Banking Chapter 5

Section 5.1 Objectives Identify types of financial services Describe the various types of financial institutions

How to Manage Your Cash Daily cash needs Sources of quick cash Lunch and dinner Gas Movies Routine activities Sources of quick cash ATM, debit card, check Credit card or borrow What about intermediate or long-term needs?

Types of Financial Services Three main categories Savings Essential for financial plan CD’s are time deposits left for a pre-determined time Payment Services Checking account – demand deposit Borrowing Credit card or loan Other Financial Services Insurance protection, investments, tax assistance, and financial planning assistance

Financial Services for Short-Term Needs Daily Purchases Living Expenses Emergency Fund Daily Cash Needs Check cashing ATM Prepaid cards Savings Regular saving acct. Money market Checking Regular checking Online payments Automatic payments Pay by phone Cashier’s check Money orders Credit Cards Major purchases Long-term financial security CD’s US Savings Bond Credit Services Cash loans for cars and education Home loans Investment Services Mutual funds Financial advice Other Services Tax preparation Insurance Budgeting

Electronic Banking Services Online banking Direct deposit Automatic payments Automated Teller Machines (ATMs) Plastic Payments Point-of-Sale Transactions – debit cards Stored-Value Cards – gift cards, smart cards E Money PayPal, Bitcoin, Apple Pay, Venmo

Types of Financial Institutions Federal Deposit Insurance Corporation Insures up to $100,000 per account Savings and Association Insurance Fund Insures up to $100,000 per amount For savings and loans

Deposit Institutions Commercial Banks – for-profit institution, offer wide range of services, granted by federal or state govt. Savings and Loans Associations – traditionally specialized in savings accts. and mortgage loans Mutual Savings Banks – specialize in savings and loans – interest rates better than commercial banks Credit Unions – nonprofit, owned and organized for members, interest better than commercial banks

Non-Deposit Institutions Life Insurance Companies Provide savings and investment options May offer retirement planning services Investment Companies Stocks, bonds, mutual funds Finance Companies Make high interest loans to those with bad credit Mortgage Companies

Comparing Financial Institutions What should you know to choose a financial institution? Where can you get the highest rate of interest on your savings? Where can you obtain a checking account with low (or no) fees? Will you be able to borrow money from the institution—with a credit card or another type of loan—when you need it? Do you need an institution that offers free financial advice? Is the institution FDIC or SAIF insured? Does the institution have convenient locations? Does it have online banking services? Does it have special banking services that you might need?

Section 5.2 Objectives Compare the costs and benefits of different savings plans Explain features of different savings plans Compare the costs and benefits of different types of checking accounts Explain how to use a checking account effectively

Types of Savings Plans Regular Savings Accounts Certificates of Deposit Money Market Accounts US Savings Bonds

Savings Accounts Ideal for making frequent deposits and withdrawals Require little or no minimum balance Withdraw money on demand Low risk, low interest potential

Certificates of Deposit Money left on deposit for a stated period of time (term) at a specific rate of return Maturity date is the date money can be withdrawn at end of term Low risk with high interest rates Three limitations Must leave for minimum of six months to five years generally Pay a penalty if you take out early, usually 6 months worth of interest

CD Investment Strategies Find out where you can get the best rate Never let the bank “roll over” CD if you forget to take your money at maturity, it will be placed in new CD at possibly lower rates Consider when you need the money Consider laddering, instead of tying up $5000 in one CD, get five $1000 CDs that mature at different times

Money Market Accounts Has minimum balance, typically $1000 Interest varies from month to month as market rates change May pay penalty if your balance goes below minimum FDIC insured

US Savings Bonds Series EE Savings Bonds Most common $25 to $5,000 in cost, at maturity the bond is worth double the cost Have to wait 10 to 20 years for maturity Earn interest up to 30 years if not cashed Subject to federal income tax

Regular Savings Accounts Low minimum balance Ease of withdrawal Insured Low rate of return CDs Guaranteed rate of return for time of CD Possible penalty for early withdrawal Minimum deposit Money Markets Accounts Good rate of Some check writing Minimum balance No interest and possible service charge if below a certain balance US Savings Bonds deposit Lower rate of return when cashed in before bond reaches maturity date

Evaluating Savings Plans Rate of return – know how the interest is calculated, the more its compounded the more you will earn Inflation – bad if you are locked in a low rate for a long time Tax Considerations – look for tax-exempt or tax deferred savings plans Liquidity – if the savings plan allows you to withdraw your money easily you will have a low interest rate, so for long-term savings a high interest rate is important Restrictions and Fees – be aware of fees for deposits and withdrawals and service charges for balance drops or lack of account usage

Type of Account Advantages Disadvantages Regular Checking Account Most have no minimum balance $10 service charge for each month you go below – can add up Activity Checking Accounts No minimum balance required May charge fee for checks and deposits Can only write a few checks per month Interest-Earning Checking Accounts Pay interest if you have a minimum balance If go below balance, you may not earn interest and may have a service charge

Evaluating Checking Accounts Restrictions – most common is keeping a minimum balance, number of transactions allowed, number of checks you may write in a month Fees and Charges – monthly service charge, checking printing, overdrafts, stop-payment orders Interest – rates, frequency of compounding, way interest is calculated Special Services – ATM, telephone, online banking, overdraft protection

Checking Account Fees ATM Fees - Charged when using one out of bank’s network Account Minimum Fee - Charged if your account goes under a certain amount Overdraft Fees - Charged for going below zero Stop Payment Fee - Charged when cancelling a check

Using a Checking Account Opening a checking account Individual or joint Writing checks Know proper way Making deposits Check clearing Money deposited is on hold for no more than 2 days from local banks, 5 days for non-local Keeping track of a checking account Record all money coming in and going out

Other Payment Methods Certified check Cashiers check Travelers check Payer gives check and bank signs or attaches guarantee that money is in the account Cashiers check Money taken out of payer’s account and the bank issues the check Travelers check Prepaid checks that can be used in other countries like cash, can be cancelled if lost or stolen Money Order Prepaid “checks” you purchase from stores and can use to pay people

Financial Institutions and Your Money Make money by making loans Amount of money banks lend is affected by reserve requirement set by Federal Reserve Reserve requirement is 3% to 10% of bank’s total deposits When bank gets $100 deposit, they could lend out $90 (with a 10% reserve) That $90 goes out into the economy and if it gets deposited in another bank $81 of the $90 (10% reserve) can be lent out and so on