Transcript Nobody plans to fail....

Chapter 4
Savings and
Payment Services
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Savings and Payment Services
Chapter Objectives
1. Identify commonly used financial
services
2. Compare the types of financial
institutions
3. Assess various types of savings
plans
4. Evaluate different types of payment
methods
4-2
Objective 1
Identify Commonly Used Financial
Services
Meeting Daily Money Needs
Common mistakes:
– Overspending
– Insufficient liquid assets
– Using savings or borrowing to pay for
current expenses
– Failing to put unneeded funds in an
interest bearing or investment account
4-3
Objective 1
Identify Commonly Used Financial
Services
Meeting Daily Money Needs
Sources of quick cash:
– Liquidate savings
• Savings account
• CD
• Mutual fund
– Borrow
Both options
reduce net
worth
• Credit card advance
• Personal loan
4-4
Types of Financial Services
• Savings
– Time deposits
– Savings and certificates of deposit
• Payment services
– Checking accounts = demand deposits
– Automatic payments
• Borrowing for the short- or long-term
• Other financial services
– Insurance, investment, real estate
purchases, tax assistance, and financial
planning
4-5
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:
•
•
•
•
•
Checking account and ATM card
Credit card
Online banking
Line of credit for quick cash loans
Access to a variety of investments
4-6
Electronic and Online Banking Services
Traditional banks  online services
Web-only banks (E*Trade Bank)
Services provided:
•
Direct deposit
– Paychecks and other regular income
•
Automatic payments transfer funds
– Recurring payments such as for utilities
– Remember to deduct them from your register
•
ATM access
– Obtain cash, check account balances, and transfer
funds
– Check out the fees
•
Debit card
– Deducts money directly and immediately out of your
account
– Lost card liability $50-$500
4-7
Pros and Cons of Online Banking
Benefits
Concerns
Time & money savings
Potential privacy, security
violations
Convenience for
transactions, comparing
rates
No paper trail for identity
thieves
Transfer access for loans,
investments
ATM fees can become costly
E-mail notices of due dates
Difficulty depositing cash,
checks
Overspending due to easy
access
Online scams, “phishing,”
and email scams
4-8
Financial Services and Economic
Conditions
For successful financial planning be aware of:
• Prime rate = rate banks charge large
corporations
• Consumer Interest rates
• Rising consumer prices
• Information sources:
• www.federalreserve.gov
• www.WSJ.com
• http://finance.yahoo.com
4-9
Interest Rates & Financial
Decisions
4-10
Objective 2
Compare the Types of Financial
Institutions
Basic questions to ask before
choosing a financial institution
1. Where can I get the best return
on my savings?
2. How can I minimize my costs for
financial services?
3. Will I be able to borrow money if
I need it?
4-11
Objective 2
Comparing Financial Institutions
•
Determine the financial services you
need before choosing a financial
institution
• Compare fees and convenience
• Consider the safety and rates for
deposits and loans at different
institutions
4-12
Comparing Financial
Institutions
Deposit Institutions
• Commercial banks
– Organized as corporations
– Offer a full range of services including
checking, savings, lending and other
services
• Savings and loan associations
– Checking accounts, specialized savings
plans, loans and financial planning and
investment services
4-13
Comparing Financial Institutions
Deposit Institutions (con’t)
• Mutual savings banks
– Specialize in savings accounts and mortgage
loans
– Owned by their depositors, with profits going
back to depositors by paying a higher rate on
savings
• Credit unions
– User-owned, nonprofit and provide
comprehensive financial services
– Lower fees and lower loan rates
4-14
Comparing Financial Institutions
Non-Deposit Institutions
• Life insurance companies
– Insurance plus savings and investments
– Some offer financial planning and investing
services
• Investment companies
– Mutual funds
– Money market fund
• Combination savings & investment plan
• Not covered by FDIC
4-15
Comparing Financial Institutions
Non-deposit Institutions
• Brokerage firms
– Act as agent for buyers and sellers of financial
products
• Credit card companies
– Specialize in short term loans
• Finance companies
– Make short and medium term loans to
consumers
– Higher rates
• Mortgage companies
– Provide home mortgage loans
4-16
Comparing Financial Institutions
Problematic Financial Businesses
• Pawnshops
– Loans on possessions
– Higher fees; 3% per month common
– Used for quick cash
• Check-cashing outlets
– Charge 1-20 % of check’s face value
– 1-3% is average
– Currency exchanges
4-17
Comparing Financial Institutions
Problematic Financial Businesses
• Payday loan companies
–
–
–
–
–
Cash advances,
Check advance loans
Postdated check loans
Delayed deposit loans
High interest rates
• Rent-to-Own Centers
– Lease merchandise at high interest rates to
low-income customers
4-18
Objective 3
Assess Various Types of Savings Plans
Types of Savings Plans
• Regular savings accounts
– Passbook savings
– Statement accounts
– Low minimum balance
– Easy withdrawal
– Insured
– Low rate of return
4-19
Objective 3
Assess Various Types of Savings Plans
Types of Savings Plans
• Certificates of deposit
– Required minimum deposit
– Required time on deposit
– Penalties for early withdrawal
– Take care when rolling over
– Various CD types:
•
•
•
•
Rising-rate or bump
Stock-indexed
Callable
Promotional
4-20
Objective 3
Assess Various Types of Savings Plans
Types of Savings Plans
• Interest earning checking accounts
– Checking accounts paying low interest
• Money market accounts and funds
– Floating interest rate
– Allows limited check writing
– Higher minimum balance
– Money market accounts are covered by the
FDIC, but money market funds are not
4-21
Types of Savings Plans
• U.S. Savings Bonds
– Series EE
• “Patriot Bonds”
• Sold at half of face value
• Face values $50 - $5,000
• Fixed-rate interest compounded semiannually
• Penalty if redeemed within 5 years
• Continues earning interest for 30 years
• Potential tax advantages if used to pay tuition
4-22
Types of Savings Plans
• U.S. Savings Bonds
– Series HH
• Current income bonds
• Pays interest every six months
• Interest direct deposited and taxed as current
income
– I bonds
• Earns a fixed rate plus an inflation rate
• Twice-a-year inflation adjustment
– See www.savingsbonds.gov for rates
4-23
Evaluating Savings Plans
• Rate of return or yield
– Percentage increase in value due to interest
– Frequency of compounding increases return
$10,000 at 8 percent APY
Compounding Method
End of
Year
1
2
3
4
5
Annual
Yield
Daily
Monthly
Quarterly
Annually
$ 10,832.78
$ 11,734.91
$ 12,712.17
$ 13,770.82
$ 14,917.62
$ 10,830.00
$ 11,728.88
$ 12,702.37
$ 13,756.66
$ 14,898.46
$ 10,824.32
$ 11,716.59
$ 12,682.41
$ 13,727.85
$ 14,859.46
$ 10,800.00
$ 11,664.00
$ 12,597.12
$ 13,604.89
$ 14,693.28
8.33%
8.30%
8.24%
8.00%
4-24
Evaluating Savings Plans
•
“Truth in Savings Act”
Requires disclosure of:
– Fees on deposit account
– Interest rate
– Annual percentage yield (APY)
• APY defined as the “total percent”
• Total percent is based on annual interest and
frequency of compounding
• APY = Rate per period X # periods per year
4-25
Evaluating Savings Plans
• Inflation
– Compare rate of return vs. inflation rate
• Taxes
– Reduces interest earned on savings
• Liquidity
– Quick availability of cash
– Without significant loss in value
4-26
Evaluating Savings Plans
• Safety via FDIC and NCUA
– FDIC insured up to $100,000 per person
per financial institution
– Up to $250,000 on certain retirement
accounts
– www.fdic.gov
• Restrictions and fees
– Minimum balance
– Fee for additional transactions
4-27
Objective 4
Evaluate Different Types of Payment
Methods
Payment Methods
Electronic
Checking
Payments
Accounts
Debit (cash) and
Regular checking
Credit cards
account
Online payments, Activity checking
transfer
account
Smart cards
Interest-earning
("electronic wallet")
account
Stored-value
(prepaid) cards
Other Payment
Methods
Certified check
Cashier's check
Traveler's checks
Money order
4-28
Payment Methods
Electronic Payments
• Debit Card Transactions
• Immediate account debit
• Online Payments
• PayPal, MyCheckFree
• Stored-value Cards
• Prepaid cards for telephone,
transit, tolls, etc.
• Smart Cards
• “Electronic wallets”
4-29
Payment Methods
Checking Accounts
• Regular Checking Accounts
– Monthly service charge usual
– Minimum balance
• Activity Accounts
– Fee charged for each check written,
and sometimes for deposits
• Interest-earning or share draft accounts
(credit unions)
– Require a minimum balance
4-30
Payment Methods
• Evaluating checking accounts
– Restrictions, such as a minimum balance
– Fees, which are increasing, and charges
– Interest rate and computation method
– Special services
• Overdraft protection
– Beware of “package” deals that include
unneeded services
4-31
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
4-32
Managing Your Checking Account
Opening a Checking Account
• Individual vs. joint account
Making Deposits
• 3 types of endorsements
Blank endorsement
– Signature only
Restrictive endorsement
– “For deposit only”
Special endorsement
– “Pay to the order of”
4-33
Managing Your Checking Account
Writing Checks
1. Record the date
2. Write the name of the
person/organization receiving the
check
3. Record the amount of the check in
figures
4. Write the amount of check in words
5. Sign the check
6. Note the reason for the payment
4-34
Managing Your Checking Account
Bank Reconciliation
1. Compare written checks with
those reported paid
– Subtract the total of all checks
written but not yet cleared
2. Determine deposits not on the statement;
– Add the amount to the statement balance
3. Subtract fees or charges and ATM
withdrawals from the checkbook balance
4. Add any interest to your checkbook
balance
4-35