Chapter 4 Savings and Payment Services McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Savings and Payment Services Chapter Objectives Identify commonly used financial services Compare the types of financial institutions Assess various types of savings plans Evaluate different types of payment methods 4-2

Objective 1 Identify Commonly Used Financial Services Meeting Daily Money Needs 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 4-3

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 4-4

Types of Financial Services Savings Time deposits Savings and certificates of deposit Payment services Checking accounts = demand deposits Automatic payments Borrowing for the short- or long-term Other financial services Insurance, investment, real estate purchases, tax assistance, and financial planning 4-5

Types of Financial Services Asset management account Also called a cash management account Offered by investment companies and others provide a complete line of financial services program, which include: Checking account and ATM card Credit card Online banking Line of credit for quick cash loans Access to a variety of investments 4-6

Electronic and Online Banking Services Traditional banks  online services Web-only banks (E*Trade Bank) Services provided: Direct deposit Paychecks and other regular income Automatic payments transfer funds Recurring payments such as for utilities Remember to deduct them from your register ATM access Obtain cash, check account balances, and transfer funds Check out the fees Debit card Deducts money directly and immediately out of your account Lost card liability $50-$500 4-7

Pros and Cons of Online Banking Benefits Concerns Time & money savings Potential privacy, 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 4-8

Financial Services and Economic Conditions For successful financial planning be aware of: Prime rate = rate banks charge large corporations Consumer Interest rates Rising consumer prices Information sources: www.federalreserve.gov www.WSJ.com http://finance.yahoo.com 4-9

Interest Rates & Financial Decisions 4-10

Objective 2 Compare the Types of Financial Institutions Basic questions to ask before choosing a financial institution Where can I get the best return on my savings? How can I minimize my costs for financial services? Will I be able to borrow money if I need it? 4-11

Objective 2 Comparing Financial Institutions Determine the financial services you need before choosing a financial institution Compare fees and convenience Consider the safety and rates for deposits and loans at different institutions 4-12

Comparing Financial Institutions Deposit Institutions Commercial banks Organized as corporations Offer a full range of services including checking, savings, lending and other services Savings and loan associations Checking accounts, specialized savings plans, loans and financial planning and investment services 4-13

Comparing Financial Institutions Deposit Institutions (con’t) Mutual savings banks Specialize in savings accounts and mortgage loans 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 4-14

Comparing Financial Institutions Non-Deposit Institutions Life insurance companies Insurance plus savings and investments Some offer financial planning and investing services Investment companies Mutual funds Money market fund Combination savings & investment plan Not covered by FDIC 4-15

Comparing Financial Institutions Non-deposit Institutions Brokerage firms Act as agent for buyers and sellers of financial products Credit card companies Specialize in short term loans Finance companies Make short and medium term loans to consumers Higher rates Mortgage companies Provide home mortgage loans 4-16

Comparing Financial Institutions Problematic Financial Businesses Pawnshops Loans on possessions Higher fees; 3% per month common Used for quick cash Check-cashing outlets Charge 1-20 % of check’s face value 1-3% is average Currency exchanges 4-17

Comparing Financial Institutions Problematic Financial Businesses Payday loan companies Cash advances, Check advance loans Postdated check loans Delayed deposit loans High interest rates Rent-to-Own Centers Lease merchandise at high interest rates to low-income customers 4-18

Objective 3 Assess Various Types of Savings Plans Regular savings accounts Passbook savings Statement accounts Low minimum balance Easy withdrawal Insured Low rate of return 4-19

Objective 3 Assess Various Types of Savings Plans Certificates of deposit Required minimum deposit Required time on deposit Penalties for early withdrawal Take care when rolling over Various CD types: Rising-rate or bump Stock-indexed Callable Promotional 4-20

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 Allows limited check writing Higher minimum balance Money market accounts are covered by the FDIC, but money market funds are not 4-21

Types of Savings Plans U.S. Savings Bonds Series EE “Patriot Bonds” Sold at half of face value Face values $50 - $5,000 Fixed-rate interest compounded semiannually Penalty if redeemed within 5 years Continues earning interest for 30 years Potential tax advantages if used to pay tuition 4-22

Types of Savings Plans U.S. Savings Bonds Series HH I bonds Current income bonds Pays interest every six months Interest direct deposited and taxed as current income I bonds Earns a fixed rate plus an inflation rate Twice-a-year inflation adjustment See www.savingsbonds.gov for rates 4-23

Evaluating Savings Plans Rate of return or yield Percentage increase in value due to interest Frequency of compounding increases return 4-24

Evaluating Savings Plans “Truth in Savings Act” Requires disclosure of: Fees on deposit account Interest rate Annual percentage yield (APY) APY defined as the “total percent” Total percent is based on annual interest and frequency of compounding APY = Rate per period X # periods per year 4-25

Evaluating Savings Plans Inflation Compare rate of return vs. inflation rate Taxes Reduces interest earned on savings Liquidity Quick availability of cash Without significant loss in value 4-26

Evaluating Savings Plans Safety via FDIC and NCUA FDIC insured up to $100,000 per person per financial institution Up to $250,000 on certain retirement accounts www.fdic.gov Restrictions and fees Minimum balance Fee for additional transactions 4-27

Objective 4 Evaluate Different Types of Payment Methods 4-28

Payment Methods Electronic Payments Debit Card Transactions Immediate account debit Online Payments PayPal, MyCheckFree Stored-value Cards Prepaid cards for telephone, transit, tolls, etc. Smart Cards “Electronic wallets” 4-29

Payment Methods Checking Accounts Regular Checking Accounts Monthly service charge usual Minimum balance Activity Accounts Fee charged for each check written, and sometimes for deposits Interest-earning or share draft accounts (credit unions) Require a minimum balance 4-30

Payment Methods Evaluating checking accounts Restrictions, such as a minimum balance Fees, which are increasing, and charges Interest rate and computation method Special services Overdraft protection Beware of “package” deals that include unneeded services 4-31

Other Payment Methods Certified check Cashier’s check Money order Personal check with guaranteed payment Cashier’s check Check of a financial institution you get by paying the face amount plus a fee Money order Purchase at financial institution, post office, store Traveler’s check Sign each check twice Electronic traveler’s checks - prepaid travel card with ability to get local currency at an ATM 4-32

Managing Your Checking Account Opening a Checking Account Individual vs. joint account Making Deposits 3 types of endorsements Blank endorsement Signature only Restrictive endorsement “For deposit only” Special endorsement “Pay to the order of” 4-33

Managing Your 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 4-34

Managing Your 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 4-35