1 Chapter 5: Checking & Savings Accounts Learning ObjectivesList the tools of monetary asset management and identify the types of financial services firms that provide those tools.Earn interest and pay no or low fees on your checking accounts.Make use of the benefits of savings accounts.Explain the importance of placing excess funds in a money market account.Describe electronic money management.
2 Monetary Asset Management How you handle your most liquid assets(Cash and low-risk, near-cash items that can be readily converted to cash with little or no loss in value)What financial institutions help us manage our money needs on a daily basis?GOALS:maximize interest earnedminimize fees paidkeep funds safekeep funds readily available
3 The Three Tools of Monetary Asset Management Low-cost, interest-earning checking accountsInterest-earning savings accountsMoney market accountsSEE PAGE 142 for accurate rates
4 Depository Institutions: Organizations licensed to take deposits and make loansCommercial Banks and Savings BanksGovernment regulatedDeposits are insured by the FDICCredit UnionsNot-for-profit; owned by membersDeposits are insured by the NCUAOther Services Providers:Mutual FundsStock Brokerage FirmsInsurance CompaniesMaximum insurance = $250,000 per account holder per institutionCONSIDERABLE OVERLAP among services provided!See pg. 142Difference between these and above?
5 Tool #1: Interest-Earning Checking Accounts Interest-Earning Checking Account (NOW Account): to pay monthly living expensesTiered InterestCan be accessed using debit cardAt ATMs or POS terminalsBalance RequirementsBe careful of monthly fees!3 Types of Overdraft protection: pg. 152Automatic transfer from savingsAutomatic overdraft loan from bankOpt-in: bank charges $20-$30 for bounce protectionBeware of penalties and other fees!Pg 147
6 Tool #2: Savings Accounts Time Deposits rather than Demand DepositsUsed for emergency fundsPassbook / Statement savings accountSome Time Deposits are Fixed-Time Deposits: CDs$100 to $100,0007 days to 8 yearsInsured by FDIC or NCUAFixed interest rate for entire term (usually)Longer term CD => higher interest ratesVariable –rate, Bump-up, and Callable CDsNot restricted to local institutionsPenalties if withdrawn before maturityIs there risk with CDs?CD Laddering, pg149
7 How to save: How do Americans rate as savers? “Pay Yourself First”: build savings into your budgetPage 149
8 Institutions must use the APY as its interest rate in What are the 4 most important factors that affect your savings?PrincipleRateTimeFrequency of CompoundingInstitutions must use theAPY as its interest rate inadvertising
9 Comparing frequency of compounding: Years4.0%6.0%8.0%10.0%1$1,040$1,060$1,080$1,1003$1,125$1,191$1,260$1,3315$1,217$1,338$1,469$1,61110$1,480$1,791$2,159$2,594This $1,000 investment earns interest that is compounded on an annual basis (once per year):Years4.0%6.0%8.0%10.0%1$1,041$1,061$1,082$1,1043$1,127$1,196$1,268$1,3455$1,220$1,347$1,486$1,63910$1,489$1,814$2,208$2,685This $1,000 investment earns interest that is compounded on a quarterly basis (4x per a year):APR vs. APY:
10 Tool #3: Money Market Accounts Use when you have substantial excess fundsInterest-earning accounts with higher ratesA savings and checking (limited) toolMoney market deposit accounts (MMDA)From depository institutionsGovernment insuredMin balance requirements; tiered interest ratesMoney market mutual funds (MMMF)From investment companies not depository institutionsCheck-writing privileges; Highest rate of return for liquid assetsFunds buy mostly government securities: safe but not insuredFunds cannot be drawn from ATMs
11 Electronic Money Management How we manage our money: Paper, Plastic, or Neither?Electronic Money ManagementTransactions without paperFunds are transferred electronically ( EFT )Debit Cards vs. Credit Cards?Easy, but not always FREE! Beware of fees!ATM feesOverdraft feesHit debit button => PIN number = online transaction = feeHit credit button => signature = offline transaction = avoid fee
12 Electronic Banking and Safety Concerns Fixing errorsProtections for lost/stolen cardsWithin 2 days: $50Over 2, less than 60 days: $500Over 60 days: unlimitedThe Psychology of Money ManagementDecision-makingOpposites Attract!
13 How To Develop Money Sense in Children Give an AllowanceEncourage WorkTalk About Family Finances with ChildrenBe a Role Model