4 Savings and Payment Services Cash management for routine spending activities Payment options: cash, check, credit cards, debit cards Common Mistakes: Overspending Insufficient liquid assets Using savings or borrowing to pay for current expenses Failing to put unneeded funds in an interest bearing or investment account Question: How/Where Do You Manage Your Money? 4-1

Objective 1 Identify Commonly Used Financial Services Meeting Daily Money Needs Sources of Quick Cash: Liquidate savings Savings account CD Mutual fund Borrow Credit card advance Personal loan Both options reduce net worth 4-2

Types of Financial Services Savings Savings accounts and certificates of deposit (a.k.a., “time deposits”) Payment services Checking accounts = “demand deposits” Automatic payments Borrowing for the short- or long-term Other financial services Insurance, investments, real estate purchases, tax assistance, financial planning, and asset management (cash management) accounts 4-3

Electronic Banking: ATMs Obtain cash, check balances, and transfer funds Check out the fees! (use own bank ATM; withdraw larger sums, beware of fees for ATMs not tied to customer’s bank account and “public” ATMs like this

Pros and Cons of Online Banking Benefits Concerns Time and money savings Potential privacy and security violations Convenience for transactions, comparing rates ATM fees can become costly No paper trail for identity thieves Difficulty depositing cash, checks Transfer access for loans, investments Overspending due to easy access E-mail notices of due dates Online scams, “phishing,” and email scams 4-5

Interest Rates & Financial Decisions Be aware of current trends and future prospects for interest rates 4-6

Four Tools of Monetary (Cash) Asset Management A low-cost, interest-earning checking account from which to pay monthly living expenses. A small savings account in a local financial institution for irregular expenses and emergency cash (3-6 months of expenses- or more- is recommended) When income begins to exceed expenses regularly, open a money market account. Your monetary asset management plan is complete when you transfer some funds into longer-term savings instruments. Examples: CDs, U.S. Savings Bonds

Objective 2 Compare the Types of Financial Institutions Basic questions to ask before choosing: Where can I get the best return on my savings? How can I minimize costs for financial services? Will I be able to borrow money if I need it? Determine the financial services you need Compare fees and convenience Consider safety (FDIC insurance) and rates for deposits and loans at different institutions How did YOU choose your bank or credit union? 4-8

Comparing Financial Institutions Deposit Institutions Commercial Banks Organized as corporations (answer to stockholders) Offer a full range of services including checking, savings, lending and other services (e.g., trust management) Savings and Loan Associations Checking accounts, savings plans, loans, and financial planning/investment services 4-9

Comparing Financial Institutions Deposit Institutions Mutual Savings Banks Specialize in savings accounts and mortgage loans (mostly in northeastern U.S.) Owned by their depositors, with profits going back to depositors by paying a higher rate on savings Credit Unions User-owned, nonprofit and provide comprehensive financial services Lower fees and lower loan rates 4-10

Bank Account Comparison Activity http://www.consumercredit.com/media/12323/bank-account-comparison-worksheet.pdf

Comparing Financial Institutions Problematic Financial Businesses Pawnshops Loans on tangible possessions (e.g., jewelry) High fees; 3% per month common Short-term loans (e.g., 30 -45 days) Used for quick cash (small dollar amounts) Check-Cashing Outlets (Currency Exchanges) Charge 1-20 % of check’s face value 1-3% fee is average Many provide other services (e.g., money orders, bill paying, international remittances) 4-12

Comparing Financial Institutions More Problematic Financial Businesses Payday Loan Companies A.k.a., “Cash advances,” “check advance loans,” “postdated check loans,” “delayed deposit loans” Very high interest rates (write $115 check to borrow $100 for 2 weeks; translates into 390% APR!) Car Title Loans High-cost short term loan secured with car title Rent-to-Own Centers Lease merchandise at high interest rates to low-income customers; small weekly payments add up Often pay 3 to 4 times the cost of an item 4-13

Payday Loans Video https://www.youtube.com/watch?v=d4TqNI9rU_s

Objective 3 Assess Various Types of Savings Plans Regular Savings Accounts A.k.a., Passbook savings and Statement accounts Low minimum balance; easy withdrawal FDIC Insured; fees and balance requirements vary Low rate of return Called “share accounts” at credit unions Certificates of Deposit (CDs) Required minimum deposit; required time on deposit Penalties for early withdrawal Take care when rolling over (check current interest rates) Consider creating a “CD portfolio” (laddering) 4-15

Objective 3 Assess Various Types of Savings Plans Interest-Earning Checking Accounts Checking accounts paying low interest Money Market Accounts and Funds Floating interest rate (based on current interest rates) Allows limited check writing Higher minimum balance than regular savings Money market accounts are covered by the FDIC, but money market funds are not (generally) 4-16

Evaluating Savings Plans Rate of Return or Yield Percentage increase in value due to interest Compounding frequency increases return (notice over time) Compounding- Earning interest on previously-earned interest 4-17

Evaluating Savings Plans “Truth in Savings Act” Requires disclosure of: Fees on deposit accounts; other terms and conditions Interest rate paid on savings Annual percentage yield (APY) APY defined as the “total percent” based on annual interest and frequency of compounding APY = Rate per period X # periods per year “Total interest that would be received on a $100 deposit for a 365-day period, given an institution’s annual rate of simple interest and frequency of compounding” APY must be in advertising and disclosures….WHY? 4-18

Payment Methods Checking Accounts Regular Checking Accounts (service charge; minimums) Interest-Earning Checking Accounts (called share draft accounts at credit unions) Require a minimum balance Evaluating checking accounts: Restrictions, such as a minimum balance Fees and charges Interest rate and computation method Special services (e.g., overdraft protection) “Relationship account” deals 4-19

Other Payment Methods Certified Check Cashier’s Check Money Order Personal check with guaranteed payment Shows that account has enough $; fee charged Cashier’s Check Check of a financial institution (backed by institution’s assets) you get by paying the face amount plus a fee Money Order Purchase at financial institution, post office, stores (e.g., Wal-Mart) 4-20

Managing a Checking Account Writing Checks Record the date Write the name of the person/organization receiving the check Record the amount of the check in figures Write the amount of check in words Sign the check Note the reason for the payment (memo) 4-21

Managing a Checking Account Bank Reconciliation Compare written checks with those reported paid Subtract the total of all checks written but not yet cleared Determine deposits not on the statement; Add the amount to the statement balance Subtract fees or charges and ATM withdrawals from the checkbook balance Add any interest to your checkbook balance What should you do if the balances don’t match? 4-22

Check-Writing Video https://www.youtube.com/watch?v=JQaUXU_tb5s

Calculator Clues APY Interest Calculator (Bank of Internet USA): https://www.bankofinternet.com/calculators/apy-interest-calculator Simple Savings Calculator (Bankrate): http://www.bankrate.com/calculators/savings/simple-savings- calculator.aspx CD Calculator (Bankrate): http://www.bankrate.com/calculators/savings/bank-cd-calculator.aspx Payday Loan APR Calculator (CSG Network.com): http://www.csgnetwork.com/apr4calc.html Payday Loan Calculator (Calculator Pro): http://www.calculatorpro.com/calculator/payday-loan-calculator/