Savings Products Flashcards
Why do people save money?
So that they have funds too pay for goods and services in the future.
They feel safer if they have money to pay for unexpected expenses.
Define savings
Delayed spending
What might people need to pay for in the future?
Needs - eg deposit on rented flat
Wants - items that can’t be afforded on a day to day basis eg computer
Aspirations - goods or services they want / want to experience eg holiday
What do people need to consider when choosing a savings product?
- how safe their savings will be
- what the rate of return is
- if the rate of return is higher than inflation
- if they will have to pay tax on the interest earned
- how often they will be able to withdraw money
- how regularly they want to save
- how the account can be operated
Where provides savings products?
Banks
Building societies
Credit unions
Friendly societies
What do providers of savings products do with the saved money?
Providers lend the money to borrowers
What is meant by ‘return on savings’ and how is it expressed?
Return in savings is the interest that the provider pays the account holder.
Expressed as an annual equivalent rate (AER)
What is AER?
AER is the interest that will be earned on the money in one year.
Takes into account how often the provider pays the interest eg monthly / annually, the effect of compounding the interest and any fees or charges.
How do providers set their AER?
All providers calculate their AER using the same formula.
In relation to the bank of England’s bank rate and the savings offered by other providers in the market
Why are low bank rates beneficial?
Low bank rates -> low returns on savings
Encourages people to spend rather than save -> eases recession
What are the factors that impact the return offered by providers
Amount of money that us saved.
How often money is saved.
How long money is saved for.
Number of withdrawals the saver can make.
The account application and operations channel.
The tax status of the account.
Introductory bonuses.
How does the amount of money that is saved impact the return offered by providers?
Larger sums of money -> earn higher rates of return.
Usually a minimum amount has to be deposited in order to open a savings account but this varies greatly
Why does how often money is saved impact the return offered by providers?
Saving a specific amount each month -> higher rates of return
How does the length of time the money is saved for impact the return offered by providers?
Longer term savings -> higher interest rate
What are the different categories of savings account
Instant access accounts - can withdraw immediately, any time, no charge
Notice accounts - must give notice eg 90 days before withdrawing money. Pay higher AER than instant access.
Fixed period accounts / bonds - pay a fixed AER for a set period of time, limited / no withdrawals. Pay higher AER.
How does the number of withdrawals the safer can make impact the return offered by providers?
Instant / easy access allow unlimited withdrawals.
Restricted access limits withdrawals.
More withdrawals -> lower interest rate
How does the account application and operation channels impact the return offered by providers?
Accounts that the customer applies for / operates online -> higher AER.
Because customer does most of the administrative work themselves
How does the tax status of the account impact on the return offered by providers?
Interest on some accounts are tax free, others are charged a net of tax
How do introductory bonuses impact on the return offered by providers?
Some savings have fixed introductory bonuses that boost the return in the first year.
After the first year the AER drops significantly
What is inflation?
The general rise in the price of goods and services, affecting the purchasing power of money
Why do savers need an AER that is the same as the rate of inflation?
To maintain the purchasing power of their money
What was the rate of inflation in January 2015?
0.5%
