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Chapter 30: Savings Accounts

Saving Account Basics

A Guide to Saving

  • 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.

Earning Interest on Savings

  • 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.

Types of Savings Accounts

Choosing a Savings Account

  • 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.

    • 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.

Advantages and Disadvantages of Savings 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.

Chapter 30: Savings Accounts

Saving Account Basics

A Guide to Saving

  • 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.

Earning Interest on Savings

  • 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.

Types of Savings Accounts

Choosing a Savings Account

  • 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.

    • 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.

Advantages and Disadvantages of Savings 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.

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