Module 2 Lesson 3 Narrative

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1 Module 2 Lesson 3 Narrative What are savings tools/products/instruments? If you have a specific savings goal in mind and know the amount you need to save and how long you have to save for it, you have a choice of financial institutions that will also offer you a variety of savings tools (different types of savings accounts) to choose from. Every customer has different requirements and no matter which tool (or tools!) you, as the customer, decide will be appropriate for their situation, they are all designed to assist you in attaining your savings goal of keeping your money safe but available. Let s look at the various features of the savings tools. Checking Accounts (Interest-bearing) Many financial institutions (both traditional and on-line) offer interest-bearing checking accounts. These accounts call it a rewards checking account, but no matter what it is named, it is a safe and fairly convenient way to help you achieve your short-term savings goals. However, it is important to compare accounts closely before making your deposit, as this type of account may have additional limitations and requirements than traditional nointerest checking accounts. Most of us are familiar with checking accounts (sometimes called a transactional account) since a checking account, especially the debit or ATM card associated with the account, has become basic and essential tool for managing your personal finances, your purchases, and your money. This tool is a type of deposit account (where money can be deposited and withdrawn) specifically designed to provide a customer with frequent, on-demand, access to their money. Many checking accounts do not earn interest, but for those that do, the interest rates (and money earned) may be lower than other savings tools. However, checking accounts are the also the most liquid (a financial term which refers to how quickly your assets can be converted to cash or you can get access to your money) of all the savings tools. You have immediate access to your cash through check writing, debit cards, ATM machines, telephone, and/or Internet. Checking accounts reduce the need to carry large amounts of cash and may require a customer to maintain some money in the account to keep the account open, but usually do not dictate a specific minimum balance. Check writing is often free and unlimited (even there may be a cost to buy the checks themselves). Some checking accounts don t have ATM fees or debit card fees if you conduct transactions at your home bank branches or ATMs, but charge fees to use your ATM or debit card at a competing institution (or to get cash back with a purchase).

2 Savings Accounts (Passbook Savings) This is a go-to type of savings account that allows you to deposit you money in a safe place and earn a bit of interest on it. It also allows for frequent deposits and withdrawals of funds, is easily accessible, and can be used as a place to store money for emergencies or to temporarily hold money not needed for daily living expenses. After checking accounts, savings accounts are the next most liquid and typically earning you a higher interest rate on their money than a checking account. Savings accounts are available at bank and credit unions. Depending upon the institution, savings accounts usually have minimum balance requirements. Also, the federal government mandates that savings accounts allow only six (6) electronic withdrawals each month without penalty, and a fee can be charged for more transactions over this limit. So, before opening a savings account, consumers should be aware of all requirements, restrictions, and fees associated with their account. High-interest/high-yield online and interest savings accounts These online/internet savings accounts are just as safe (FDIC-insured) and often will offer a much higher interest rate than you can get in a traditional bank or credit union. While your access to your money may not be instant and it may take a day or two longer to access your deposit or transfer funds, but overall your funds will still be very accessible. This type of savings account shouldn t be overlooked when you are comparing rates to determine the best place to put your savings. What is a depository institution? It s a bank or a credit union or any financial institution legally allowed to accept monetary deposits from consumers for purposes of making loans and is regulated by the Federal Deposit Insurance Corporation (FDIC). Every depository institution will offer different interest rates, accessibility options, fees, penalties, and minimum balance requirements for the same type of savings tool. It is important to research and compare that savings tool at different depository institutions in order to find the best option. Keep in mind you can choose to have different savings tools at different depository institutions. Credit unions are members only institutions. Individuals must join a credit union to take advantage of its services. Federal credit unions are non-profit and the members can obtain loans from their combined savings. They typically have fewer fees and higher interest rates on their savings tools than traditional banks. For more on the subject of credit unions:

3 Money deposited in financial or depository institutions is safe The money you have deposited in a bank is insured by the FDIC (Federal Deposit Insurance Corporation) which means you will get back the money you deposited (up to $250,000) in the event the institution should fail or go out of business. And to-date no customer has ever lost any of their FDIC-insured deposits! On the other hand, if you have your money deposited into a Credit Union it is insured by the National Credit Union Administration (NCUA). Savings vs. Credit We ll be discussing all the ins and outs of credit in more detail later in this class, but everyone must understand one very basic advantage of saving your money for short-term goals or purchases (or emergencies) instead of using credit: When you save your money, especially in a bank or other financial institution (also called depository institution), the institution where you deposit or keep your savings PAYS YOU extra money (or interest) for the use of your money! But using credit COSTS YOU extra money because you have to pay interest to use someone else s money. Savings is convenient and low risk In addition to earning interest on your money and being very safe, saving your money in a savings account of any kind normally does not require a large sum of money to get started and there s little to no risk of losing your money (provided you keep an eye on your accounts and avoid penalties and fees), it allows you to keep the money in your account relatively liquid. And with most institutions and types of savings account you will have 24-hour access to your account via the internet and ATM locations. So, to get you started with saving for most relatively short-term financial purchases or goals, a checking and a savings account are basic, essential, and practical tools. But keep in mind your institution of choice is likely to charge you a fee if your account balance drops below a certain amount as an incentive to keep money in your account. And while you can earn interest on your account balance, that interest rate can fluctuate and could even go down (or up) based on the general interest rates in the US.

4 Additional Savings Tools/Instruments In addition to the two main savings tools we discussed earlier, there are three more savings account types that normally offer a higher interest rate that may allow you to increase your money at a faster rate, but generally will offer a bit less access to your money as the tradeoff. Money Market Deposit Account: If you still need easy access to your funds, but want to make a bit more money on your balance (this is referred to as your return, or return on investment), most financial and depository institutions offer a money market account which while not insured by the FDIC, these funds are still very safe and protected. A money market account is less liquid than a savings or checking account, but the tradeoff for a bit less access to your money is that you can earn a higher interest rate than a traditional savings account which lets you potentially make even more money on your money! Money market deposit accounts often have tiered interest rates (means the amount of money in the account will determine the interest rate received). For example, an account with a balance of $5,000 will earn a higher interest rate than an account balance of $1,000. Now most money market accounts will also have service fees which may vary by institution, so customers should compare fees before opening an account. For instance, money market accounts have a minimum daily balance requirement (usually $1000) and you could be charged a fee (and your interest rate on the account could be lowered) if you drop below the minimum daily balance. And just like savings accounts, money market accounts charge fees for excess withdrawals over six. But like any account you open, you have to keep up with your money every day to avoid fees or penalties that could eat up your savings. Certificates of Deposit (CD): If you are absolutely sure you won t need access to your funds for a longer period of time, financial institutions offer a certificate of deposit (CD) which is another insured interest-bearing savings tool, even less liquid than a money market account. But again, because you will have less access to your money and are essentially leaving your money alone for a longer period of time, it means you can earn more interest with a CD than with a money market account and your money can potentially grow at a faster rate. The interest rate of a CD depends on the specified time you choose and amount of money deposited. In most cases, the longer the length of the CD period and the higher the amount deposited, the higher the interest rate will be. And you can decide to leave your money in the account (with no access) for as little as one week to 10 years. Even when you re sure you won t need to access your money, you should be knowledgeable about CD withdrawal fees and penalties charged as some institutions charge more than others. And comparison shop for CDs, some institutions will give you a better interest rate if

5 you are a regular customer. And you should keep track of when your CD matures (means the CD period you selected is ending) to set up another account so your money can continue to earn the best interest rate available if you miss the CD maturity date, some institutions will automatically roll the CD over and lock you in to a less than desirable interest rate. However, if the funds are held for the full designated time period, then CDs are simple with little risk and no fees. Deposits into a CD can range from $100 to $250,000 (remember, funds over $250,000 won t be insured by the FDIC). Savings Bond: A savings bond is essentially a loan you make to the government and eventually you get it back with interest. Of the many types of bonds available, the savings bond is the only one considered a secure savings tool, since the U.S. government agrees to repay you the original amount of the bond plus interest on a specified future date. Savings bonds may be purchased for a minimum of $50 and a maximum of $10,000. There are two kinds of savings bonds currently available for purchase; Series EE bonds, which are purchased at half of the face value (for instance, if you are purchasing a $100 bond you will only pay $50) and Series I bonds, which are purchased at face value (you pay $100 for a $100 bond, but the interest rate is typically higher). Savings bonds are affordable and safe but are the least liquid of all the savings tools, taking 30 years to reach maturity. Cashing them in prior to their maturity date can cause you to lose some interest. Available for $50 to $10,000, savings bonds offer certain tax benefits as interest earned is exempt from being taxed until the bond is redeemed. IMPORTANT! If the bond is used to pay for college, it is tax exempt period.