Chapter 30: Savings Accounts

Saving Account Basics

To achieve your financial goals, you will need a plan.
Saving is putting money aside for future use.
- The money you save is called your savings.
Savings plans include regular savings accounts, certificates of deposit, and money market funds.
Some personal finance experts say people should try to save about 10 percent of their take-home income.
The opportunity cost of a decision is the same as the benefit of the choice that is given up when one decision is made instead of another.
People set up and maintain a savings plan for three reasons: to make major purchases, to provide for emergencies, and to have income for retirement.

To earn income on savings, you must store it in a place that will provide you with interest, such as a bank or savings and loan association.
The money you put into a savings account earns interest.
If you put money into a bank’s savings account, you are actually lending the bank your money.
Saving is important to the economy because it generates loan money for people and businesses.
Earnings on savings can be measured by the rate of return, or yield.
- The rate of return is the percentage of increase in the value of your savings from earned interest.
Simple interest is interest earned only on money deposited into a savings account, called the principal.
When principal and interest are left in an account, it earns compound interest.
- Compound interest is interest earned on both the principal and any interest earned on the principal.
- Compounding may take place every year, every quarter, every month, or even every day.

Banks, savings and loans, savings banks, credit unions, and brokerage firms all offer several types of savings accounts
Traditionally called passbook accounts, regular savings accounts allow consumers to deposit or withdraw money at any time and to earn interest on the funds.
Another type of savings account, called a certificate of deposit (CD), requires you to deposit a specified amount of money in an account for a set period of time.
- A CD has a maturity date, which is when the money becomes available to you.
Brokerage firms, which buy and sell stocks and bonds, offer a special type of savings account called a money market fund.
- A money market fund is a kind of mutual fund, or pool of money, put into a variety of short-term debt (loans of less than one year) by business and government
- Money market funds usually require high balances.
Banks, savings and loans, and credit unions have their own form of money market fund called money market deposit accounts.

Banks, savings and loans, and credit unions are all insured.
The Federal Deposit Insurance Corporation (FDIC), a government agency, insures bank accounts.
Liquidity means the ability to quickly turn an investment into cash.
- Savings accounts are highly liquid because cash can easily be withdrawn.
Since there is very little risk with a savings account, there is usually a low return.
Inflation is a general increase in the cost of goods and services.
- Inflation risk is the risk that the rate of inflation will increase more than the rate of interest on savings.
Savings accounts earn interest, but they can also cost money.
- Some accounts charge a penalty for early withdrawal or if the account balance falls below a certain minimum during a given period.