Economics Notes

CHAPTER 16

Saving

The nonuse of income for a period of time so that it can be used later in life

Reasons to save money

Emergencies, retirement, special purchases, car, college, house

Interest

Each institution offers various programs that will earn interest. Some are not interested in small accounts so you may need to bank at a different location than your parents.

·       Banks make money by charging interest on loans (they charge more than they would pay a depositors)

                 

Þ    Trade Offs: Liquidity vs. Risk vs. Yield

Liquidity (low interest) how quickly can your investment be turned into cash

RISK: is it safe or risky?

Yield: Profit (what are you making from your profit)

Types of Savings Accounts

1.           Passbook  (AKA) regular savings accounts

·       Depositor keeps a book hat records deposits and withdrawals.

·       Some banks require a minimum balance

Þ    Trade offs:  easy access/ low interest

2.          Money Market Deposit Account-

·       Requires a high minimum balance ($1000 to $5000)

·       Pays more interest out

Þ    Trade offs:  Easy access and High interest, but still liquid

3.          Time Deposits aka  CD’s-

·       Invest your money and not get your money back until the account reaches its MATURITY (length of investment) and you can cash it in. 7 days to 10 or 15 years.  Has a higher interest rate with very little access, the cd must reach maturity.

·       Minimum deposit required $25 to $100,000

Þ    Trade offs: Pays higher interest but low Liquidity

·       TYPES OF TIME DEPOSITS

1.           CD’s: Certificate of Deposit

·       Trade offs: Pays higher interest but the tradeoff is LOW LIQUIDITY.

2.          IRA- Individual Retirement Account

·       Tax deferred and ROTH

·       You cannot get that money out until you are 59 years old.

·       You can put up to 5000 a year in it.

·       5,000 x 40 years = 200,000 + Interest