1. “The way to build your savings is by spending less each month.” -Suze Orman (author & financial advisor)

2. Learning Objectives Different types of savings plans How to evaluate and compare different savings plans How to properly manage your accounts

3. Types of Savings Plans: Regular savings accounts “Statement Account”: Require a low or no minimum balance. Easy withdrawal whenever you need your money. Insured by the FDIC (Federal Deposit Insurance Corporation - an independent agency created by US Congress to insure deposits up to $250k per insured bank).FDIC Provide a low rate of return.

4. Types of Savings Plans: Interest-Earning checking accounts: Checking accounts that pay low interest; much like a savings account. Service charges on these accounts can sometimes exceeded the interest earned.

5. Types of Savings Plans: Certificates of deposit (CD): Require a minimum balance. Require a certain amount of time on the deposit and penalties are imposed for withdraw before this time is up. Fairly safe. Usually yield higher earnings than a regular savings account. If you believe interest rate will fall you should purchase a long-term CD to lock in the current interest rate. https://www.youtube.com/watch?v=fB2Ui1HDX98

6. Types of Savings Plans: Types of CD’s: Rising/Bump-up - has greater rates at different intervals. Stock-indexed - Earnings are based on the stock market’s performance; they earn and lose based on the stock’s performance. Callable - Start with high rates and long-term maturities. Bank may call the CD after a specified time period if interest rates drop. In this case an investor receives the original investment plus all interest earned up to that point. Promotional - Attracts investors using gifts or offers. For example: instead of offering interest they many offer a Rolex watch.

7. Types of Savings Plans: Money market accounts and funds:accountsfunds Require a minimum balance usually around $1,000. Has a floating interest rate which is based on market interest rates. Check writing is limited. Money market accounts are insured by the FDIC, but money market funds aren’t. Nevertheless both are relatively safe. Money Market Account Video Money Market Fund Video

8. Types of Savings Plans: U.S. Savings Bonds: Can be purchases at banks, financial intuitions, and online. There are three types of bonds: EE, HH, and I (main difference is how they pay interest). Series EE: “Patriot Bond” Has a fixed-rate of interest which is compounded twice a year. Treasury determines the fixed interest rate for new bond issues every May 1st and November 1st. Can be purchased at any value from $25 to $10,000 (each Social Security Number can only purchase $10,000/year). Require five years on the deposit and penalties are imposed for withdraw before this time is up. Continues earning interest for 30 years after the bond is purchased. Exempt from state and local taxes. https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds.htm

9. Types of Savings Plans: U.S. Saving Bonds Cont. Series HH: Pays a fixed rate of interest every six months directly deposited into a bank account (taxed federally in year paid). Must be held for a 6 month minimum Last issued August 2004. Came in denominations of $500, $1,000, $5,000, and $10,000. Continues earning interest for 20 years after the bond is purchased. Exempt from state and local taxes. https://www.treasurydirect.gov/indiv/research/indepth/hhbonds/res_hhbonds.htm

10. Types of Savings Plans: I bonds: Purchases at face value and earns a fixed rate plus an inflation rate which is adjusted twice a year. You can cash them in after one year. But if you cash them in before five years, you lose the last three months of interest. Electronic bonds can be purchased in any dollar amount between $25 and $10,000; Paper Bonds can be up to $5,000. Purchased with IRS tax refund. Continues earning interest for 30 years after the bond is purchased. Exempt from state and local taxes. https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

11. Question Cluster 1

12. Evaluating Savings Plans – understanding saving plan components: Rate of return or yield: Percentage increase in value as a result of interest. Compounding:  The process which interest is made on previously earned interest.  The more frequently compounded the higher the total return.

13. Savings Plan Components: Annual percentage yield (APY): Shows the total interest which an investor should expect to receive. Based on annual interest and the frequency of compounding. APY = Rate per period * # compounding periods a year Inflation: Compare rate of return to the inflation rate. Rate of return should always be higher than inflation or you essentially lose money. Therefore generally as inflation rates increase interest rates tend increase as well.

14. Savings Plan Components: Taxes: Reduce the interest earned on savings therefore tax exempt and deferred savings plans are preferred as the increase your real rate of return. Liquidity: The quick accessibility of cash without a significant loss in value. Many trade off liquidity for higher return to achieve long-term financial goals.

15. Savings Plan Components: Safety via FDIC and NCUA (National Credit Untion Association): FDIC insures up to $250,000 per person per financial institution in accounts they cover such as credit unions. FDIC and NCUA insures up to $250,000 on retirement accounts covered by them. Restrictions and fees: Some accounts may have minimum balance required. Charge fees for transactions that occur etc.

16. Question Cluster 2

17. Payment Methods Financial Institutions facilitate payments using several electronic options: Debit Card Transactions Online Payments PayPal Stored-value Cards Prepaid cards for things such as school lunches, or gift cards. Smart card Card which stores pre-paid amounts as well as other information. Ex. A college id which has money for meals on it

18. Payment Methods Some financial institutions will also offer several types of checking accounts : Regular Checking Accounts Monthly service charge usual but can usually be avoided if you have the minimum balance in the account. Activity Accounts Fee charged for each check written, and sometimes for deposits. No minimum balance required. Best for those who only write a few checks and are unable to maintain a minimum balance. Interest-earning or “share draft” accounts (credit unions) Require a minimum balance and will receive a service charge amount falls below this value.

19. Payment Methods Evaluating checking accounts The most appropriate type of checking account will vary from person to person depending on the specific needs of the individual because every type of checking account has different restrictions, fees, interest rates, and special services which need to be evaluated when opening an account. For example one person may be depositing a set amount of money into an account for investment purposes - to draw interest - but has no plans of using it to pay daily bills with it. While another may not have enough money to keep a set amount in the account at all times but plans on using the account to pay bills and make daily purchases. The needs of these two people are extremely different and they will likely use a different type of account.

20. Financial Institutions offer several different physical payment methods. Cashier’s check Check from a financial institution you pay the face amount plus a fee. Money order Can obtain from a financial institution, or store. It acts as cash as the receiver knows it is valid. You pay the face value plus a small fee. Beware: Because it acts as cash if lost or stolen you cannot redeem or call a stop-payment order. Unlike checks they do not provide a proof of deposit on checking account.

21. Physical Payment Methods Certified check Personal check with guaranteed payment. Traveler’s check Sign check when you purchase it and when you redeem its value. Electronic traveler’s checks – are a prepaid travel card that has the ability to get local currency at an ATM when traveling.

22. Physical Payment Methods Keep in mind: Checks are usually not honored at a bank when they are six months or older. Stop-payment orders - on a check may be necessary if a check is lost or stolen. The cost to do so tends to be around $20 to $30 per check depending on the bank. A bounced check - occurs when there isn’t enough money in the account to support the amount of the check. This results in a fee of $30 or more and can restrict the acceptance of your checks in the future.

23. Managing Your Checking Account Writing Checks 1. Record the date. 2. Write the name of the person/business in receipt of the check. 3. Record the amount of the check in figures in the appropriate box. 4. Write the amount of check in words on the appropriate line. 5. Sign the check. 6. On the memo line (bottom left-hand side) note the purpose for the payment.

24. Managing Your Checking Account Bank Reconciliation:  Shows difference between bank statement and your checkbook as a result of checks that have not yet cleared, interest earned, and deposits that have not yet been received by the bank.  Should be done each month as just like people banks make mistakes.

25. Managing Your Checking Account Steps to Reconciling a checking account: 1. Contrast the written checks with those reported paid on the statement. – Subtract all checks written but not yet cleared from the bank statement balance. – If the check was written in a prior month and cleared the bank in the current month then you exclude it from the reconciliation as that should be reflected in the beginning balance variance. 2. Determine deposits that are not yet on the statement. – Add the amount found to the bank statement balance. – If the deposit was made in a prior month and cleared the bank in the current month then you exclude it from the reconciliation as that should also be reflected in the beginning balance variance 3. Subtract any fees, charges, or ATM withdrawals from the checkbook balance. 4. Add any interest that was earned to your checkbook balance. *Once completed, the adjusted bank balance should equal the adjusted checkbook balance.

26. Managing Your Checking Account ASSIGNMENT: Please reconcile the following information:

27. Managing Your Checking Account Reconciliation Template:

28. Question Cluster 3