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Chapter 5: Checking & Savings Accounts

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1 Chapter 5: Checking & Savings Accounts
Learning Objectives List 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 earned minimize fees paid keep funds safe keep funds readily available

3 The Three Tools of Monetary Asset Management
Low-cost, interest-earning checking accounts Interest-earning savings accounts Money market accounts SEE PAGE 142 for accurate rates

4 Depository Institutions:
Organizations licensed to take deposits and make loans Commercial Banks and Savings Banks Government regulated Deposits are insured by the FDIC Credit Unions Not-for-profit; owned by members Deposits are insured by the NCUA Other Services Providers: Mutual Funds Stock Brokerage Firms Insurance Companies Maximum insurance = $250,000 per account holder per institution CONSIDERABLE OVERLAP among services provided! See pg. 142 Difference between these and above?

5 Tool #1: Interest-Earning Checking Accounts
Interest-Earning Checking Account (NOW Account): to pay monthly living expenses Tiered Interest Can be accessed using debit card At ATMs or POS terminals Balance Requirements Be careful of monthly fees! 3 Types of Overdraft protection: pg. 152 Automatic transfer from savings Automatic overdraft loan from bank Opt-in: bank charges $20-$30 for bounce protection Beware of penalties and other fees! Pg 147

6 Tool #2: Savings Accounts
Time Deposits rather than Demand Deposits Used for emergency funds Passbook / Statement savings account Some Time Deposits are Fixed-Time Deposits: CDs $100 to $100,000 7 days to 8 years Insured by FDIC or NCUA Fixed interest rate for entire term (usually) Longer term CD => higher interest rates Variable –rate, Bump-up, and Callable CDs Not restricted to local institutions Penalties if withdrawn before maturity Is there risk with CDs? CD Laddering, pg149

7 How to save: How do Americans rate as savers?
“Pay Yourself First”: build savings into your budget Page 149

8 Institutions must use the APY as its interest rate in
What are the 4 most important factors that affect your savings? Principle Rate Time Frequency of Compounding Institutions must use the APY as its interest rate in advertising

9 Comparing frequency of compounding:
Years 4.0% 6.0% 8.0% 10.0% 1 $1,040 $1,060 $1,080 $1,100 3 $1,125 $1,191 $1,260 $1,331 5 $1,217 $1,338 $1,469 $1,611 10 $1,480 $1,791 $2,159 $2,594 This $1,000 investment earns interest that is compounded on an annual basis (once per year): Years 4.0% 6.0% 8.0% 10.0% 1 $1,041 $1,061 $1,082 $1,104 3 $1,127 $1,196 $1,268 $1,345 5 $1,220 $1,347 $1,486 $1,639 10 $1,489 $1,814 $2,208 $2,685 This $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 funds Interest-earning accounts with higher rates A savings and checking (limited) tool Money market deposit accounts (MMDA) From depository institutions Government insured Min balance requirements; tiered interest rates Money market mutual funds (MMMF) From investment companies not depository institutions Check-writing privileges; Highest rate of return for liquid assets Funds buy mostly government securities: safe but not insured Funds cannot be drawn from ATMs

11 Electronic Money Management
How we manage our money: Paper, Plastic, or Neither? Electronic Money Management Transactions without paper Funds are transferred electronically ( EFT ) Debit Cards vs. Credit Cards? Easy, but not always FREE! Beware of fees! ATM fees Overdraft fees Hit debit button => PIN number = online transaction = fee Hit credit button => signature = offline transaction = avoid fee

12 Electronic Banking and Safety Concerns
Fixing errors Protections for lost/stolen cards Within 2 days: $50 Over 2, less than 60 days: $500 Over 60 days: unlimited The Psychology of Money Management Decision-making Opposites Attract!

13 How To Develop Money Sense in Children
Give an Allowance Encourage Work Talk About Family Finances with Children Be a Role Model

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