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CHAPTER XIV

SAVINGS ACCOUNTS

Many banks have a savings department in which a low rate of interest (3% or 4%) is paid on savings deposits. Such an account may be opened with one dollar. Interest is generally computed and added to the account on Jan. 1 and July 1 of each year. The rules governing interest on savings deposits, followed by many banks, are these:

1. On deposits made during the first ten days of January and July, and during the first five days of any other month, interest will be allowed from the first day of the month in which such deposit is made. On deposits made after the above named days of each month, interest will be allowed from the first day of the month following the deposit.

2. Interest will not be allowed on the average balances, nor for parts of months, nor for parts of dollars, nor on sums withdrawn between January 1 and June 30, or between July 1 and December 31. In computing interest, withdrawals between these periods will be deducted from the first deposits.

EXAMPLE. A man deposits $100 January 2, also $100 on June 1. On June 15 he withdraws $100. Under the rule stated above this man receives interest on July 1 on $100 for one month.

Problems

1. This problem shows how the above rules are used. On Jan. 6, 1920, James Baker deposited $100 in a savings bank which paid 4% per annum, interest payable semiannually. On Mar. 6 he deposited $50. On Aug. 9 he deposited $25. On Nov. 24 he withdrew $35. What balance was due Jan. 1, 1921?

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EXPLANATION.-The interest is computed and entered on July 1 and January 1, and then it becomes a part of the balance. On July 1, 1920, Baker was entitled to interest on $100 for 6 mo. ($2.00) and on $50 for 3 mo. (50%). See Rule 1. This interest was added to the balance on July 1.

On January 1, 1921, he was entitled to interest on $117 ($152.50-$35 Rule 2) for 6 mo. and on $25 for 4 mo. The interest due on Jan. 1, 1921, was $2.67, which made the balance on this date $145.17.

2. Find Baker's balance on July 1, 1921, if he deposited $40.75 on Mar. 2, 1921, and withdrew* $50 on June 10.

3. Was it good business for Baker to draw on his savings account on June 10 if he could have borrowed the money for a month at 8% per annum?

*NOTE.-If you would have your savings account earn the maximum amount of interest, observe these three rules:

(1) Make your deposits in whole dollars before the 5th of each month. Why?

(2) In the first week of January and July, add enough to the interest to make the next dollar. Why?

(3) Make no withdrawals except at interest periods. Why?

4. A young woman had a balance of $52 in a savings bank on Jan. 1. Her deposits were as follows: Feb. 12,

$10; Mar. 3, $15; May 1, $20; June 1, $5. What was her balance on July 1 if interest at 4% per annum, payable semi-annually, is allowed?

5. A young man owns some Liberty Bonds. He put all the interest from them into his savings account at 4% per annum, payable Jan. 1 and July 1. These were the amounts of interest he collected in a certain year:

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In your study of savings accounts you found that banks added the interest at certain periods, usually Jan. 1 and July 1, to the balance of the account at those periods. Interest for the next period was computed on this sum. In other words, interest was allowed on the principal and on the interest due.

This kind of interest is called compound interest. Adding the interest due at a certain period to the principal and computing interest on this sum is called compounding interest. Interest may be compounded annually (once a year), semi-annually (every six months), or quarterly (every three months). Banks which allow interest on the checking account add to the account at the end of the month the interest earned during the month. This is compounding interest monthly.

HOW INTEREST EARNS MONEY

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Compound interest is legal in several states* if specified in the contract. In the rest of the states compound interest cannot be collected, even if called for in the contract. There is no penalty attached to paying compound interest by those who wish to do so for business reasons. If savings banks did not allow compound interest, depositors might draw their interest when due and with it start a new account, which would amount to the same thing as getting compound interest.

Compound Interest Problems

1. This table shows how money increases if compound interest is allowed.

At 3%, interest added annually.

$100 during the first year becomes $103.

(How did we get $103?)

The $103 during the second year becomes $106.09. (How did we get $106.09?)

The $106.09 during the third year becomes $109.27.
(How did we get $109.27?)

The $109.27 during the fourth year becomes $112.55.
The $112.55 during the fifth year becomes..

The

..during the sixth year becomes

(1) Find the values at the end of the fifth and sixth years in the table.

(2) The compound interest on $100 for 6 years at 3% is $. ... less $100.

(3) How much greater is the compound interest which you found in the previous problem than the simple interest for the same time and rate?

* Cal., Iowa, Mo., Mont., Neb., Tenn.

2. Find the compound interest for 2 years on $200 at 4% per annum payable semi-annually.

HINT. At the end of the first 6 months, the $200 would be $204. At the end of the first year the $204 would be $208.08. At the end of 11 years the $208.08 would be.... etc. The compound interest for 2 yr. the amount at the end of the second year less $200.

.........

Persons who must compute compound interest often do so by means of a table, a part of which is shown here.

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1. The amount for each succeeding period is found by computing the interest at the given rate on the last known amount and adding the interest found to this amount.

The amount for the 9th period at 1% is $1.0937. The interest for the next period (10th) is 1% of this amount, which is $.0109. The amount for the 10th period = $1.0937 +$.0109 = $1.1046.

2. Make the table for the 11th period; for the 12th.

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