# After completing this chapter, you will be able to: Savings Accounts

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1 Chapter 30 Savings Accounts Section 30.1 Savings Account Basics Discuss the three reasons people save money. Describe compound interest. After completing this chapter, you will be able to: Section 30.2 Types of Savings Accounts Differentiate a regular savings account from a CD, a money market fund, and a money market deposit account. Explain two advantages and two disadvantages of savings accounts. Ask Savings Accounts Q: Which is best, passbook accounts, money markets, or CDs? A: A basic savings account is sometimes referred to as a passbook account, since many banks provide account holders with little books used for keeping track of activity. The main advantage of a basic savings account is its accessibility the money is pretty much there whenever you need it, and you re free to add or subtract at will. They can be opened with relatively little money, but of course, the disadvantage is that these accounts typically provide a comparably low rate of return. A money market account can be thought of as a restricted savings account since you re only allowed so many withdrawals per month. In addition, they tend to require a higher balance than a basic savings account. However, you will be rewarded with a higher interest rate. Finally, CDs, or certificates of deposit, usually provide investors with more favorable interest rates than most savings accounts and money markets. The downside is that your money would be locked away for a specific amount of time, anywhere from six months to a number of years. Mathematics Patrick plans to open a savings account. He prefers a passbook account, but the interest rate of the money market account is 1.78% higher. How much more will he make if he puts \$5,000 into a money market account? Percents Less Than One Percents less than 1 represent values less than. In other words, 0.1% is one-tenth of 1 percent, which can also be represented in decimal form as or in fraction form as. 528 Unit 10 Money Management

2 Photo Credit: Royalty-Free/Corbis Planning for the Future Money people put aside for future use is called savings. What are some things for which people save money? Chapter 30 Savings Accounts 529 Photo Credit: vlkjdf;lkjeijeojf;ldkjl;dskfj;

9 Choosing a Savings Account Banks, savings and loans, savings banks, credit unions, and brokerage firms all offer several types of savings accounts. The three basic types are regular savings accounts, certificates of deposit, and money market funds. Figure 30.2 offers a look at interest compounded in savings accounts. Identify What are the three basic types of savings accounts? Think about putting your savings in a bank account or keeping it at home. Which would you prefer? Regular Savings Accounts Banks, savings and loans, savings banks, and credit unions all offer regular 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. Generally, a low minimum deposit, such as \$100, is required to open a regular savings account. The interest rate varies from one financial institution to another. The rate can also change over time at the same institution. With a savings account, you can withdraw money without any penalty. However, the interest rate is usually low. Many banks also charge a service fee if the savings account falls below a certain minimum balance. Figure 30.2 The Power of Compound Interest Year Principal Simple Interest 6% Interest Earned Interest Total Principal Compound Interest 6% Interest Earned Interest on Interest Compound interest makes your money grow faster when interest is left to accrue. Which account earned more interest? What is the difference in the account totals after 15 years? Interest Total 1 \$50,000 \$3,000 \$3,000 \$50, \$3, \$3, \$50,000 \$3,000 \$6,000 \$53, \$3, \$6, \$50,000 \$3,000 \$9,000 \$56, \$3, \$9, \$50,000 \$3,000 \$12,000 \$59, \$3, \$13, \$50,000 \$3,000 \$15,000 \$63, \$3, \$16, \$50,000 \$3,000 \$18,000 \$66, \$4, \$20, \$50,000 \$3,000 \$21,000 \$70, \$4, \$25, \$50,000 \$3,000 \$24,000 \$75, \$4, \$29, \$50,000 \$3,000 \$27,000 \$79, \$4, \$34, \$50,000 \$3,000 \$30,000 \$84, \$5, \$39, \$50,000 \$3,000 \$33,000 \$89, \$5, \$44, \$50,000 \$3,000 \$36,000 \$94, \$5, \$50, \$50,000 \$3,000 \$39,000 \$100, \$6, \$56, \$50,000 \$3,000 \$42,000 \$106, \$6, \$63, \$50,000 \$3,000 \$45,000 \$113, \$6, \$69, Total Interest Earned: \$45,000 Total Interest Earned: \$69, Chapter 30 Savings Accounts

12 Inflation Risk 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. Suppose you have \$1,000 in a savings account that earns 2 percent interest. During the next year, inflation is 4 percent. That means it costs \$1,040 at the end of the year to buy what you could have bought at the beginning of the year for \$1,000. Interest rates on most savings accounts fluctuate with inflation. However, the main risk with CDs is that their interest rates are locked in for a specific period of time. The Costs of Savings Accounts 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. Other accounts charge a fee for each deposit and withdrawal. The money you earn in interest on a savings account is also considered income. As a result, you have to pay income tax on it. Section 30.2 Review Key Concepts 1. What is the difference between a regular savings account, a certifi cate of deposit, and a money market fund? 2. Discuss some advantages and disadvantages of savings accounts. 3. What is the Federal Deposit Insurance Corporation, and what does it do? Academic Skills 4. English Language Arts Work in a group of four to write, design, and produce a brochure titled Saving the Key to Your Future. Develop the content of the brochure around ways to make saving a regular habit. Include testimonials from people for whom saving has made a difference in their lives. 5. English Language Arts Collect brochures or other printed material from local banks containing information concerning the method each uses to compute interest. Analyze each to determine which communicate most effectively and how others might be improved. Present your fi ndings orally and visually. Go to the Introduction to Business Online Learning Center through glencoe.com to check your answers. glencoe.com Section 30.2 Types of Savings Accounts 539

13 Chapter 30 Review and Activities Section 30.1 Summary Savings Account Basics Saving is putting aside money for future use. The three main reasons for saving money are to make major purchases, for emergencies, and for retirement. Financial institutions pay interest on savings accounts in return for using savers money. As with a credit account, the amount of interest earned depends on the interest rate, the size of the account, and the length of time you keep the account. Savings accounts earn simple interest or compound interest. Savings can grow more quickly with compound interest. Section 30.2 Summary Types of Savings Accounts Banks, savings and loans, and other fi nancial institutions offer several types of savings accounts. Regular savings accounts, certifi cates of deposit, and money market funds are the major types of savings accounts. Some fi nancial institutions have their own form of money market fund called a money market deposit account. Savings accounts earn interest, are usually secure, and have high liquidity. However, they can also cost money in fees and taxes, and generally carry a low return that may not keep up with infl ation. Vocabulary Review 1. On a sheet of paper, use each of these key terms and academic vocabulary terms in a sentence. Key Terms savings rate of return compound interest regular savings accounts certificate of deposit (CD) maturity date money market fund money market deposit accounts liquidity inflation risk Academic Vocabulary experts institution suggest set item duration accumulate mutual Review Key Concepts 2. Discuss the three reasons people save money. 3. Describe compound interest. 4. Differentiate a regular savings account from a CD, a money market fund, and a money market deposit account. 5. Explain two advantages and two disadvantages of savings accounts. 540 Chapter 30 Review and Activities

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