Presentation on theme: "Chapter 5 Financial Services: Savings Plans and Payment Accounts"— Presentation transcript:
1 Chapter 5 Financial Services: Savings Plans and Payment Accounts
2 Chapter 5 Learning Objectives Analyze factors that affect selection and use of financial servicesCompare the types of financial institutionsCompare the costs and benefits of various savings plansIdentify the factors used to evaluate different savings plansCompare the costs and benefits of different types of payment accounts
3 A Cash Management Strategy Objective 1: Analyze factors that affect selection and use of financial servicesBanks, saving and loan associations, credit unions, and other financial institutions provide a variety of financial servicesAccount aggregation: online banking -- deposits, investments, credit cards, loans, mortgages, rewards programs and IRAsMEETING DAILY MONEY NEEDSCash, check, credit card or an ATM are the most common payment choices
4 A Cash Management Strategy (continued) Common mistakes in managing cash include…Overspending from impulse buying and using credit cardsNot having enough liquid assets (cash and checking account) to pay current billsUsing savings or borrowing to pay for current expensesFailing to put unneeded funds in an interest-earning savings account or investment plan
5 A Cash Management Strategy (continued) TYPES OF FINANCIAL SERVICESSavingsTime deposits in savings, CD’sPayment servicesChecking accounts are called demand depositsAutomatic paymentsBorrowing for the short- or long-termOther financial servicesInsurance, investment, real estate purchases, tax assistance, and financial planning are additional services you may use
6 A Cash Management Strategy (continued) Other types of financial services (continued)TrustA legal agreement that provides for the management and control of assets by one party for the benefit of anotherAsset management accountAlso called a cash management accountOffered by brokers and financial institutionsProvides a complete financial service program for a single fee and includes:A checking account and an ATM cardA credit cardOnline bankingLine of creditAccess to a variety of investmentsor
7 A Cash Management Strategy (continued) ELECTRONIC AND ONLINE BANKINGObtain cash; check account balancesDirect deposit of paychecks, government paymentsPreauthorized payments for insurance, mortgage, utilities, and other billsOnline transfer of funds from one account to anotherDebit card retail purchases
9 A Cash Management Strategy (continued) OPPORTUNITY COSTS OF FINANCIAL SERVICESHigher rate of return may be obtained at the cost of lower liquidityConvenience of a 24-hour ATM should be considered against service feesThe “no fee” checking account with a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years
10 A Cash Management Strategy (continued) FINANCIAL SERVICES AND ECONOMIC CONDITIONSChanging interest rates, rising consumer prices and other economic factors also influence financial servicesBe aware of current trends and future prospects for interest rates (Exhibit 5-3)Read Wall Street Journal, business section of daily newspapers, and business periodicals, such as BusinessWeek, and Forbes
11 Financial Institutions Objective 2: Compare the types of financial institutionsDEPOSIT INSTITUTIONSCommercial banksOffer a full range of services including checking, savings, lending and other servicesSavings and loan associationsOffer specialized savings plans, loans including mortgages, and other financial planning servicesMutual savings banksspecialize in savings accounts and mortgage loans: they are owned by their depositorsCredit unionsare user-owned, nonprofit cooperative financial institutions
12 Financial Institutions (continued) OTHER FINANCIAL INSTITUTIONSLife insurance companiesOffer insurance, plus savings and investment features; some offer financial planning and retirement servicesInvestment companiesAre also referred to as Mutual FundsOffer a money market fund on which you can write a limited number of checksFinance companiesMake short and medium term loans to consumers, but at higher ratesMortgage companiesProvide loans to customers so they can purchase homes
13 Financial Institutions (continued) Beware of high-cost financial servicesPawnshops-- Make loans on possessions but charge higher fees than other financial institutions, used for quick cashCheck-cashing outlets--Charge 1-20% of the face value of a check: 2-3% is averagePayday loans-- use personal check $115 to borrow $100 cash for 14 days% annual
14 Financial Institutions (continued) COMPARING FINANCIAL INSTITUTIONSBasic concerns of a financial service customerWhere can I get the best return on my savings?How can I minimize the cost of checking and payment services?Will I be able to borrow money when I need it?
15 Financial Institutions (continued) When choosing a financial institution Consider:Services offeredInterest ratesFees and chargesFinancial adviceSafety (deposit insurance)ConvenienceLocationsOnline servicesSpecial programs
16 Savings PlansObjective 3: Compare the costs and benefits of various savings plansREGULAR SAVINGS ACCOUNTSCalled passbook accounts, involve a low or no minimum balanceCredit unions call them share accountsCERTIFICATES OF DEPOSITSRequire you to leave your money on deposit for a set time period, otherwise you incur penaltiesSeveral types (rising-rate, indexed, callable, global, promotional)Consider all the earnings and all the costs
17 Savings Plans (continued) MONEYMARKET ACCOUNTS AND FUNDSMoney market accounts are covered by the FDIC, but money market funds are notU.S. SAVINGS BONDSSeries EE sold at half of face value, with potential tax advantages-- deductible if used to pay tuition and fees-- Exempt from state and local income taxes-- You don’t have to pay federal income tax on interest until redemptionSeries HH are current-income bonds that pay interest every six monthsI Bonds combine fixed rate and inflation rateSee for rates
18 Evaluating Savings Plans Objective 4: Identify the factors used to evaluate different savings plansRATE OF RETURNPercentage or yield is the increase in value due to interestExample: a $500 savings account that earned $25 has a yield of 5 percentCOMPOUNDINGFrequent compounding means more interest earning on interest
20 Evaluating Savings Plans (continued) TRUTH IN SAVINGSRequires Disclosure of...Fees on deposit accountThe interest rateThe annual percentage yield (APY)Other terms and conditionsINFLATIONCompare your APY with inflation rateTAX CONSIDERATIONSTaxes reduce interest earned on savingsTaxes are not withheld from savings and investments; you may owe additional taxes at year-end as a result of earnings on saving
21 After Tax Savings Rate of Return (1 - tax rate) x yield on savings( ) x .06.72 x .064.32%A person earns 6% on savings, but has a 28% marginal tax rate. The after tax rate of return is 4.32%.
22 Evaluating Savings Plans (continued) LIQUIDITYAllows you to withdraw money on short notice without penalty or feesSAFETYFDIC insures up to $250,000 per person per financial institution (seeRESTRICTIONS AND FEESSeveral restrictions can affect the choice of a savings programDelay in time between earned and posted, transactions fees from deposits and withdrawals, time money has to be left in a deposit account in order to receive a “free” gift, etc.
23 Payment MethodsObjective 5: Compare the costs and benefits of different types of payment accountsELECTRONIC PAYMENTSDebit CardsOnline Payments –most credit cards now offer this serviceStored-value cardsSmart Cards
24 Payment Methods (continued) TYPES OF CHECKING ACCOUNTSRegular Checking Accounts– many have minimum balancesActivity Account -fees on checks & depositsInterest-earning or NOW accounts, which usually require a minimum balanceInterest Earning Checking accounts are also known as Share draft accounts at credit unions
25 Payment Methods (continued) EVALUATING CHECKING ACCOUNTSChecking accounts need to be evaluated based on :RestrictionsFees and chargesInterest rate and computation methodSpecial services, such as overdraft protection
26 Payment Methods (continued) MANAGING YOUR CHECKING ACCOUNTOpening a Checking AccountIndividual or joint accountMaking DepositsDeposit ticketEndorsementBlank endorsementRestrictive endorsementSpecial endorsement
27 Payment Methods (continued) Writing ChecksRecord the dateWrite the nameRecord the amountWrite the amount in wordsSign the checkNote the reason for payment
28 Payment Methods (continued) OTHER PAYMENT METHODSCertified checkPersonal check with guaranteed paymentCashier’s checkCheck of a financial institution you get by paying the face amount plus a feeMoney orderPurchase at financial institution, post office, storeTraveler’s checkSign each check twiceElectronic traveler’s checks - prepaid travel card
29 Online ActivityGo to and explore money market account ratesAlso, look at rates for one year and five year CDs. If you had money to invest right now, which maturity of CDs would you choose?