1. Banking Chapter 5

2. Section 5.1 Objectives Identify types of financial services Identify types of financial services Describe the various types of financial institutions Describe the various types of financial institutions

3. How to Manage Your Cash Daily cash needs Daily cash needs Lunch and dinner Lunch and dinner Gas Gas Movies Movies Routine activities Routine activities Sources of quick cash Sources of quick cash ATM, debit card, check ATM, debit card, check Credit card or borrow Credit card or borrow What about intermediate or long-term needs? What about intermediate or long-term needs?

4. Types of Financial Services Three main categories Three main categories Savings Savings Essential for financial plan Essential for financial plan CD’s are time deposits left for a pre-determined time CD’s are time deposits left for a pre-determined time Payment Services Payment Services Checking account – demand deposit Checking account – demand deposit Borrowing Borrowing Credit card or loan Credit card or loan Other Financial Services Other Financial Services Insurance protection, investments, tax assistance, and financial planning assistance Insurance protection, investments, tax assistance, and financial planning assistance

5. Financial Services for Short-Term Needs Daily Purchases Living Expenses Emergency Fund Daily Cash Needs Check cashing Check cashing ATM ATM Prepaid cards Prepaid cardsSavings Regular saving Regular saving acct. acct. Money market Money market acct. acct.Checking Regular checking Regular checking acct. acct. Online payments Online payments Automatic payments Automatic payments Pay by phone Pay by phone Cashier’s check Cashier’s check Money orders Money orders Credit Cards Financial Services for Short-Term Needs Major purchases Long-term financial security Savings CD’s CD’s US Savings Bond US Savings Bond Credit Services Cash loans for cars Cash loans for cars and education and education Home loans Home loans Investment Services Mutual funds Mutual funds Financial advice Financial advice Other Services Tax preparation Tax preparation Insurance Insurance Budgeting Budgeting

6. Electronic Banking Services Direct Deposit Direct Deposit Automatic Payments Automatic Payments Automated Teller Machines (ATMs) Automated Teller Machines (ATMs) ATM Fees ATM Fees Lost Debit Cards – notify within a stated time Lost Debit Cards – notify within a stated time Plastic Payments Plastic Payments Point-of-Sale Transactions – debit cards Point-of-Sale Transactions – debit cards Stored-Value Cards – gift cards Stored-Value Cards – gift cards Electronic Cash – in the future? Electronic Cash – in the future?

7. Types of Financial Institutions Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation Insures up to $100,000 per account Insures up to $100,000 per account Savings and Association Insurance Fund Savings and Association Insurance Fund Insures up to $100,000 per amount Insures up to $100,000 per amount For savings and loans For savings and loans

8. Deposit Institutions Commercial Banks – for-profit institution, offer wide range of services, granted by federal or state govt. Commercial Banks – for-profit institution, offer wide range of services, granted by federal or state govt. Savings and Loans Associations – traditionally specialized in savings accts. and mortgage loans Savings and Loans Associations – traditionally specialized in savings accts. and mortgage loans Mutual Savings Banks – specialize in savings and loans – interest rates better than commercial banks Mutual Savings Banks – specialize in savings and loans – interest rates better than commercial banks Credit Unions – nonprofit, owned and organized for members, interest better than commercial banks Credit Unions – nonprofit, owned and organized for members, interest better than commercial banks

9. Non-Deposit Institutions Life Insurance Companies Life Insurance Companies Provide savings and investment options Provide savings and investment options May offer retirement planning services May offer retirement planning services Investment Companies Investment Companies Stocks, bonds, mutual funds Stocks, bonds, mutual funds Finance Companies Finance Companies Make high interest loans to those with bad credit Make high interest loans to those with bad credit Mortgage Companies Mortgage Companies

10. Comparing Financial Institutions What should you know to choose a financial institution? What should you know to choose a financial institution? Where can you get the highest rate of interest on your savings? Where can you get the highest rate of interest on your savings? Where can you obtain a checking account with low (or no) fees? Where can you obtain a checking account with low (or no) fees? Will you be able to borrow money from the institution—with a credit card or another type of loan—when you need it? Will you be able to borrow money from the institution—with a credit card or another type of loan—when you need it? Do you need an institution that offers free financial advice? Do you need an institution that offers free financial advice? Is the institution FDIC or SAIF insured? Is the institution FDIC or SAIF insured? Does the institution have convenient locations? Does the institution have convenient locations? Does it have online banking services? Does it have online banking services? Does it have special banking services that you might need? Does it have special banking services that you might need?

11. Section 5.2 Objectives Compare the costs and benefits of different savings plans Compare the costs and benefits of different savings plans Explain features of different savings plans Explain features of different savings plans Compare the costs and benefits of different types of checking accounts Compare the costs and benefits of different types of checking accounts Explain how to use a checking account effectively Explain how to use a checking account effectively

12. Types of Savings Plans Regular Savings Accounts Regular Savings Accounts Certificates of Deposit Certificates of Deposit Money Market Accounts Money Market Accounts US Savings Bonds US Savings Bonds

13. Savings Accounts Ideal for making frequent deposits and withdrawals Ideal for making frequent deposits and withdrawals Require little or no minimum balance Require little or no minimum balance Withdraw money on demand Withdraw money on demand Low interest potential Low interest potential

14. Certificates of Deposit Money left on deposit for a stated period (term) with a specific rate of return at maturity date Money left on deposit for a stated period (term) with a specific rate of return at maturity date Low risk with high interest rates Low risk with high interest rates Three limitations Three limitations Must leave for minimum of one month to five years Must leave for minimum of one month to five years Will receive a penalty if you take out early Will receive a penalty if you take out early Must deposit a minimum amount Must deposit a minimum amount

15. CD Investment Strategies Find out where you can get the best rate Find out where you can get the best rate Consider the economy Consider the economy Never let the bank “roll over” CD Never let the bank “roll over” CD Consider when you need the money Consider when you need the money If you have enough funds to have several accounts, create a CD portfolio If you have enough funds to have several accounts, create a CD portfolio

16. Money Market Accounts Has minimum balance, typically $1000 Has minimum balance, typically $1000 Interest varies from month to month as market rates change Interest varies from month to month as market rates change May pay penalty if your balance goes below minimum May pay penalty if your balance goes below minimum FDIC insured FDIC insured

17. US Savings Bonds Series EE Savings Bonds Series EE Savings Bonds $25 to $5,000 in cost (face values $50 to $10,000) $25 to $5,000 in cost (face values $50 to $10,000) Have to wait 10 to 30 years for maturity and pay taxes Have to wait 10 to 30 years for maturity and pay taxes Earn interest up to 30 years if not cashed Earn interest up to 30 years if not cashed No local or state tax on interest earned, but must pay federal tax until bond is cashed No local or state tax on interest earned, but must pay federal tax until bond is cashed Can defer taxes if bond is exchanged for Series HH bond Can defer taxes if bond is exchanged for Series HH bond

18. Regular Savings Accounts Low minimum Low minimum balance balance Ease of Ease of withdrawal withdrawal Insured Insured Low rate of Low rate of return return CDs Guaranteed Guaranteed rate of return for rate of return for time of CD time of CD Possible penalty for Possible penalty for early withdrawal early withdrawal Minimum deposit Minimum deposit Money Markets Accounts Good rate of Good rate of return return Some check Some check writing writing Insured Insured Minimum balance Minimum balance No interest and No interest and possible service possible service charge if below a charge if below a certain balance certain balance US Savings Bonds Low minimum Low minimum deposit deposit Lower rate of return Lower rate of return when cashed in before when cashed in before bond reaches maturity bond reaches maturity date date

19. Evaluating Savings Plans Rate of return Rate of return % of increase from earned interest ($75 invested and $3 interest is 4% ($3 divided by $75) % of increase from earned interest ($75 invested and $3 interest is 4% ($3 divided by $75) Compounding interest – interest earned on principal (original amnt. deposited) and on any previously earned interest – using this your interest earnings will be much greater, especially the more times compounded and for longer periods of time Compounding interest – interest earned on principal (original amnt. deposited) and on any previously earned interest – using this your interest earnings will be much greater, especially the more times compounded and for longer periods of time Inflation – bad if you are locked in a low rate for a long time Inflation – bad if you are locked in a low rate for a long time Tax Considerations – look for tax-exempt or tax deferred savings plans Tax Considerations – look for tax-exempt or tax deferred savings plans Liquidity – if you need to withdraw your money easily you will have a low interest rate, for long-term savings a high interest rate is important Liquidity – if you need to withdraw your money easily you will have a low interest rate, for long-term savings a high interest rate is important Restrictions and Fees – delays between when interest is earned and when it is added to account, fees for deposits and withdrawals, service charges for balance drops or lack of account usage Restrictions and Fees – delays between when interest is earned and when it is added to account, fees for deposits and withdrawals, service charges for balance drops or lack of account usage

20. Type of Account AdvantagesDisadvantages Regular Checking Account Most have no Most have no minimum balance minimum balance $10 service charge $10 service charge for each month you for each month you go below – can add go below – can add up up Activity Checking Accounts No minimum No minimum balance required balance required May charge fee for checks and deposits May charge fee for checks and deposits Can only write a few checks per month Can only write a few checks per month Interest-Earning Checking Accounts Pay interest if you Pay interest if you have a minimum have a minimum balance balance If go below balance, If go below balance, you may not earn you may not earn interest and may interest and may have a service have a service charge charge

21. Evaluating Checking Accounts Restrictions – most common is keeping a minimum balance, number of transactions allowed, number of checks you may write in a month Restrictions – most common is keeping a minimum balance, number of transactions allowed, number of checks you may write in a month Fees and Charges – monthly service charge, checking printing, overdrafts, stop-payment orders Fees and Charges – monthly service charge, checking printing, overdrafts, stop-payment orders Interest – rates, frequency of compounding, way interest is calculated Interest – rates, frequency of compounding, way interest is calculated Special Services – ATM, telephone, online banking, overdraft protection Special Services – ATM, telephone, online banking, overdraft protection

22. Using a Checking Account Opening a checking account Opening a checking account Individual or joint Individual or joint Writing checks Writing checks Know proper way Know proper way Making deposits Making deposits Check clearing Check clearing Money deposited is on hold for no more than 2 days from local banks, 5 days for non-local Money deposited is on hold for no more than 2 days from local banks, 5 days for non-local Keeping track of a checking account Keeping track of a checking account Other payment methods Other payment methods Certified check, cashiers check, travelers Certified check, cashiers check, travelers

23. Financial Institutions and Your Money Make money by making loans Make money by making loans Amount of money banks lend is affected by reserve requirement set by Federal Reserve Amount of money banks lend is affected by reserve requirement set by Federal Reserve Reserve requirement is 3% to 10% of bank’s total deposits Reserve requirement is 3% to 10% of bank’s total deposits When bank gets $100 deposit, they could lend out $90 (with a 10% reserve) When bank gets $100 deposit, they could lend out $90 (with a 10% reserve) That $90 goes out into the economy and if it gets deposited in another bank $81 of the $90 (10% reserve) can be lent out and so on That $90 goes out into the economy and if it gets deposited in another bank $81 of the $90 (10% reserve) can be lent out and so on