times the monthly net income. This way makes it possible to keep up with daily expenses through unemployment lasting 3-6 months

What are the 3 reasons of how credit can lead to increased spending in the long run?

Using credit means paying interest on the money you borrow, adding to the cost of the item. Saving earns interest, as the money in a savings account gives your interest income. When you buy on credit, that income is lost Credit makes it easy to buy anything that appeals at the moment. Saving gives you time to decide whether it's really important to you, helping you spend your money wisely.

What does the saying time is money mean?

When the savings are left to grow for a long time, the amounts earned can be a lot. When it comes to savings time is your ally. The longer you leave money on deposit to earn interest the more quickly that interest starts to add up.

What's included with earnings?

When you look at the interest rates for accounts, find out the APY since it includes the effects of compound interest. The higher the APY, the greater your earnings will be

Can small amounts of money grow large?

Yes, they can grow up over time. If you add $30 every month, after 20 years, the account balance will be $12,382 from your total deposit of $7,200.

Why do you need automatic savings?

You can't simply put the amount you decide to save into your account when you deposit or cash your paycheck. It'll work fine if you have the self discipline to stick to your plan but these will make it easier.

What's included with restrictions?

You may have to comply with some restrictions, such as being required to deposit a certain amount ranging from $5-$2500 to open the account, maintaining a certain minimum balance, or limiting the number or transactions you can make. Make sure the account will meet your needs.

What is included with emergencies?

You should protect yourself for situations that may happen that you don't expect such as refrigerators that stops working, bills that aren't covered by insurance, or the loss of a job. In these, you should have an emergency fund (money set aside in case of loss of income or unexpected major expenses) used only for its intended purpose.

How does payment by direct deposit make saving easier?

You simply get part of your money in the paycheck directly depositors into a savings account while the rest gets put into a checking account. It's an automatic saving.

Term

a period of time during which money must be kept on deposit

Saving

setting aside money for future use

annual percentage yield

tells you the actual annual rate at which interest is earned, including the effects of compounding

Discretionary income

the amount of available income after taxes and necessary spending for food, clothing, and shelter

Liquidity

the ease with which savings or investments can be turned into cash to be spent

Give 2 reasons why buying an item on credit costs more than saving for the item and then buying it.

1) credit means paying interest on the money you're borrowing, whereas savings doesn't 2) savings earns interest since the money gives interest income, where in credit that income is lost

All of the following are common reasons for saving EXCEPT A) earning interest quickly B) emergencies C) financial goals D) retirement

A

What are certificates of deposit?

A certificate issued by a financial institution to indicate that money has been deposited for a certain time. It specifies the amount deposited, the interest rate, and the length of the term which usually ranges from 3 month to 5 years. If you withdrawal before that you must pay a substantial penalty such as 6 months interest. The longer the term, the higher the interest rate, which is usually fixed until the end of the term. At that time you can renew it for another term or cash in the CD. Most times, it's renewed automatically unless you notify the bank for a date. The minimum deposit can range from $1000-$100000. although you might not be able to make additional deposits during the term, you can change the amount when you renew it.

What are the long term effects of interest rates?

A larger interest rate will have the largest interest in the long run. If $1000 is put in for 20 years with 3, 5, and 7% interest the money with the 7% interest will earn more interest

What at money market accounts?

A savings account where deposits are invested by the financial institution to yield higher earnings and have higher interest rates, but also have more restrictions with a higher minimum opening deposit such as $2,500. They usually let you write check but only a few per month and withdrawals and transfers are usually limited as well. These accounts shouldn't be confused with funds which are mutual funds not protected by FDIC or NCUA insurance unlike money market accounts.

Savings plan

A step-by-step approach for putting money aside in savings.

What are the 3 forms of automatic savings?

Automatic transfers- each month the bank transfers a specified amount from checking to savings Direct deposit- employers electronically deposit earnings into employees bank account which can be requested to put part of the money to be deposited into a savings account and the rest in a checking account Payroll deductions- employers encourage this for an employee to authorize a specific amount to be deducted from each paycheck and put into a savings plan

The purpose of investing your money is to A) anticipate future needs B) make a profit over time C) pay for recurring expenses D) save for a rainy day

B

When interest rates are low, consumers tend to A) save less and borrow less B) save less and borrow more C) save more and borrow less D) save more and borrow more

B

What's the relation between saving and investing?

Before you can invest, you need a sum of money to invest. Investing begins with saving. You might accumulate money in a savings account until it reaches a certain amount. Then invest it.

Once you set a specific goal for saving, how can you go about reaching that goal?

Break your long term goal into short term goals and see if their realistic, save regularly and consistently, put your savings to work, and keep your savings in mind

What are the steps to saving?

Decide on what you're saving for: new clothes? Car? College? Set a specific goal: decide on the amount of money needed and date it's needed for Break your long term goals into short term goals: $250 in 6 months. $10 a week. See if it's realistic. If not, revise the long term goal Save regularly and consistently: specific strategy Put your savings to work: keep your money in an account that earns interest. You'll reach your girls faster Keep your savings goals in mind: post a pic to remind your long term goal. mark short term goals on calendar and check them off as you reach them. Make a chart of your progress

Give 3 examples of restrictions that might apply to a saving product.

Depositing a certain amount to open the account, maintaining a certain minimum balance, or limited in the number of transactions you can make.

What is included with safety and risks?

Deposits at most institutions are insured by the FDIC or NCUA as an indication of safety. However if you see these signs, check the individual account options carefully. Because many savings institutions offer financial services that aren't insured which can carry more risks and are usually considered investments rather than savings plans.

What is the Truth in Savings Act?

An act passed in 1991 and amended since then that helps consumers make such comparisons with one of its requirements being for financial institutions to tell consumers the APY of accounts.

The recommended size of an emergency fund is ______ times your monthly net income. A) one to two B) two C) three to six D) five to ten

C

When you buy an expensive item on credit, you spend more than if you save for the purchase because A) buying on credit earns rewards B) saving encourages impulse buying C) the money you save earns interest D) you pay interest on the amount you save

C

Using ___ to purchase and item adds to its cost because you must pay interest on the money you borrow

Credit

What happens with the series EE bond?

It's strategy is to hold an investment that increases in value. It's purchased through financial institutions, online from the US treasury dept, or through payroll deduction with a smallest denomination of $50 and Purchase price of 50% of face value. It's interest rate is a variable rate adjusted every 6 months and that interest is paid when the bond is cashed. The cashing in the bond can be cashed done after 6 months but has a pentagon if before 5 years, and pays the current value of the bond which is guaranteed higher than the purchase price. It's earnings potential increases every month, is guaranteed to reach face value in 17 years but may reach sooner depending on interest rates, and continues earning for up to 30 years.

What happens with the series I bond?

It's strategy is to hold and investment that's protected against inflation purchased through financial institutions, online from the US Treasury dept, or through payroll deduction. The smallest denomination is $50 with a purchase price of the face value. The interest rate is the sum of a fixed rate and a variable rate based on the rate of inflation which is paid when the bond is cashed. The bond can be cashed after 6 months with a penalty if done before 5 years and it pays the current value of the bond which is likely to be higher than the purchase price. The earnings potential generally increases in value every month except in period of deflation, when value could remain unchanged and earns interest for up to 30 years.

What happens with the series HH bond?

It's strategy is to obtain current income in the form of interest payments purchased in exchange for a series EE bond or by reinvesting H bonds (an older type of savings bond). It has a smallest denomination of $500 which a purchase price of the face value. It's interest rate is a fixed rate that is paid every 6 months by direct deposit to checking or savings account. It can be cashed after 6 months and pays the face value of the bond. It's earning potentials are the bond itself doesn't increase in value but can earn interest for up to 20 years

Why should you pay yourself first?

It's the most effective savings plan that means setting aside part of your income for savings first, then spending what's left. It's the opposite of what many unsuccessful savers do. You should decide on how much to save out of each pay check based on your goals and budget. You'll stick to the system if you set a fixed amount that's easy to remember and handle. However if it varies from paycheck to paycheck you middle save a certain percentage instead.

Why do you need a savings plan?

Many people hope to save money but have trouble doing it, where every dime goes for things your want and need to buy now. They say "when I make more money I'll start saving but not now." But when they do, they do the exact same thing. To be a successful saver, you need a plan because savings don't accumulate by themselves. You need to take charge.