Saving - Alternatives and Choices
Learning Goals/Objectives:
Objectives:
• Identify criteria used to compare savings account options.
• Explain the advantages and disadvantages of the saving account options.
Activities:
Procedures
1. Explain that this lesson introduces the reasons for saving and savings account options through the use of a decision grid analysis. Students identify the basic savings account options and the criteria to determine the advantages and disadvantages of the alternative savings account options.
2. Ask the students to write down the first word that you think of when you say the word “saving.” (2 or 3 words if it is a small group).
3. Share and clarify the meanings of the participant responses.
4. Categorize into the two groups:
A. Spending less to preserve income – reduce expenses.
B. Setting aside income for later use – achieving future goals.
5. Explain that there are two ways to look at saving (A and B, above). One is reactive (A) and one is proactive (B).
6. Introduce the “The Decision-Making Process” handout.
Explain that this decision-making process can be used in a variety of decision-making situations – any situation when a decision has several difference alternatives and criteria.
7. Using the handout, ask student to write after line 1, “The Problem or Issue,” the problem or goal that motivates them to save. Write the goal or problem in a complete sentence.
After they have written the problem or goal, ask them to rewrite it in different words or from a different perspective. After they have finished, ask them to rewrite the problem or goal a third time -with different language or perspective.
Ask students to share the three ways they have described the problem or goal. In most cases, the second or third version is the one they think more accurately describes the problem. This illustrates the reason why we may not want to focus on the first thing or way of identifying a problem that comes to mind.
8. Ask students to write after line 2, “Decision to be Made,” what they must decide in order to start saving. What is the real decision to be made?
Students share their ideas of the decision. In most cases, the decision is to give up some consumption now to be able to save for the future goal. This identifies the opportunity cost of saving as current consumption. Help students to understand that this is the economic problem they face – are they willing to incur the opportunity cost of saving?
9. Referring to the handout, line 3, begin a discussion of the options for savings.
Focus on the more basic methods or types of accounts. See the “Teacher Resource: Savings Options” for ideas.
Elicit from the group the basic options for savings accounts
a. cash at home
b. passbook savings account
c. certificates of deposit
d. money market account
e. money market mutual fund.
f. other?
10. Explain that each of the savings options has advantages and disadvantages.
Participants should suggest the advantages and disadvantages (criteria). Guide the discussion to include at least the criteria listed below:
a. liquidity (time requirements)
b. transaction costs (fees, other barriers)
c. minimum deposit/withdrawal rules
d. interest rate differences
e. withdrawal penalties, limits, etc.
f. location/technology access
11. Participants complete the grid with the alternatives and criteria developed by the class. Rate each alternative + or – according to each criteria.
12. Small groups discuss their individual ratings – share information and reach consensus about the advantages and disadvantages of each option.
Materials:
Teacher Resource: Savings Options
Checking Account
Checking accounts are primarily meant for transactions. They don't pay much, if any, interest. Some banks combine the conveniences of checking with the return of a money market account. "Asset management" accounts at brokerages may also offer unlimited check writing, ATM access, and money market rates.
Advantages
•Your can access your money with a check or an ATM machine..
•A bank branch is usually not far, often in a grocery store. so you can deal with a human being.
•As with all bank deposits, checking accounts are insured by the Federal Deposit Insurance Corp (FDIC).
Disadvantages
•Depending on the bank, you may not earn much, if anything, on the money in your account.
•Many checking accounts require a minimum balance or charge fees, or both.
Passbook Savings Account
Savings accounts -- or passbook accounts, as they're sometimes known – have traditionally been the most popular choice for short-term savings. The very low interest rate you earn in most savings accounts typically isn't enough to even keep up with inflation
Advantages
•The money in a savings account is insured by the FDIC.
•Account minimums are often low.
Disadvantages
•The return on savings accounts is so low.
Money Market Deposit Accounts
Money market deposit accounts are offered by banks, usually require a minimum balance, and permit a limited number of transactions per month (eg., six transfers, three of which can be checks written on the account).
Advantages
•Money market deposit accounts are very liquid. Most allow for easy access through checks, transfers, and even ATMs.
•Because they are offered by banks, money market accounts are insured by the FDIC.
Disadvantages
•You may pay for the liquidity by receiving less in return than from certificates of deposit.
•If your account falls below the minimum required balance, or you exceed the limited number of transactions, you might pay a penalty.
Money Market Funds
Money market funds are offered by brokerages and mutual fund families. These funds invest in highly liquid, safe securities such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations).
Advantages
•With a money market fund, you can have the money in your hot little hands very quickly. Often, you can write checks or use an ATM card.
•The returns on money market funds are typically higher than the return on money market accounts.
•Issuers go to great lengths to keep the NAV (the price of each share of the fund) at $1, so your principal is relatively safe.
Disadvantages
•Money market funds are not FDIC insured.
•There is no guarantee that the NAV will remain at $1.
Certificates of Deposit (CDs)
CDs are debt instruments with a specific maturity, which can be anywhere from three months to 60 months (i.e., five years). Most CDs are issued by banks, but they can be bought through brokerages.
Advantages
•CDs are very safe because most are offered by banks, so they are FDIC insured.
•Depending on how long it is to maturity, CDs may pay more than money markets.
Disadvantages
•Your money is off-limits until the CD matures. If you must, you can redeem the CD early, but you'll pay a penalty.
High-yield Bank Accounts
Nowadays, you can find high-yield savings and checking accounts. They offer flexibility - you can add or withdraw funds at any time, and liquidity -your money isn't locked in for a specific time period. Some even boast interest rates on par with more restrictive investments like CDs. The best rates by far are offered by online-only banks that keep costs low by cutting back on frills.
Advantages
•Better rates than many standard bank accounts.
•Same FDIC insurance applies to high-yield accounts.
Disadvantages
•Bare-bones banks with no ATM/debit access or check-writing privileges can be a problem if you need your cash fast.
•Customers must coordinate their cash flow by transferring money back and forth from the online bank to a linked checking/savings or brokerage account. That means delays -- two to five days -- before everything's reconciled.
•They often offer limited-time teaser rates.
Materials
• Handout: The Decision-Making Process
• Handout: The Decision-Making Grid
Assessment:
Assessment
• Identify five alternatives for savings accounts
• Identify 3 criteria for selecting a savings account option
• Given a scenario about a saver, determine the most appropriate savings account option. Explain your reasoning using the decision-making grid criteria.
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