4-4-11

McGraw-Hill/IrwinFocus on Personal Finance, 2e

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

4 Savings and Payment Services

4-4-33 Savings and Payment Services

1. Identify commonly used financial services

2. Compare the different types of financial institutions

3. Assess various types of savings plans4. Evaluate different types of payment

methods

Chapter Objectives

4-4-44Objective 1: Identify commonly used financial servicesWhat Financial Services Do You Need?

Banks, savings and loans associations, credit unions, and other financial institutions provide, payment, savings and credit services.

Meeting Daily Money NeedsCommon mistakes made when managing current cash needs include– Overspending– Insufficient liquid asset– Using savings to pay for current expenses– Failing to put extra funds in an interest bearing or investment

account

4-4-55 Sources of Quick Cash

There are times when you need more cash than you have available

You have two basic choices– Liquidate savings– Borrow

Using savings and increased use of borrowed funds may reduce net worth and your potential to achieve long-term stability

4-4-66 Types of Financial Services

Savings.– Time deposits in savings and

certificates of deposit. Payment services.

– Checking accounts monies are commonly called demand deposits.

– Automatic payments. Borrowing for the short- or long-term. Other financial services.

– Insurance, investment, real estate purchases, tax assistance, and financial planning are additional services you may use.

4-4-77 Types of Financial Services

Asset management account.– Also called a cash management account.– Offered by investment companies and others

provide a complete line of financial services program, which include.

• A checking account and an ATM card.• A credit card• Online banking.• A line of credit for quick cash loans.• Access to a variety of investments.

(continued)

4-4-88 Electronic and Online Banking ServicesMost banks are offering online services, however the Web-only banks have started to expand over the years e.g. E*Trade Bank. These electronic branches and banks provide the following services:

Direct deposit of paychecks and other regular income.

Automatic payments transfer funds such as for utilities. Remember to deduct them from your register.

ATM access to obtain cash, check account balances, and transfer funds - check out the fees.

A debit card - takes money out of your account. Lost card liability $50-$500.

4-4-99 Financial Services and Economic conditions

For successful financial planning be aware of the following:The prime rate is what banks charge large corporations. See www.federalreserve.gov.

When interest rates are rising...– Use long-term loans to take advantage of current low rates.– Select short-term savings instruments to take advantage of

higher rates when they mature. When interest rates are falling...

– Use short-term loans to take advantage of lower rates when you refinance the loans.

– Select long-term savings instruments to “lock in” earnings at current high rates.

4-4-1010 Objective 2: Compare the types of financial institution

3 questions to ask before choosing a financial institution

1. Where will I get the best return for savings?2. Where can I minimize my costs for financial services?3. Will I be able to borrow money when I need it?

Determine the financial services before choosing a financial institution

Compare the fees for financial services and convenience

Consider the safety and rates for deposits and loans at different institutions

4-4-1111 Comparing Financial Institutions

Deposit type institutions– Commercial banks are corporations that offer a full

range of services including checking, savings, lending and other services.

– Savings and loan associations have checking accounts, specialized savings plans, loans and financial planning and investment services.

– Mutual savings banks specialize in savings accounts and mortgage loans. They are owned by their depositors, with profits going back to depositors by paying a higher rate on savings.

– Credit unions are user-owned, nonprofit and provide comprehensive financial services.

4-4-1212 Types of Financial Institutions

Non-deposit type institutions.– Life insurance companies offer insurance plus savings

and investment features, with some offering financial planning and investing services.

– Investment companies offer a money market fund on which you can write a limited number of checks.

– Brokerage firms which act as agent for buyers and sellers of financial products

– Credit card companies which specialize in short term loans

– Finance companies make short and medium term loans to consumers, but at higher rates.

(continued)

4-4-1313 Types of Financial Institutions

Non-deposit type institutions (continued). – Mortgage companies provide loans to customers so

they can purchase homes. Problematic Financial Businesses

– Pawnshops make loans on possessions but charge higher fees than other financial institutions. Used for quick cash.

– Check-cashing outlets charge 1-20% of the face value of a check. 2-3% is average.

– Payday loan companies - high interest.– Rent-to –Own Centers leasing merchandise at high

interest rates to low-income customers

(continued)

4-4-1414Objective 3: Assess various types of savings plans

Types of Savings Plans Regular savings accounts. Certificates of deposit.

– Require you to leave your money on deposit for a set time period, otherwise you incur penalties.

– Several types to chose from.– Consider all the earnings and all the costs.

Interest earning checking accounts. Money market accounts and funds.

– Money market accounts are covered by the FDIC, but money market funds are not.

4-4-1515 Types of Savings Plans

U.S. Savings Bonds.– Series EE sold at half of face value, with potential tax

advantages if used to pay tuition and fees.– Series HH pays interest every six months.– I bonds which earns a fixed rate plus an inflation rate which

changes twice a year– See www.savingsbonds.gov for rates.

Advantages– Exempt from state and local income taxes.– You don’t have to pay federal income tax on earnings until

you redeem the bonds.

(continued)

4-4-1616 Evaluating Savings Plans Rate of return or yield.

– Percentage increase in value due to interest. Compounding.

– Interest on previous interest earned. Inflation - compare the rate of return on your savings

with the inflation rate. Taxes- reduce interest earned on savings Liquidity. Safety via FDIC and NCUA.

– FDIC insures up to $100,000 per person per financial institution (see www.fdic.gov).

Restrictions and fees

4-4-1717 What is “Truth in Savings?” Requires Disclosure of...

– Fees on deposit account.– The interest rate.– The annual percentage yield.– Other terms and conditions.

It defines the APY as the total percent The total percent is based on annual interest

and frequency of compounding.

4-4-1818Objective 4: Evaluate different types of payment methods

Comparing Payment Methods While check writing is the most common form of consumer

transactions, there is a considerable amount of electronic payment used for retail transactionElectronic Payments• Debit Card Transactions• Online Payments• Stored-value Cards• Smart Cards

Checking Accounts Types of checking accounts include...

– Regular Checking Accounts• Usually have a monthly service charge.

– Activity account.• Charge a fee for each check written, and sometimes for deposits.

4-4-1919 Comparing Payment Methods Types of checking accounts include…(continued)

– Interest-earning or share draft accounts as they are called at credit unions

– These accounts require a minimum balance.

Evaluating checking accounts.– Restrictions, such as a minimum balance.– Fees, which are increasing, and charges.– Interest rate and computation method.– Special services, such as overdraft protection.

4-4-2020 Other Payment Methods

Certified check.– Personal check with guaranteed payment.

Cashier’s check.– Check of a financial institution you get by paying the

face amount plus a fee. Money order.

– Purchase at financial institution, post office, store. Traveler’s check.

– Sign each check twice.– Electronic traveler’s checks - prepaid travel card

with ability to get local currency at an ATM.

4-4-2121 Managing your Checking AccountObtaining and using a checking account involves several activities

1. Opening a Checking Account:• Individual vs. joint account

2. Making Deposits• 3 types of endorsements

– Blank endorsement– Restrictive endorsement– Special endorsement

3. Writing Checks• Steps for proper check writing

– Record the date– Write the name of the person/organization receiving the check– Record the amount of the check in figures– Write the amount of check in words– Sign the check– Note the reason for the payment

4-4-2222 Managing your Checking Account4. Reconciling your checking account

• Steps involved in reconciling bank statements– Compare the written checks with those reported

paid. Subtract the total of all checks written but not yet reported as cleared

– Determine deposits not on the statement. Add the amount to the statement balance

– Subtract fees or charges and ATM withdrawals from the checkbook balance

– Add any interest to your checkbook balance

(continued)