Economics / Unit 12: Personal Finance
12.3 Banking and Saving
Notes
- A checking account is for everyday spending with a debit card, checks or transfers. It usually pays little or no interest.
- A savings account pays interest and is good for short-term goals and emergency funds. Money market accounts often pay a bit more but may require a higher balance.
- A certificate of deposit (CD) pays a fixed rate for a set term; withdrawing early usually costs a penalty.
- Deposits at FDIC-insured banks and NCUA-insured credit unions are protected up to a legal limit.
- Watch for fees, such as overdraft fees when you spend more than your balance, and monthly maintenance fees.
- Compound interest helps savings grow: $A = P(1 + r)^t$. Worked example: $2,000 at $6\%$ for 2 years grows to $2{,}000 \times 1.06^2 = 2{,}000 \times 1.1236 = 2{,}247.20$ dollars.
- Rule of 72: money doubles in about $\displaystyle \frac{72}{\text{interest rate}}$ years. At $6\%$, about $\displaystyle \frac{72}{6} = 12$ years.
Practice
Using the Rule of 72, about how long will it take money to double at $8\%$ interest per year?
$\displaystyle \frac{72}{8} = 9$.
You deposit $1,000 in an account paying $3\%$ compounded once a year. What is the balance after 2 years?
$1{,}000 \times 1.03^2 = 1{,}000 \times 1.0609 = 1{,}060.90$.
Which account is best for money you plan to leave untouched for exactly one year in exchange for a fixed, higher rate?
A CD locks in a rate for a set term, with a penalty for early withdrawal.
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