Banking Chapter 5 11/7/2018

How to Manage Your Cash (5.1) What are you cash needs? Daily cash needs Ex. Buying lunch, gas for car, or paying for routine activities Paid w/cash , ATM card, or credit card Consider added fees for use of ATM or credit card Resist temptation to overspend and avoid buying on impulse Sources of quick cash Use your savings or borrow money…long-term goals may be delayed though 11/7/2018

Types of Financial Services Savings Safe storage of funds for future use. Essential for any personal finance plan Time deposit – money that is going to be left in a financial institution for months or years Payment services – transferring money out of your account for payments either electronically or by check. Borrowing – credit cards or loans 11/7/2018

Electronic banking services #1 issue for online customers…security Use a security code, password, and customer identification name or number Direct deposit- automatic deposit of net pay to an employee’s bank account This replaces printed paycheck that you would take to bank Saves time, money, and effort Offers safe way to transfer funds 11/7/2018

Automated Teller Machines (ATM’s) Computer terminal that allows a withdrawal of cash from an account You can also make deposits and transfer money from one account to another Debit card- cash card that allows you to withdraw money or pay for purchases from your checking or savings account May be a small fee for use of the card Unlike credit card, debit card enables you to spend only the money you have in your account 11/7/2018

Never give your PIN number to any business or individual If your card is lost or stolen along w/your PIN, anyone could withdraw money from your account ATM Fees – charge for convenience of using an ATM Compare fees from bank to bank Use your bank’s ATM machine in order to avoid additional fees When away from home, consider using traveler’s checks, credit cards, & prepaid cash cards 11/7/2018

Lost Debit Cards Notify bank immediately Most card issuers will not hold you responsible for stolen funds. Check w/your card issuer. Some institutions require you to notify them within two days of losing your card If you wait longer, you may be held responsible for up to $500 for its unauthorized use for up to 60 days Beyond that time, your liability may be unlimited 11/7/2018

Plastic payments Point-of-sale transactions – purchase by debit card of a good or service at a retail store, restaurant, etc. Stored-value cards – prepaid cards that you can use for things like school lunches, phone calls, etc. Can reload money onto the card Electronic cash – some companies are working to develop this…the day may come when you will not handle currency at all 11/7/2018

Opportunity Costs of Financial Services What are the trade-offs when you choose financial services? Find a balance between short-term needs & future financial security Remember to consider the value of your time 11/7/2018

Federal Deposit Insurance Corporation Created in 1933 during the Great Depression to protect deposits in banks FDIC insures each account in a federally chartered banks up to $100,000 per account When you consider a financial institution, consider its safety record 11/7/2018

Types of Financial Institutions Deposit institutions Commercial banks – for-profit institution that offers a full range of financial services, including checking, savings, and lending Serve individuals & business Savings & Loan Associations – specializes in savings accounts and mortgage loans Credit unions – nonprofit owned by its members & organized for their benefit. 11/7/2018

Non-Deposit Institutions Life insurance companies Main purpose is to provide financial security for dependents Policies also contain savings & investment features Investment companies Combine your money w/funds from other investors in order to buy stocks and bonds. They manage these combined investments (mutual funds) Finance companies Make higher-interest loans to consumers & small business They cannot borrow elsewhere due to low credit ratings Mortgage companies Specialize in loans for the purchase of homes (covered in ch. 7) 11/7/2018

Comparing Financial Institutions Consider the following questions: Interest rate on savings account? Checking account with lowest fees Ability to borrow money w/a credit card or another type of loan when you need it FDIC insured? Convenient location? Online banking services? 11/7/2018

Regular savings accounts (5.2) Ideal if you plan to make frequent deposits & withdrawals Require little or no minimum balance & allow you to withdraw money on demand Low interest though Statements arrive monthly or quarterly in the mail 11/7/2018

Certificates of Deposit (CD) Money is left on deposit for a stated period of time (term) to earn a specific rate of return (interest) Date when money is available to you is maturity date Low-risk way to invest your money Higher interest rate than regular savings account but can’t access money for a specified period of time 11/7/2018

CD Investment Strategies Find out where you can get the best rate Consider the economy as you decide what maturity date to choose Never let your financial institution “roll over” a CD Consider when you will need the money 11/7/2018

Money Market Accounts Savings account that requires a minimum balance and earns interest that varies from month to month Higher interest rate than regular savings account but requires a higher minimum balance (typically $1,000) 11/7/2018

Evaluating Savings Plans How should you evaluate a savings plan? Your selection of a savings plan will be influenced by: rate of return, inflation, tax considerations, liquidity, restrictions, & fees Rate of return - % of increase in the value of your savings from earned interest Compounding – interest is earned on both the principal (original deposit) & any previously earned interest 11/7/2018

Tax considerations- taxes reduce interest earned on savings Inflation- compare interest rate for savings account to current inflation rate Tax considerations- taxes reduce interest earned on savings Liquidity- check to see if there is a penalty or a lower interest if you withdraw your funds early 11/7/2018

Types of Checking Accounts Regular checking account Usually don’t require a minimum balance Activity accounts – if you only write a few checks each month & are unable to maintain a minimum balance…fee charged for each check you write Interest-earning checking accounts – combination of checking & savings accounts…pay interest if you maintain a minimum balance. 11/7/2018

Evaluating checking accounts Restrictions (min. balance?) Fees & charges – monthly service charge, check printing fees, overdrafts, & stop-payment Interest Special services Overdraft protection – automatic loan made to your account if the balance will not cover a written check. Bank will charge interest on that loan. 11/7/2018

Using a checking account Opening a checking account – Individual or joint account Writing checks Stop-payment order – request that bank not cash a particular check. Fees range from $10-20 or more. Used for lost of stolen checks Making deposits Endorsements – signature of payee (person who gets money) Check clearing Reconciliation – report that accounts for the differences between the bank statement & a checkbook balance “balancing your checkbook” 11/7/2018