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Lesson C: Savings
Saving money is an important part of building your financial future. This course will give you some tips to help you get started. It will also show you how your money can grow when you save. Paying yourself first means that when you get a paycheck, you first put away the money you want to save for your goals. There are many reasons to save money. Some of the benefits of paying yourself first include:

•You can establish an emergency fund

•You can have funds available for large ticket items such as a home purchase

•You can improve your standard of living

Types of Savings Accounts

With passbook accounts the depositor receives a booklet in which deposits, withdrawals and interest are recorded. The average interest rate on these accounts is likely to be lower at banks and savings and loans than credit unions. Funds are easily accessible. These are often referred to as "regular" savings accounts. These accounts usually earn interest. Generally, statements are not generated for this type of account.

Statement accounts are very similar to passbook accounts, except that the depositor receives a monthly statement instead of a passbook. Funds are also easily accessible, often through a 24-hour automated teller machine (ATM). Expect the same interest rate as a passbook account. Statement accounts are interest bearing checking accounts, which combine the benefits of checking and savings. The depositor earns interest on any unused money in his/her account.

Money Market accounts are a combination of checking and savings accounts. The interest rate paid is built on a complex structure that varies with the size of the balance and the current level of market interest rates. The average yield (rate of return) is higher than regular passbook or statement savings accounts. You can access your money from an ATM, a teller, or by writing up to three checks per month. This type of account provides immediate access to your money, but usually requires a minimum balance of $1,000 to $2500 with a limited number of checks that can be written each month.

Certificates of Deposit offer the benefits of being simple, with no risk, no fees, and have higher interest than a passbook or statement account. On this type of account the financial institution pays a fixed amount of interest for a fixed amount of money during a fixed amount of time. The trade-off for the higher return is that you have restricted access to your money. There is usually a withdrawal penalty if you cash in the account before the expiration date of the certificate of deposit. This penalty can be higher than the interest earned. If you think you might need the money before the time period expires don't use this method!

Choosing the Right Savings Account

Not all savings accounts are created equal. In fact, not all passbook, money market, or any other type account will offer the same services and dollar yield. Yes, you can shop around for a savings account that is right for you. As always, you'll first need to think about which account is right for you. When and how often you need to access the account will be key factors. Then, you'll want to look at the interest rates offered by the variety of banks and credit unions. But don't let that be your only deciding factor. Also, check the benefits you receive with the account. Some will have fees, charges and even penalties based on minimum balance requirements or number of transactions. Some accounts require a certain balance prior to paying interest. On some money market accounts a financial institution may pay a higher interest amount for a higher balance - you'll want to know what the cutoff balance is for the higher rate. Most calculate interest on a daily basis, and some use the average of all daily balances.

Interest Compounding

Interest Compounding Example

Annual Compounding	Daily Compounding
$1000	$1000
@5% compounded annually	@5% compounded annually
$1,000 at the end of the first day.	$1,000.14 at the end of the first day.
	$1,000.14 @ 5% daily
$1,050.00 (End of Year 1)	$1,051.27 (End of Year 1)

On the second day add the interest earned and compound the total amount

With annual compounding, at the end of the first year you would have $1,050. With daily compounding, at the end of the first day you would have earned $0.14. The next day, interest is calculated on the entire amount of your original deposit of $1,000 PLUS the previously earned interest of $0.14. The table shows that the more frequently interest compounds, the faster it grows.

529 Savings Plans
A Section 529 Plan is a prepaid savings program for higher education. Any person can set up a plan for a child pursuing higher education. The money grows tax-deferred and is taxed at the child’s rate when withdrawn for education purposes. The donor may have state income tax breaks. The savings can be applied to any college in any state. Many plans can be started with only $25 a month. More information about state tuition programs can be found at: www.irs.gov.

Exercise
Compare accounts from different financial institutions. Look at the savings and checking accounts you have. List the type account, interest and fees. Then list any requirements. Look for 5-10 other options. Is the return on other options better than what you're getting now?

Type of Account	Interest Paid	Fees	Charges (late, over-limit)	Requirements

Quiz

1. Money Market accounts earn a rate of interest
True False

2. Statement Savings accounts offer a fixed amount of interest for a certain period of time.
True False

3. There are several types of CD products available.
True False

4. It best to shop around for the savings product that’s right for you.
True False

5. An example of compounding is when earned interest is added to the balance and interest is paid again.
True False

6. 529 plans are a way to save for a child’s education with possible added tax benefits.
True False

7. Comparing the interest rate on savings accounts is not a good way to determine what account is best for you.
True False

8. All savings accounts use the average daily balance calculation method before interest is paid.
True False

9. With CD’s you have restricted access to your money.
True False

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