Chpt. 7 Flashcards
What is Saving?
When we choose not to spend part of our income. Savings could also be seen as deferred/postponed spending because we are making a decision to put this money aside with the intention of spending it at some point in the future.
Name 5 reasons for Saving
1) For future planned expenditure, e.g. a new car, holiday, home extension
2) For emergencies: to have money available in case something goes
wrong, E.g: car breaks and needs to be replaced
3) For major family events, e.g. a wedding/funeral
4) For retirement, when our income level will reduce
5) To improve our credit rating: lenders like to see that a person is saving money regularly.
Explain 6 factors to consider when saving money (know 5)
1) Risk: Will your savings be safe?** Money saved in a licensed financial institution (e.g. bank) is safer than keeping it at home.
(Savings with An Post are ‘state guaranteed’. They are 100% secure and will definitely be repaid by the government.)
2) Reward: Will the savings earn interest?
All financial institutions offer slightly different rates of interest. The rate quoted by the financial institutions (annual equivalent rate AER) tells the saver the full rate of interest if all of the money is left in a savings account for a full year.
3) Liquidity: Is it easy to withdraw/access your savings when you need to?
E.g: how quickly can your savings be turned back into cash? Some savings accounts require you to give a written notice. Penalties may apply if you withdraw earlier than the terms agreed.
4) Taxation: Will you have to pay tax on your interest?
Deposit Interest Retention Tax (DIRT) is a tax on interest earned on savings. Some savings products offered by An Post, E.g: Savings Certificates are not subject to DIRT.
5) Convenience: Is the account convenient for making regular lodgements and withdrawals?
E.g: is the location convenient? What are its opening hours?
Many banks provide online savings accounts for customers, which makes it easy to transfer money into them.
6) Terms and conditions:
Are there fees and banking charges involved in operating a deposit account? Is there a minimum/maximum deposit required? Will you be penalised for withdrawing money early?
What’s the simple interest formula?
Interest = Principal × Time × Rate
What does AER stand for? What is it?
Annual equivalent rate
AER is the rate of interest you could earn on your savings in a full year with a compound interest rate.
Financial Institutions in Ireland show the AER. Makes it easier for savers to compare different financial institutions.
What does DIRT stand for? What is it?
Deposit Interest Retention Tax
DIRT is a tax on the interest earned on deposit accounts.
What is a Dividend?
A dividend is a payment to shareholders based on the number of shares owned. It’s the percentage% of profit made by shareholders.
