Personal Savings Strategies
mrsx_bri
Mod_31.pptSavings
- BA250 - Personal Finance
- Week 3
- Create emergency fund
- Set aside funds for financial goals
- Utilize direct deposits and automatic transfers
- Make suitable choices based on goals and time horizon
PAY YOURSELF FIRST
On payday - deposit money into savings account, using check or debit card
Establishing A Savings Program
Earning Interest on Your Money
Simple Interest interest paid only on initial deposit
Compound Interest
interest paid at set intervals and added back to principal
- Nominal rate - named or stated interest rate
- Effective rate - annual rate of return actually earned
Earning Interest on Your Money
If interest is compounded more frequently than once a year, the effective rate will be greater than the nominal rate of interest
If simple interest is used, there is no compounding
- Interest = Principal x rate x time
- = $1000 x .05 x 1
- = $50
How Is Interest Calculated?
1st 6 months' interest:
$1000 x .05 x 6/12 = $25.00
2nd 6 months' interest: +
$1025 x .05 x 6/12 = $25.63
Total annual interest = $50.63
If compound interest is used and the compounding occurs semiannually then
How Is Interest Calculated?
Effective Rate = $50.63 $1000
= 0.05063
= 5.063%
Nominal rate = 5% …but…. Effective rate = 5.063%
How Is Interest Calculated?
Amount of interest earned depends on
- Frequency of compounding
- Balance on which interest is paid
- Interest rate applied
How Much Interest Will You Earn?
Time value of money concepts are used in compounding to find interest earned
A Variety of Ways to Save
Certificates of Deposit (CDs)
- Funds remain on account for a given time period
- Early withdrawals incur an interest penalty
U.S. Treasury Bills
- Debt securities issued by U.S. Treasury
- Sold at a discount; $1000 minimum
- Mature in 1 year or less
A Variety of Ways to Save
Series EE Bonds
- Purchased at a discount
- Accrual-type security with Interest paid when cashed in
- Exempt from state, local taxes
- New bonds must be held at least 1 year
- Income taxes may be avoided if redeemed for educational purposes
References
Gitman, L. J., Joehnk, M. D., & Billingsley, R. S. (2011). PFIN. Mason, OH: South-Western Cengage Learning.
