Savings chapter 30 PF
Guide to savings
-saving money should be a part of your budget. -10% of your take home income should be savings.
who is the first person to be paid when you get a paycheck?
-yourself
Formula: Simple Interest
A= Prt
Compound Interest Formula
A=P(1+r/n)^nt
Certificate of Deposit
An account that requires you to deposit a specified amount of money in an account for a set period of time.
What does FDIC stand for?
Federal Deposit Insurance Corporation
What degree of liquidity do savings accounts have?
High Degree of liquidity
Money market fund vs Money market deposit
Money market fund isn't insured by the FDIC. A deposit is insured by the FDIC
Savings
Plans include regular savings account, CD, and money market accounts. a money market account includes Brokerage firms.
Types of savings accounts
Regular savings account, certificate of deposits, money market funds.
Why are savings important to our economy
Savings allow banks to create loans, causing the circulation of money.
Rule of 72
Used to calculate the doubling of money
creditor
You are this when you put money into a bank's savings account.
money market fund
a kind of mutual fund, or pool of money, put into a variety of short-term (less than 1 year) debt by business and government
regular savings accounts
accounts that allow consumers to deposit or withdraw money at any time and to earn interest on the funds.
service fee
banks charge this when a savings account falls below a minimum balance.
Who offers money market funds?
brokerage firms
The interest rate on savings accounts usually...
fluctuate
The interest rate on a certificate of deposit is...
higher than a regular savings account.
FDIC (Federal Deposit Insurance Corporation)
insures accounts for up to $250,000.
compound interest
interest earned on both the principal amount and any interest earned on the principal
simple interest
interest earned on money deposited into a savings account called the principle
Main risk with CDs
interest rates are locked in a specific period of time.. They carry more inflation risk.
Why is saving important to the economy
it generates loan money for people and businesses.
The interest rate of regular savings accounts is..
low
What does the bank do with your savings
makes loans to other people
What does a CD have
maturity date
Opportunity cost
putting off spending money on an item that you might want right now. -The benefit of saving money might be greater than purchasing an item that you want.
rate of return
rate of return in the value of your savings from earned interest
How can earnings on savings be measured
rate of return or yield.
How much should people set aside for emergencies (months)?
six months
Why is it important to know the rate of return
so you know the value of how much you are to earn via interest.
Liquidity
the ability to quickly turn an investment into cash.
savings
the money you save
inflation risk
the risk that the rate of inflation will increase more than the rate of interest on savings
maturity date
when the money in an account becomes available to you.
Differentiate regular savings account from a CD and a money market fund.
-A regular savings account has low interest but allows the consumer to deposit or withdraw at any time. -A CD has a higher interest rate, but you can't take the money out for the specified time. -A money market fund has varying interest rates due to being based in stocks.
Advantages of savings accounts
-FDIC insured -High liquidity -low inflation risk
How does inflation affect your savings account, CD, or money market fund?
-Savings account- interest rate fluctuates, thus it has low inflation risk. -CD- interest is locked for a specific period, thus it has more inflation risk. -Money market fund- interest rate varies from month to month, carrying some inflation risk.
3 reasons people save money
-To make major purchases -To provide for emergencies -To have income for retirement.
2 disadvantages of Money market funds.
-high balances are required -account holders can write only a limited number of checks.
How does a CD work?
-interest does not change over duration -you have to pay a penalty if you cash before the maturity date.
How does a Money market fund work?
-interest rate on it varies from month to month
disadvantages of Savings accounts
-low rate of return due to little risk -can have Penalty for early withdrawal -can have penalty for falling below a minimum balance -Some accounts charge fees for deposits and withdrawals. -Interest can be taxed.
