Notes

UNIT 3 Lesson 3

Annual Percentage Yield (APY) - The total amount earned as a percentage of what you invest.
•Annually - Yearly.
•Average Daily Balance Method - The most common method banks use to determine an account balance for calculating interest. Uses the average daily balance in the account for the month.
•Certificate of Deposit (CD) - A savings option that earns a fixed rate of interest for a fixed period of time.
•Credit Union - A non-profit financial institution that offers memberships to people in a particular profession, company, religious affiliation, or labor union. They operate to provide savings and lending services to members.
•Commercial Bank - A financial institution that serves individuals and businesses, offering savings and checking accounts, consumer and business loans, and numerous other financial services.
•Compound Interest - Interest earned on interest plus principal.
•Direct Deposit - A form of electronic funds transfer through which a paycheck is directly deposited into a bank account on payday.
•Federal Deposit Insurance Corporation (FDIC) - Provides security against loss if a financial institution fails, on deposits up to $250,000. www.fdic.gov This link will open in a new window
•Interest Rate - The percentage of an investment added to the account each time interest is paid.
•Low-balance Method - A method used by banks to determine an account balance which calculates interest based on the balance that has been in the account the entire month
•Money Market Account- Deposit account for which the interest rate fluctuates with interest rates in the economy.
•Passbook Account - A traditional savings account that records deposits, withdrawals and interest earned on the account in a booklet.
•Principal - The amount of money deposited or invested.
•Quarterly - Every three months – 4 times per year.
•Rule of 72 - A simple way to estimate how money can grow with interest. •Divide 72 by the interest rate to find how many years it will take for your money to double.
•Divide 72 by a number of years to determine the interest rate needed to double your money

•Savings Account - An account offered by any savings institution for depositing money, earning interest, and withdrawing, or removing, your money at any time.
•Savings and Loan - A financial institution that specializes in consumer home loans, as well as accepting deposits and paying interest.
•Semiannually - Twice yearly.
•Simple Interest - Amount earned on principal only, calculated by P x R x T. (Principal x rate x time)
•Statement Account - Transactions are reported on a monthly or quarterly statement.
•Truth in Savings Act 1933 - Requires banks to report the APY for their accounts; it is calculated the same way by all banks.

Financial security
A fund for emergencies helps people cope with unexpected events such as illness, unemployment, accidents, loss, or needed repairs.

Reach financial goals
Save up for a new car, a college education, a vacation, a down payment on a house, or anything else you dream about!

Earn more money
Put your money to work earning interest, and watch it grow.

Good for the economy
When you deposit your savings in a bank, you are not only improving your own financial position but the well-being of your community and the economy as well. This is because the bank uses your savings to make loans to people who are starting or expanding businesses, making improvements on their homes, or for other personal reasons. This keeps money in circulation, which keeps the economy growing.

Commercial Banks

A commercial bank is a financial institution that serves individuals and businesses by offering savings and checking accounts, consumer and business loans, and other financial services.
•Largest savings institutions in the United States and the main source of loans for businesses.
•Most convenient because most have multiple branches and offer the full range of services.
•Fees for checking and other services are generally highest, and service is often impersonal.
•Designed to earn a profit. Like any business, commercial banks can fail and have to shut their doors. What happens to your money? See information on FDIC below.

Savings Bank and Savings & Loan Associations

Savings & loan associations are financial institutions that specialize in lending money to consumers to buy homes as well as accepting deposits and paying interest.
•Although savings and loan associations offer most services that commercial banks do, they are relatively small and their main purpose is to be a source of home loans for consumers.
•Fees may be lower and service more personal.
•Not as convenient due to smaller number of branches.

Credit Unions

A credit union is a financial institution that offers memberships to people who are in a particular profession, company, religious affiliation, or labor union. Depositors are members and owners of the credit union. Not all consumers can join.
•Do not operate for profit, but exist to provide savings and lending services for members.
•Pay slightly higher interest rates to depositors and charge lower interest rates to borrowers.
•Fees are usually the lowest of any type of financial institution.

Advantage of Depositing Savings in a Financial Institution with Deposit Insurance

Consumers who deposit $250,000 or less in insured accounts have security against loss if the financial institution fails.
•The FDIC, or Federal Deposit Insurance Corporation, insures money deposited in most commercial banks.
•The Saving Association Insurance Fund (SAIF) insures deposits made in Savings and Loan Associations.
•The National Credit Union Share Insurance Fund (NCUSIF) insures deposits in credit unions.

Savings Accounts

Accounts offered by any saving institution that allow you to deposit money, earn interest, and withdraw your money at any time.

Advantages

Disadvantages

Deposits are insured and money can be easily accessed. Interest rates are much lower than for other savings options
You can open an account with a relatively small deposit ($50-$100) Some accounts require a minimum balance at all times or a fee is charged. Other accounts charge a fee for using a teller rather than the ATM to withdraw money.

Passbook vs. Statement Accounts
•Passbook accounts are traditional savings accounts through which you get a booklet that serves as the record of your account transactions. Each time you deposit or withdraw money, the teller records the amount, calculates interest earned, and figures your new balance.
•Statement accounts are increasingly more common. Transactions are reported on a statement either monthly or quarterly. Some statement accounts may even have statements sent to you through e-mail.

Money Market Accounts

Deposit accounts for which the interest rate changes over time. Interest rates fluctuate with interest rates in the economy.

Advantages

Disadvantages

Generally, money market accounts pay higher interest rates than regular savings accounts. These accounts usually require a substantial minimum deposit --$500 to $1000 or more -- but pay higher interest rates for higher balances.
A major benefit is that you can withdraw your money at any time without penalty. You don't know how much you can earn because rates will fluctuate.
These accounts are also insured by the FDIC so your money is safe.
Some banks offer money market checking accounts but there are often restrictions on the number of checks and/or the minimum amount of a check.

Certificate of Deposit

Deposit accounts for which the interest rate changes over time. Interest rates fluctuate with interest rates in the economy.

Advantages

Disadvantages

CDs typically pay a higher yield than other bank accounts. CDs require a substantial minimum deposit, usually $500 to $1000.
Rate and time commitment are determined beforehand so you know exactly what you'll earn and when. You pay large withdrawal penalties if you take money out early.
You pay no charges for a bank CD. If your bank is taken over by another bank, your CD rate or term may change.
Rate is guaranteed regardless of economic conditions. You may be responsible to keep track of when your CD will need to be renewed. Some banking instructions will automatically “roll over” the CD after the expiration date if you do not renew it yourself.
Most CDs are insured by the FDIC, or other organizations, on deposits up to $250,000.