Saving is the decision to set aside part of income for future usage. Students will investigate the opportunity costs of choosing to save or spend. They will also learn the benefits of compound interest and the impact interest rates have on spending or saving.
Talking Points
1. People’s income is saved, spent on goods and services, or used to pay taxes. People choose between immediate spending and saving for future consumption. Because some people are less patient than others, they choose immediate spending over saving.
2. Setting a savings goal can serve as an incentive to encourage people to save. And having a savings plan helps people reach their savings goals.
3. People may choose to save money in many places. For example, they can save at home, at a commercial bank, a credit union, or a savings and loan.
4. Banks and other financial institutions often pay interest on deposits. People also deposit money in banks because banks are a safe place to keep money.
5. Banks and other financial institutions loan money they receive from depositors (deposits) to borrowers. Banks charge borrowers interest for the loans. Part of the money received as interest from these loans is used to pay interest to depositors for the use of their money.
6. An interest rate is usually expressed as an annual percentage of the amount saved. The interest rate paid on savings and charged on loans, like all prices, is determined in a market. When interest rates increase, people earn more on their savings and their savings grow more quickly. Principal is the initial amount of money deposited on which interest is paid.
7. Compound interest is the interest that is earned on the principal and the interest already earned.
8. The value of a person’s savings in the future is determined by the amount saved and the interest rate. The earlier people begin to save, the more savings they will be able to accumulate (all other things equal) as a result of compound interest.
9. People save money for different reasons, including higher education, retirement, unexpected events, and large purchases such as cars and homes.
10. To assure savers that their deposits are safe from bank failures, federal agencies guarantee depositors’ savings in most commercial banks, credit unions, and savings associations up to a set limit.
11. The interest rate that banks quote is the nominal, or stated, interest rate. The real interest rate expresses the rate of return on savings, adjusted for inflation; that is, the real interest rate is the nominal interest rate minus the rate of inflation. Inflation reduces the value of money, including savings.
12. Usually real interest rates are positive because people expect to be compensated for deferring the use of savings from the present to the future—that is, they expect to be paid interest for letting someone else use their money now instead of using it themselves now.
13. The nominal interest rate tells savers and investors how the dollar value of their savings or investments will grow. The real interest rate tells savers and investors how the purchasing power of their savings or investments will grow.
14. Discounting the future value of a sum of money based on an interest rate allows you to compare money received (or paid) in the future with money held today.
15. Government policies can create incentives and disincentives for people to save. Employer benefit programs also create incentives and disincentives for saving.