Posted in Finance, Accounting and Economics Terms, Total Reads: 221
Savings is a portion of the disposable income that is left after expenditure, which is put aside in some kind of savings instrument like deposit account for future use. Since a person is uncertain about his future, one needs to save money for unexpected events and emergencies like medical emergencies, accident, natural disaster etc. Without savings, such unexpected events can become a huge financial burden. Therefore savings help a person become financially secure.
People can save money in their piggy banks or depository institution. If the savings is for a short period of time and if the person wants his savings to be liquid, then he can go for piggy bank method. If it is for a longer period of time and for the savings to be safe it is better to go for a depository institution. Depository institutions also allow customers to take advantage of time value of money by paying interest.
Some of the common methods of savings through depository institutions are
• Savings account- Is an account that holds money not spent on current expenditure. Money can be withdrawn when needed but there may be a minimum balance which needs to be maintained
• Money market deposit account- It provides a higher interest rate than savings account. It also requires higher balance to be maintained and provides the benefit of both savings account and checking account
• Certificate of deposit (CD) - Where a lump sum amount of money has to be placed with the depository institution for a specific period of time. Once the time period is over the savings and principal earned can be withdrawn. There will be a penalty if money is withdrawn earlier. It doesn’t provide much of liquidity and has a higher interest rate than money market deposit account.
For e.g Mr. A saves and puts $500 in a CD, which gives an interest rate of 4%. Then the amount that will be available at the end of 5 years is