Earning Interest on Savings

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Earning Interest on Savings
Interest is like a rental fee for using someone
elses money. Banks use the money in your savings
account to lend to other people, so they pay you
a rental fee, or interest.
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Simple Interest
Simple interest is interest earned only on the
money you deposited into your savings account, or
the principal.
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Compound Interest
Compound interest is interest earned on both the
principalthe money you deposited in your savings
accountand any interest you earned on it.
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Figure 30.2
THE POWER OF COMPOUND 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?
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Types of Savings Accounts
The three basic types of savings accounts are

• Traditional
• Certificates of deposit
• Money market

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Traditional Savings Account
One type of traditional account is a passbook
savings account in which all of the deposits and
withdrawals are recorded in a book that the
depositor keeps.
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Traditional Savings Account
The interest rate on traditional savings accounts
is usually quite low.
Many banks charge a service fee if the savings
account falls below a certain minimum balance.
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Certificate of Deposit
A certificate of deposit (CD), requires you to
deposit a minimum amount of money in an account
for a minimum period of time.
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Certificate of Deposit
There is a maturity date for a CD, which is when
the money becomes available to you.
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Certificate of Deposit
The interest rate on a CD is higher than a
regular savings account.
There is a penalty fee if you cash in the CD
before the maturity date.
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Money Market Fund
A money market fund is a kind of mutual fund, or
pool of money, put into a variety of short-term
debt by business and government.
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Money Market Fund
Money market funds are offered by brokerage firms
and financial institutions that buy and sell
stocks and bonds.
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Money Market Fund
The interest rate on a money market fund varies
from month to month.
An advantage is that you can withdraw your money
at any time.
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Money Market Fund
The two disadvantages of a money market fund are

• A high minimum balance
• You can only write a limited number of checks

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Money Market Deposit Account
Banks, savings and loans, and credit unions have
their own form of money market fund called a
money market deposit account.
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Money Market Deposit Account
One difference between the money market fund and
the money market deposit account is that the
federal government insures the money in a market
deposit account.
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Graphic Organizer
Graphic Organizer
Types of Savings Plans
TRADITIONAL SAVINGS ACCOUNTS
CERTIFICATES OF DEPOSIT
U.S. SAVINGS BONDS
SAVINGS
MONEY MARKET ACCOUNTS
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Insurance Against Loss
Banks, savings and loans, and credit unions all
have insurance.
The Federal Deposit Insurance Corporation (FDIC),
a government agency, insures bank accounts for up
to 100,000.
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Insurance Against Loss
Money market funds offered by brokerage firms
arent federally insured, but most brokerage
firms have insurance on their accounts.
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Liquidity
Liquidity means the ability to quickly turn an
investment into cash.
Savings accounts are highly liquid because you
can easily withdraw cash from them.
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Inflation Risk
Inflation risk is the risk that the rate of
inflation will increase more than the rate of
interest on savings. Consumer Price Index
(CPI) CPI 5 ROI 45 Good
Investment?
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Inflation Risk
The interest rates on most savings accounts
increase with inflation.
The main risk is with CDs, where you are locked
into an interest rate over a long period of time.
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Costs of Savings Accounts
Some accounts charge a penalty fee for early
withdrawal or if the account balance falls below
a certain minimum.
Some accounts charge a fee for each deposit and
withdrawal.
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Costs of Savings Accounts
You have to pay income tax on the interest you
earn on savings account.