Problem 6 Beth and Mark would like to put ... [FREE SOLUTION] (2024)

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Imagine you want to secure your money and potentially grow your savings over a specific period of time. This is where a Time deposit, also known as a term deposit, comes into play. It's like a pact with your bank: in exchange for higher interest, you agree to keep your money untouched for a pre-agreed period. For Beth's preference of a four-year Certificate of Deposit (CD), she has chosen a type of time deposit that locks funds for that four-year term, providing a guarantee of returns at a fixed interest rate.

With time deposits, you are making a commitment, and banks value this as it allows them to plan their finances with more stability. This is why they offer an incentive in the form of higher interest rates compared to savings accounts. However, the restriction is clear: if you withdraw your money before the term is up, you'll likely face monetary sanctions, which could diminish the overall earnings you'd expect.

Now, let's dive into the Interest rates comparison between Certificates of Deposit (CDs) and savings accounts. CDs generally come with a fixed rate, meaning over the course of the deposit term, you know exactly how much you will earn in interest. This predictability is comforting to many savers who can budget around this assured income from interest.

In contrast, savings accounts often have variable interest rates subject to market fluctuations. While this means your rate could potentially rise, it also could decrease over time. In Beth and Mark's scenario, opting for a CD could result in more substantial gains over the four-year period due to typically higher rates that accompany CD accounts. This is a prime advantage for long-term savers who do not require immediate access to their funds.

Mark's inclination towards a passbook savings account brings us to a critical aspect of banking—Liquidity of savings. Liquidity refers to how quickly and easily you can access your funds without incurring penalties. In a standard savings account, liquidity is high; you can withdraw your money at practically any time. It's a flexible option for those who value immediate access to their funds over higher interest rates.

However, for a CD, liquidity is low until the term concludes. Withdrawing early from a CD, like the four-year one Beth is considering, usually results in penalty fees. This can be a significant disadvantage if unexpected expenses arise or if you suddenly need access to your cash. It's the trade-off for the often higher interest rates that CDs provide—you're sacrificing liquidity for potentially greater returns.

Exploring Bank savings options is crucial when making the best financial decision for saving money. Each bank may offer a variety of financial products, including several types of savings accounts—each with unique features.

For example, apart from CDs and passbook savings accounts, you might encounter high-yield savings accounts, which offer higher interest in exchange for maintaining a higher balance, or money market accounts, which blend the features of a checking and savings account with typically higher interest as well. Online banks and credit unions often provide competitive options too.

When examining bank savings options, always consider factors such as the interest rate, minimum balance requirements, fees, and the convenience of banking services provided. Beth and Mark's decision will hinge upon their desired balance between earning potential through interest rates and the flexibility of fund accessibility.