Savings Accounts

​Chapter 5:

Savings Accounts

​Benefits of a Savings Account

• ​FDIC-insured accounts:

​Insures up to $250,000 per person for a single account.

Joint accounts are insured up to $250,00 per person​.

• Link to checking account to avoid overdraft fees.​

​Withdrawal limits: May only allow a certain amount of withdrawals/transfers each month.

• Earn interest calculated as Annual Percentage Yield (APY)​

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​Types of Savings Accounts

• Traditional Savings Account: earns interest on balance; may require a minimum balance to waive monthly fee

• Money Market Savings Account: generates higher APY than traditional savings account; may require a higher minimum balance

• Certificates of Deposit (CDs): deposit money for a specific term; usually the longer the term, the higher the APY.

• Retirement Accounts: IRA, 401k

​Common Ways to Save

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• Have 3-6 months' worth of bills in case of emergency

• Set aside a certain dollar amount or percentage of each paycheck

• Set aside a certain dollar amount or percentage each month

• Manage expense and create a budget

​3-6 Month Rule

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​Molly has monthly bills including the following: mortgage $2,354, car payment $416.23, car insurance $180.97, homeowner's insurance $566.45, phone bill $102.51, electricity $229.30, water $145.82, groceries $642, gas $350.

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Determine how much Molly would need to save to pay bills for 3 months.

What about 6 months?​

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​Simple Interest

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​Used to calculate the amount of interest gained in an account or paid on a loan. This type of interest applies to auto loans and short-term loans, and can sometimes be seen in mortgage loans. Interest is the fee for borrowing money.

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Interest Earned = Principal x Rate x Times/year

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​Simple Interest Ex

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​I = P x R x T

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R = (1/T)(A/P - 1)

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P = A / (1 + RT)

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T = (1/R)(A/P)​

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​I = Interest Earned

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R = Interest Rate (decimal)

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P = Principal

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T = Time (in years)

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​Simple Interest Ex

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​How much interest will I get on $1,000 in a savings account with 1% interest rate after 1 year?

​I = P x R x T

I = 1000 x 1% x 1 (yr)​

I = $10

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​Compound Interest

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​The interest on a deposit or loan calculated based on the initial principal and the accumulated interest from prior periods.

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• Returns more money on deposits than simple interest​

​Compound Interest Ex

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​How much interest will I get on $10,000 invested in a savings account for 3 years with 5% interest rate compounded annually?

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C = ​[P (1 + i)^n - 1]

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C = [10,000 (1 + ​0.05)^3 - 1]

C = $1,5​76.25

​Compound Interest Ex

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​How much interest is earned on a principal of $713 invested at an interest rate of 3% compounded annually for eight years?

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C = [713 (1 + 0.03)^8 -1]

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