Although banks, credit unions, and saving and loan companies offer similar services, they have pertinent features that cater to specific financial needs of customers. Saving and current are the two basic types of accounts offered by financial institutions. Savings accounts accumulate interests, which vary depending on the prevailing market rates, the amount saved, and the frequency of withdrawals. The paper examines the types of savings accounts offered by the mentioned financial institutions, discusses the differences between continuous and compound interests, and explores the influence of inflation rate on the spending power.
Saving Accounts Offered by Banks, Credit Unions, and Loan Companies
In this region, banks, credit unions, and savings and loan companies offer different types of savings accounts to the customers. A review of the posters and brochures of these financial institutions revealed that they mainly offer two basic types of savings accounts, i.e., goal-oriented savings account and student savings account. Furthermore, these institutions offer both online and basic saving accounts. The students saving accounts offer a great chance for students to avoid payment of fees and can receive waivers on a monthly basis. Even so, the conversion of the student savings accounts to regular saving account can happen any time at a substantial fee (Pritchard para 14). Also, the institutions offer interest rates in the range of 0.05% to 1.85% annually (Karimi para 4). The annual percentage yield (APY) offered by these banks ensure that students earn some interest on the savings over a specified period.
The goal-oriented savings accounts help the customers to earmark funds for particular projects. Most of the financial institutions offer savings accounts designated for specific goals (Pritchard para 14). Although people do not earn a lot of interest from these types of savings accounts, their effect is mainly psychological and help the customers to attain the earmarked goal(s). However, some credit unions, savings and loan companies, and banks offer perks to clients to encourage regular savings. A survey of these institutions revealed that they offer interest rates in the range of 0.08% to 1.26% APY.
Continuous and Compound Interests
Some financial institutions offer continuous interests rates while others offer compounded rates. As mentioned, these institutions offer similar services with discrepancies existing on a few features. The difference between compound and continuous interest lies on the kind of deposit that earns interests. The principal is the first amount of money deposited by a client in the saving account. When financial institutions pay interests continuously, the client earns interest continually on his or her principal and the earned interest also keeps generating interest on the initial interest earned. On the other hand, calculation of the compound interest occurs on the principal and also on the interest earned periodically. The differences between these two types of interests imply that their calculation also varies.
Continuous Interest Calculations
The below formula applies in the calculation of continuous interests:
Where:
A=Amount
P=Principal
e=the mathematical constant e
r=rate of interest (annual)
t=time in years
Calculation
In this question:
A=$1000000
P=$1000
Assuming an interest rate of 1.2%, the calculation of the time taken to hit that amount is as follows:
Log (1000) =log (e0.012t)
2.9999=0.012t⋅log (e)
249.99log (e) =t
575.65=t
It takes 575.65 years for an initial amount of $1000, compounded continuously at a rate of 1.2%, to become $1000000
Compound Interest Calculations
The below formula applies in the calculation of continuous interests:
Where:
A=Amount
P=Principal
r=rate of interest (annual)
t=time in years
n=number of times of compounding per year
Calculation
In this question:
A=$1000000
P=$1000
Assuming an interest rate of 1.2%, compounded 12 times per years, the calculation of the time taken to hit that amount is as follows:
It takes 575.934 years for an initial amount of $1000, compounded 12 times a year at a rate of 1.2%, to become $1000000
Impact of Inflation Rate on Spending Power
The inflation rate in a country has an impact on the spending power of people. The rate determines the cost of commodities and as such, influences the living of standards of the citizenry. Countries with high inflation rates have a high cost of living while those with low inflation rates experience fair cost of living. Concisely, the high inflation rate lowers the spending power of money. As such, an individual will use a lot of money to purchase fewer goods in comparison to buyers in countries with low inflation rates. In the U.S, the inflation rate is the yearly change in the prices of commodities (Amadeo para 1). Also, the rates correspond to various phases of the business cycle, i.e., expansion, peak, concentration (recession), and trough. The current inflation rate stands at 1.9% even though. However, the forecasts indicate that the value is likely to elevate to 2.0% by 2020 (Amadeo para 5). Below is the trend of inflation rate in the U.S from 1960 to 2011:
Source: (University of Minnesota para 3)
Conclusion
Financial institutions offer different savings accounts to their customers to promote their operations and guarantee future financial security for the clients. A survey of the posters and brochures of these financial institutions revealed that they mainly offer goal-oriented savings account and student savings account as the two basic types of savings accounts. Banks offer both continuous and compounded interests rates on the invested amount in the saving accounts. The difference between compound and continuous interest lies on the kind of deposit that earns interests. Finally, the inflation rate determines the cost of commodities and as such, influences the living of standards of the citizenry. High rate lowers the purchasing power of money.
Works Cited
Amadeo, Kimberly. “U.S. inflation rate by year from 1929 to 2020” The balance, Jul. 2018, https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093. Accessed 3 Sep. 2018.
Karimi, Sabah. “10 best student savings accounts” Go banking rates, Nov. 2017, https://www.gobankingrates.com/banking/savings-account/9-best-student-savings-accounts/. Accessed 28 Aug. 2018.
Pritchard, Justin. “Types of savings accounts” The balance, Jul. 2018, https://www.thebalance.com/types-of-savings-accounts-315775. Accessed 28 Aug. 2018.
University of Minnesota. “Principles of macroeconomics” Libraries,
http://open.lib.umn.edu/macroeconomics/chapter/5-2-price-level-changes/. Accessed 3 Sep. 2018.
