Transcript Personal Financial Literacy

Chapter 5
The Banking System
What Is the Purpose of a
Checking Account?
• A checking account is a
demand deposit
account on which
checks are drawn.
• Why do people have
checking accounts?
• A check is a written
order to a bank to pay a
person or business.
5-1 Checking Accounts
Slide 2
What Is the Purpose of a
Checking Account?
• To open a checking account, the
account holder will need some money.
• Usually it only takes 50 to 100 to open
an account.
• To open an account you will need to
give up some personal information
such as your social security number
• A bank account be individual or joint
5-1 Checking Accounts
Slide 3
Checkbook Register
• Account holders should verify all
amounts deducted
• A checkbook register is a tool that can
be used to tracking checking account
transactions
• This register tracks both deposits and
withdrawals.
• A deposit is adding money to a
checking or savings account.
Checkbook Register
5-1 Checking Accounts
Slide 5
Making Withdrawals and
Deposits
• A withdrawal involves taking money
from your account.
o Automatic withdrawals
o Writing checks
o Using debit and ATM cards
5-1 Checking Accounts
Slide 6
Writing Checks
• Checks are legal transfers of money.
• Postdated checks are checks written with a date that will occur
in the future.
– Banks usually will not hold the check until the future and will
process them without regard to the date
• Debit card: used to withdraw money from your checking
account
• It allows you to make purchases by swiping the card through a
point of sale terminal at the stores counter
• Debit card and credit cards do not have the same protection.
– Credit cards allow you to reverse and dispute charges.
– If a debit card is stolen, funds can be withdrawn from your account.
• Check fraud and forgery
Making Withdrawals and
Deposits
• A deposit of money can be made to
your account.
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Endorsement: signature
o Blank: signature of payee is written on back
o Restrictive: restricts or limits use of check
o Special: transfers the rights to cash the check to
someone else
Direct deposit: wages or benefits are automatically
deposited into a bank account
o An electronic funds transfer uses a computer based
system to move money from the drawers account to the
payees account
5-1 Checking Accounts
Slide 8
How Do You Reconcile a Bank
Statement?
• Bank reconciliation is the process of
adjusting the checkbook register and
bank statement so they agree.
• The bank statement lists checks,
withdrawals, deposits, service charges,
interest, and fees.
• Consider deposits in transit, outstanding
checks, and transposition errors.
5-1 Checking Accounts
Slide 9
Fees
• When a paper check is transformed
into a digital image it is considered
truncated.
• Fees can include monthly service fees
(5 to 20) and transaction fees (20
cents)
What Is the Purpose of Savings?
• A savings account is a
demand deposit account
for the accumulation of
money.
• It is a safe place to hold
money to meet future
needs and wants.
• Can be linked to
checking account
5-2 Savings Accounts
Slide 11
How Can You Grow Your
Savings?
• Principal is the money set aside on
which interest is paid.
• Simple interest is computed once
during a time period.
• Compound interest is earned on both
principal and interest earned
previously.
5-2 Savings Accounts
Slide 12
Computing Simple Interest
• P = amount of money set aside
• R = interest rate
• T = time that money will be set aside
Simple Interest
Interest (I) = Principal (P) × Rate (R) × Time (T)
= $1,000 × 6% annual rate × 6 months
= $1,000 × 0.06 × 6/12 = $30
5-2 Savings Accounts
Slide 13
The Future Value of Money
• Saving a single sum
– Saving a lump sum for a period of time
• Saving on a regular basis
– Setting aside money regularly
– Annuity: when you set aside a fixed amount on a
regular basis over time
• Rule of 72
– How long will it take my investment to double?
– Divide the annual interest rate into 72
– Invest $50 at 6%
– It will double in 12 years (72/6=12)
Slide 14
Computing Compound Interest
Quarterly Compounding
Annual Interest Rate 6%
Year
Beginning
Balance
Rate
6%
Ending
Balance
Quarter
1
2
3
4
1
$100.00
0.015
$1.50
$1.52
$1.55
$1.57
$106.14
2
$106.14
0.015
$1.59
$1.62
$1.64
$1.66
$112.65
3
$112.65
0.015
$1.69
$1.72
$1.74
$1.77
$119.57
5-2 Savings Accounts
Slide 15
What Are Your Savings Options?
• Money market accounts earn the
market rate of interest.
• Certificates of deposit (CDs) pay a
fixed interest rate for a time period.
• U.S. savings bonds pay a guaranteed
minimum interest rate.
• Individual retirement accounts (IRAs)
help you save for retirement.
5-2 Savings Accounts
Slide 16
Places To Save Your Money
• Online only banks: banks placed solely
online.
– Not always FDIC insured
• Brokerage Firms: generally pay higher
on savings accounts
– Not always FDIC insured
• International banks: Will become more
commonplace as we get older and wont
be so scary.
Slide 17
Focus On . . .
The FDIC
• Protects depositors of insured U.S. banks
against loss if the bank fails
• Covers all types of deposits
• Covers principal and accrued interest
• Does not insure some items
o Examples: stocks, bonds, valuables
• Insures deposits in different banks separately
5-2 Savings Accounts
Slide 18
What Banking Services Are
Available to Consumers?
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Safe deposit boxes
– Secure container located
in the bank vault
Overdraft protection
– If you write a check the
your account does not
have enough to cover,
bank will cover it
ATMs
Cashier’s checks
– Check issued from bank
funds
5-3 Banking Services and Fees
Slide 19
What Banking Services Are
Available to Consumers?
• Money Order
– Type of check used to pay bills or make
payments for which money is guaranteed
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Financial advising
Loans
Internet banking
Bank cards
5-3 Banking Services and Fees
Slide 20
What Are the Costs of Banking?
•
•
Monthly account fees
– Service fee for maintaining a
checking account ($10-$20)
Nonsufficient fund fees
– Bounced Checks: check that in
not honored by a bank and
returned to the payee’s bank
because of nonsufficient funds is
a bounced check
– Cost $30-$40 per check
5-3 Banking Services and Fees
Slide 21
What Are the Costs of Banking?
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Special service fees
o Examples: stop payment, cashier’s check, money
order
ATM fees
– Fee from another bank to withdraw money
– $2-$7
Inactive account fees
– Does not meet minimum account usage
requirements
– $5-$15
5-3 Banking Services and Fees
Slide 22
What Are Consumer
Responsibilities?
• Maintain your balance.
o Avoid writing bad
checks.
• Monitor your account.
o Reconcile your bank
account.
• Know your rights.
o Be aware of consumer protection laws.
5-3 Banking Services and Fees
Slide 23
Success Skills
Negotiating
It is the process of reaching an agreement that
benefits both parties.
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Understand your position.
Understand the other party’s position.
Create a proposed solution.
Identify what is important and what you are
willing to give up.
5-3 Banking Services and Fees
Slide 24