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HOW TO FINANCE YOUR LIFE Financial Literacy

Financial Literacy

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Financial Literacy. How to finance your life. Savings Accounts. Saving – The process of setting money aside for a future date instead of spending it today. Not intended to be used for every day purchases - PowerPoint PPT Presentation

Text of Financial Literacy

Financial Literacy

How to finance your lifeFinancial LiteracySavings AccountsSaving The process of setting money aside for a future date instead of spending it today.

Not intended to be used for every day purchases

Intended to be a safe place to keep money to be used at a later date for a major purchase.

Gives a little EXTRA return on money depositedSavings AccountsThe goal of saving is to provide funds for:EmergenciesShort-term goalsInvestments

Save first, then invest with a sufficient amount of $.

Savings AccountsInvesting The process of setting money aside to increase wealth over time and accumulate funds for long-term financial goals such as retirement.

Have you ever tried to save up money for something?Savings AccountsDeposit Money you put into your savings account

Withdrawal Money taken out of your saving account

Savings AccountsInterest Money paid back to you by the bank for being able to use your money

Interest is that something EXTRA, that is a larger benefit than a checking account.

Interest is a result of the banks using your money while it is in your accountSavings AccountsThe bank pays interest on the amount of money in your savings account

Interest Rate percentage you are paid for your money.

Rates may vary from month to monthInterest can be paid:Annually once a year12%Semi-annually twice a year6%Monthly once a month 1%Quarterly four times a year3%

Savings AccountsAccount Balance Total amount of money that is in your accountAccount Balance = Amount deposited + Interest payment

Interest Payment =Interest Rate x Beginning Account Balance

Beginning Account Balance =Ending account balance from the previous month

Savings AccountsIf you had $1000 in a savings account. The interest rate is 7%

What is the Interest Payment?What is the Account Balance?Savings AccountsCompounding of Interest When money is earned on the total amount in the account.Including the initial deposit and interest already credited to the account

The more often the interest is compounded, the more money is gained through interest paymentsSavings AccountsYou have $100 in your savings account at the beginning of the month. The bank pays you 6% interest on this account each year; interest is paid each month. Assuming you make no deposits or withdrawals over the next month, how much interest will you earn during the month?Monthly rate = 6/12 = 0.5% = .005Beginning Balance = $100Interest Payment = $100 x .005 = $0.50Account Balance = $100 + $0.50 = $100.50

Savings AccountHow much money will be gained after Month 2, 3Month 2Beginning Balance = $100.50Monthly rate = 6/12 = 0.5% = .005Interest Pmt = $100.50 x .005 = $0.51Account Balance = $100.50 + $0.51 = $101.01Month 3Beginning Balance = $101.01Interest Pmt = $101.01 x .005 = $0.51Account Balance = $101.01 + $0.51 = $101.52Savings AccountYou have the opportunity to put your money in one of two savings accounts. $100 dollars in each account. Account 1 compounds interest monthly at a rate of 4%. Account 2 compounds annually at a rate of 4%.Account 1Beginning Balance = $100Interest Rate = Monthly = 4/12 = .33% = .0033Interest Pmt = $100 x .0033 = $0.33Account Balance = $100.33Account 2Beginning Balance = $100Interest Rate = annual = 4% = .04Interest Pmt = $100 x .04 = $4Account Balance = $104Savings AccountAccount 1 will compound throughout the year.

We will start Microsoft Excel in February.

Savings AccountsFuture Value how much a set amount of money will be worth in the future

Think back to interest payments$1000 today is worth $1040 in one year with 4% interest compounded annually.

FV = PV x interest rateFV = $1000 x .04FV = $1040

Savings AccountsPresent Value The value of money right now, today$1040 in one year is still worth $1000 today at a rate of 4% annually.

PV = FV / ratePV = $1040 / .04PV = $1000

Savings AccountsDiscount Factor The amount that $1 at some point in the future is worth today

Divide: Present Value / Future ValueDivide $1000 by $1070 and get 0.9345This means that 93.4 cents today is worth one dollar in a year.

Savings AccountsThe Rule of 72 a formula designed to help people estimate how long it will take to double their money at a certain expected interest rate

Divide: 72 / Annual Interest rate This will ESTIMATE the amount of years it will take to double your money

Savings Account$1000 at an annual rate of 4%72 / 4 = 18It will take approximately 18 years to double the money.

Savings AccountWhat about $500 at an annual rate of 5%?72 / 5 = 14.4 It will take 14.4 years to double your money.Checking AccountsLearning to maintain a checking account is a necessary skill to master before living independently.

Checking Accounts are meant to be a place to keep money for short times before it is spent.

Typically banks offer little to NO interest on checking accounts.

Checking AccountsChecks Written order specifying the amount of money to be paid and the name of the person or company who should receive the funds.

Should be written in pen so no changes can be made

Checking AccountsChecks may be written to pay for:UtilitiesRentMortgage PaymentsFoodClothingOther expenses

Each box of checks will be deducted from the checking account total.Checking AccountsChecking Account Balance may be recorded on the check register.

May be changed in two ways;Increase Deposit/CreditDecrease DebitDeposit/Credit is money put into your accountDebit is a withdrawal from your account

Checking AccountsCheck Register

For credits/depositsRecord the date and amount of depositsFor checks/debitsRecord the date, check number, payee, and amount of each check written

Checking AccountAt the end of each month, you should balance your checkbook.

Balance compare the amount of money in an account, to the net of credits and debits against the account at that time.

Account Balance = Start of month account balance + Total amt of deposits made during month Total amt of checks/debits during month.

Checking AccountsAt the end of the month, the bank will send you a banking statement, which includes the:

statement balance how much money you have in your checking account as of the statement date

All debits and credits made before statement dateChecking AccountIf your beginning balance was $1000 dollars.You wrote 3 checks for $100 each.You wrote 4 checks for $50 each.You deposited a check for $500 into your account.

What is your ending balance?Checking AccountsBeginning Balance = $1000$1000 - $100(3) - $50(4) +$500$1000 - $300 - $200 +500 = $1000

Ending Balance = $1000Checking AccountsInstead of writing a check, people may prefer to use a debit card :A card that allows the user to withdraw money from a bank account to get cash or make a purchase

When using a debit card, you will be asked to enter a Personal Identification Number (PIN)Four digit code required to use the debit card to verify identity

Checking AccountsElectronic Funds Transfer (EFT) The movement of funds using the computer systems, telephones, or electronic terminals

ExamplesDirect Deposit - Automatic transfer of your paycheck from your employers account to your checking account. Automatic payment of an ongoing monthly bill such as power or cable billChecking AccountsOnline Banking Allows account holders to access their account information, view transaction history, and perform banking transactions via the internet62 % of people bank online.

AdvantagesAvailable 24 hrs a day, 7 days a week regardless of bank hours.No checks have to be writtenTransactions are automaticService is free to account holders

Checking AccountsWhat will happen when you write a check and there is not enough money in your account to cover it?Online banking could save you from forgetting a transaction and overdrawing.

What will be the result?Checking AccountsOverdrawnHaving a negative balance in your account resulting in a BOUNCED CHECKCheck written without available funds to cover the amount

Overdraft PenaltyA fee to cover the cost of processing your bounced checkCommonly $20-$25 at most banksChecking AccountsOverdraft ProtectionArrangement with the bank to cover checks so they will not bounce

Examples:Automatically transferring money from another account at the same bank to cover the short accountSetting a specific limit to overdraft toLending you the amount of money you have overdrafted

In all of these cases, the bank may still charge a fee for this service.Checking AccountsRead all the fine print when selecting a checking accountLook out for accounts that haveHidden fees a high minimum account balanceThe amount of money you must keep in the account to avoid service charges or qualify for interest on an interest bearing accountAn account that earns interestUsually a high minimum account balance and a low interest rate

Checking AccountsLook for accounts that offer:Free checksATM fee reimbursementOnline Bill PayEmail StatementsOverdraft ProtectionSpecial Account starters for Students

Monday AssignmentCheck register

Figure interest payments with annual payments compounded monthly