Finance Unit Consumer Economics

Unit Overview I.How Banks Work II.Selection of Financial Institutions III.Checking Accounts IV.Budgets

I. How Banks Work How Banks Get Money Your deposits Interest earned by loaning out money Fees and other charges (safe deposit box, NSF checks) Interest from investments What Banks Do With the Money Pay you interest on your savings / other accounts Loan it out to other people / businesses for a higher rate of interest Make investments

II. Selection of Financial Institutions Basic Functions Does your bank do everything you want it to do? What if banks offer a lot more than what you want? What if they don’t offer enough? FDIC Federal agency resulting from the Great Depression Each depositor insured up to $___________

Selection of Financial Institutions (cont’d) Credit Union Nonprofit financial institution owned by its members For union members, local citizens, employees of the same company Offers better rates / services because they operate in members’ best interests and are nonprofit

Electronic Banking Debit Card Looks like credit card Unlike a credit card, money is transferred immediately from your account to vendor’s account (offline option may also be available) Why would people use these instead of credit cards? ATM ATMs located in numerous public places May be free, per-visit charge, or monthly charge Is your ATM part of a network (i.e., Cirrus)?

III. Checking Accounts Choosing an Account Minimum Balance – can you handle it? Fees – monthly, per check, ATM fees, etc. Transaction Limits – what are they? Interest Is there a minimum balance? Is there a maximum number of checks you can write? What are the penalties for breaching the agreement?

Joint Checking Account Saves time / effort from reconciling two accounts Either person can sign checks Both people jointly responsible for fees / penalties

Signature Card Completed when first obtaining account Used for identification purposes

Bouncing a Check NSF (Not Sufficient Funds) Nice way of saying you bounced a check Usually a penalty / charge involved ($ $20.00)

Overdraft Protection Insures that your checks won’t bounce May be fees / charges involved Usually need a separate checking or other account from which to transfer funds

Types of Checks Certified Check Check from your account that the bank certifies is good Bank freezes amount from your account until it is cashed

Types of Checks Cashier’s Check Check written and guaranteed by a bank Usually for huge amounts (i.e., a house down payment)

Types of Checks Money Order Prepaid certificate issued by bank or other business Guaranteed because it is prepaid

Types of Checks Traveler’s Check Function as cash but can be replaced if lost or stolen Used often for vacations You sign twice In front of bank teller, who knows who you are In front of payee, so they can verify both signatures

Types of Checks Prepaid Card Phone cards, gift cards, etc. Specific to a particular store / company / product Come in different and convenient denominations If stolen, anyone can use them (no ID required at time of purchase)

Checking Accounts (cont’d) Check Writing

Checking Accounts (cont’d) Deposit Slip Need to list currency, coins, and checks Can indicate if you want money back from paycheck

Checking Accounts (cont’d) Endorsements Should be done in pen Three types Blank – just your name, payable to anyone who possesses check Special – “Pay to the order of…”, transfers money to 3 rd party Restrictive – “For deposit only…”, no one else can cash it NEVER use blank endorsement unless you are in front of the teller when you endorse it Stop Payment Order Tells bank to refuse to pay your check Use when check was possibly lost or needs to be re- written and a former check should not be cashed

Checking Accounts (cont’d) Reconciling Your Account Making sure your records agree with bank’s Should be done as soon as you receive your statement Example of form and instructions on pages 252 & 253 Outstanding Checks You know about them, but the bank doesn’t If not recent, check with payee or stop payment Canceled Checks Verify amount with statement and that you actually wrote them

Saving Options Money Market Account Bank takes your money and invests it, giving you a higher than normal yield May have high minimum balances (why??) Able to write a few checks per month from your account Savings Account Most popular and liquid account option Few restrictions, but usually pays low interest

Saving Options (cont’d) Certificate of Deposit (CD) Specific amount of money invested for a specific amount of time yielding a specific amount of interest Big penalties if you withdraw funds before maturity Amounts may vary from $1,000 to 100,000 Savings Bonds You are loaning money to the government For a specific amount, time, and interest yield No risk, as it is back by the federal government Amount on bond is what it will be worth, not what you paid for it

IV. Budgets Fixed Expenses Regular payments that don’t vary in amount Examples: rent, insurance, car payment Variable Expenses Expenses that can increase or decrease in amount Examples: food, entertainment, haircuts Discretionary Expenses Unnecessary expenses Examples: vacations, manicures, elective surgery

Assets Items of value that you own, including money Liabilities Debts (money that you owe others) Net Worth Difference between assets and liabilities Budgets (cont’d)

Gross Income Amount of money you earn before taxes and other deductions Other deductions: insurance, union dues, 401K Net Income Amount of money you receive after taxes and other deductions are removed The actual amount of your check