Banking Chapter 5 How to Manage Your Cash

You have lots of alternatives 11,000 Banks 2,000 savings and loan associations 12,000 Credit Unions Lots of different services Depend on your needs and goals

Daily Cash Needs Cash, Credit Cards, ATMs, Checks ATMs might have a fee Resist Temptation Consider your long-term goals Overspending Overuse of credit cards Dip into savings

Sources of Quick Cash Regardless of how you plan, you may sometime discover you need more cash. Use Savings Borrow Money Both choices have trade- offs

Types of Financial Services Three Main Categories Savings Payment Systems Borrowing

Savings Safe storage of funds is a basic need for everyone Money left in financial institutions for months or years is called a time deposit Savings accounts, Certificates of Deposit Earn interest Bank pays you for the use of your money Bank uses that money to lend to others

Payment Services Transferring money from your account to businesses or individuals for payment Most common is a checking account – making a demand deposit.

Borrowing Most people use credit Short term Borrowing Credit card, personal cash loan Long-Term Borrowing House, car Pay interest

Interest When you deposit money in the bank, you earn interest Bank uses that money to make loans to others When you receive a loan, you pay interest What it costs for the use of the banks money When consumers increase savings – the supply of money is available for others which decreases interest rates When consumers borrow more money, the demand for money increases and interest rates rise.

Other Financial Services Insurance Investment accounts Tax help Financial planning services

Assignment Bank Comparison Shopping

Electronic Banking Services Direct Deposit Saves time money and effort Offers Safety Automatic Payments Make sure you have enough money

Electronic Banking Services Cont. Automated Teller Machines (ATMs) Withdraw cash, transfer funds Where are ATMs? Debit Cards and Your PIN ATM Fees Lost Debit Cards Let your bank know immediately

Electronic Banking Services Cont. Plastic Payments Point-of-Sale transactions-Use your debit card Store Value Cards-Prepaid cards Electronic Cash-Cashless society

Opportunity Costs of Financial Services Consider your money and your time Reevaluate your choices occasionally

Assignment Electronic Banking & Cashless Society

Types of Financial Institutions Chapter 5

Federal Deposit Insurance Corporation Great Depression Banks Failed People lost their money 1933-Fed Creates the FDIC Federal Deposit Insurance Corporation Protects deposits up to $100,000 per account All Federal Charted banks must participate in the FDIC

Deposit-Type Institutions Commercial Banks Savings and Loan Associations Mutual Savings Banks Credit Unions

Commercial Banks For-profit institution that offers a full range of services, including checking, savings, and lending Serve individuals and businesses Authorized through a charter from fed or state gov.

Savings and Loan Associations Traditionally specialized in savings accounts and mortgage loans. Today offer many of the same services as banks Fed or State Charter

Mutual Savings Banks Specialize in savings accounts and mortgage loans Some offer auto loans Lower interest loans Sometimes pay higher interest rates on savings accounts

Credit Unions A nonprofit institution that is owned by its members and organized for their benefit. Traditionally members share common bond Offer full range of services Fees and loan rates generally lower

Nondeposit-Type Institutions Life Insurance Companies Investment Companies Finance Companies Mortgage Companies

Life Insurance Companies Main purpose is to provide financial security Many policies contain savings and investment features Some offer retirement services

Investment Companies Combine your money with other investors to buy stocks, bonds, and other securities Manage investments Called Mutual Funds

Finance Companies Make loans to consumers and small businesses Provide loans to people who cannot borrow elsewhere Rates are often higher Some offer financial planning services

Mortgage Companies Specialize in loans for the purchase of homes

Assignments Financial Institutions Section 5.1 Assessment Page

Savings Plans and Payment Methods Section 5.2

Regular Savings Account Traditionally called passbook accounts Require little or no minimum balance and allow you to withdraw money quickly Earn low interest rate

Certificates of Deposit CD-A time deposit that requires you to leave your money in a financial institution for a set amount of time Fixed period called the term Date when money comes available is called the maturity date Low risk way to invest Higher interest rate than a regular savings account Have to leave your money for 1 month to five or more years Pay penalty if money is taken out before maturity date

Tips for Investing in CDs Find the best rate-Anywhere in the United states Consider the economy-What are the current interest rates? Consider when you will need the money (ex. Need money for college in 2 years)

Money Market Accounts Savings account in which the interest rate varies from month to month The rates float, or go up or down, as market rates change FDIC insured Higher minimum balance-$1,000

U.S. Savings Bond Series EE Savings Bond Federal Gov. $25 to $5,000 $50 to $10,000 face value Limited to $15,000 per year Continues to earn interest for 30 years

Savings Bonds Maturity date = date a bond reaches its face value Depends on the issue date and the interest rate For some, rate changes every six months No official maturity date for Series EE Savings Bonds –

Evaluating Savings Plan- Rate of Return Rate of Return- Percentage of increase in the value of your savings from earned interest

Compounding Compounding-The process in which interest is earned on both the principal-the amount deposited and on any previously earned interest Look at pages

Truth in Savings Financial institutions must inform you of the terms and conditions of savings accounts. Annual Percentage Yield-The amount of interest that a $100 deposit would earn, after compounding for one year.

Other Savings Evaluations Inflation Tax Considerations Liquidity Penalties for withdrawing early? Restrictions and Fees

Types of Checking Accounts Chapter 5

Regular Checking Accounts Usually don’t require a minimum balance If it does Drops below minimum balance- you pay a fee These fees can be avoided

Activity Accounts This could be right for you if: You write only a few checks each month Unable to maintain a minimum balance Financial Institution charges a fee for: each check you write sometimes for each deposit Monthly Service charge You do not need to maintain a minimum balance

Interest Earning Checking A cross between checking and savings Pay a low interest rate if you maintain a minimum balance If you go below the limit-No interest

Evaluating Checking Accounts Restrictions Minimum balance # of transactions and checks per month Fees and Charges Interest Special Services Overdraft Protection-An automatic loan if you write a check for more money than you have in your account. Could transfer money from another account

Using a Checking Account Opening an account Joint or individual Signature card verifies your signature

Writing Checks Make sure you record every transaction in your check register Open books to page 145 Check Example Document Video – How to write a check

Stop-Payment Order A request that an institution not cash a particular check Fees for this service range from $10 to $20 Make sure it is worth the charge

Making Deposits-Adding Money to Checking Account Fill out a deposit ticket Endorse or sign each check you are depositing Endorsement-the signature of the payee, the party to whom the check has been written

Tips for endorsing a check Don’t endorse check until you are ready to cash or deposit it Sign on left end of the back of the check, lines are usually provided Use pen When depositing by mail write “For deposit only” above your signature Sign your name as it is seen on the check, if incorrect sign incorrect spelling followed by the correct spelling of your name

Check Clearing Bank will hold your deposit until the check clears with the bank on which the check was drawn Should not be able to hold your money for more than 2-5 business days Check with your banks specifics

Maintaining a Checking Account

Endorsing Checks Blank/Basic Endorsement Sign your name the same way it appears on the front of the check. Cash or deposit it Restrictive Endorsement “For deposit only” or “For deposit into account: ####” Special Endorsement Sign your check over to someone else “Pay to the order of________”, then endorse

Making Deposits-Adding money to checking account Fill out a deposit ticket Endorse or sign each check you are depositing Endorsement-the signature of the payee, the party to whom the check has been written

Bank Statements Each Month Bank Sends a Statement Deposits Checks that you have written that have come into the bank (Check #) ATM Withdrawals Debit Card charges Interest Earned Any Fees

Bank Statement vs. Check Register Balances will most likely be different Checks may not have cleared Deposited money after the statement was prepared Bank Reconciliation-is a report that accounts for the differences between the bank statement and your checkbook balance. “Balancing Your Checkbook”

Bank Reconciliation Steps 1. Compare the checks you have written with those that are listed on the bank statement as paid, or cleared. List all outstanding checks-Written but have not cleared the bank Subtract that amount from the bank statement 2. Add any deposits not listed on the bank statement to the bank statement balance 3. Subtract Fees and Charges listed on the bank statement from your checkbook balance 4. Add any interest earned to your checkbook

Bank Reconciliation made simple Bank End Balance -Outstanding Checks +Outstanding Deposits Adjusted Balance Checkbook Balance End Balance -Fees & Charges +Interest Adjusted Balance Should Be the Same

Assignment Section 5.2 Assessment Page