Chapter 05 Financial Services: Savings Plans and Payment Accounts 5-1

A Cash Management Strategy Banks, saving and loan associations, credit unions, and other financial institutions provide a variety of financial services Account services provide customers with online banking offering deposits, investments, credit cards, loans, mortgages, rewards programs and IRAs 5-2

A Cash Management Strategy MEETING DAILY MONEY NEEDS Cash, check, credit card, and debit cards are the most common payment choices Cash = Currency No matter how carefully you manage your money, there may be times when you will need more cash than you currently have available. So you have two options: Liquidate Savings Borrow 5-3

Watch Video on how an ATM works… ATM (Automatic Teller Machines): Uses a “debit card” activates ATM transaction and is linked to a bank account ATM convenience can be expensive…FEES!!! Lost or stolen debit card: Notify within 2 days liability is $50 After that it could be $500 up to 60 days Beyond that is unlimited But some card issuers may treat it like a credit card with a $50 maximum Watch Video on how an ATM works…

A Cash Management Strategy (continued) Common mistakes in managing cash include… Overspending from impulse buying and using credit cards Not having enough liquid assets (cash and checking account) to pay current bills Using savings or borrowing to pay for current expenses Failing to put unneeded funds in an interest- earning savings account or investment plan 5-5

A Cash Management Strategy (continued) TYPES OF FINANCIAL SERVICES: Savings Time deposits in savings, CD’s Payment services Checking accounts are called demand deposits Automatic payments Borrowing for the short- or long-term Other financial services: Insurance, investment, real estate purchases, tax assistance, and financial planning are additional services you may use 5-6

A Cash Management Strategy (continued) Other types of financial services (continued) Trust A legal agreement that provides for the management and control of assets by one party for the benefit of another Asset management account Also called a cash management account Offered by brokers and financial institutions Provides a complete financial service program for a single fee, benefits include: Tracking money in one location Consolidated statements Lower fees due to higher balance aggregation Ease for tax reporting Ease for communicating financial issues to family 5-7

A Cash Management Strategy (continued) ONLINE BANKING Benefits Time and Money savings Convenience for customer No paper trail for identity thieves Online transfer of funds from one account to another E-mail notification regarding due dates Concerns Privacy and security Costly ATM fees Difficulty depositing checks and cash Overspending potential Online scams; phishing and e-mail scams 5-8

A Cash Management Strategy (continued) OPPORTUNITY COSTS OF FINANCIAL SERVICES Higher rate of return may be obtained at the cost of lower liquidity Convenience of a 24-hour ATM should be considered against service fees The “no fee” checking account with a $500 non- interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years 5-9

A Cash Management Strategy (continued) FINANCIAL SERVICES AND ECONOMIC CONDITIONS Changing interest rates, rising consumer prices and other economic factors also influence financial services Be aware of current trends and future prospects for interest rates (Exhibit 5-3) Read Wall Street Journal, business periodicals, such as BusinessWeek, and Forbes, and online resources. 5-10

Financial Institutions DEPOSIT INSTITUTIONS Commercial banks Offer a full range of services including checking, savings, lending and other services Savings and loan associations Offer specialized savings plans, loans including mortgages, and other financial planning services Mutual savings banks specialize in savings accounts and mortgage loans: they are owned by their depositors Credit unions are user-owned, nonprofit cooperative financial institutions 5-11

Financial Institutions (continued) OTHER FINANCIAL INSTITUTIONS Life insurance companies Offer insurance, plus savings and investment features; some offer financial planning and retirement services Investment companies Are also referred to as Mutual Funds Offer a money market fund on which you can write a limited number of checks Finance companies Make short and medium term loans to consumers, but at higher rates 5-12

Financial Institutions (continued) OTHER FINANCIAL INSTITUTIONS Mortgage companies Provide loans to customers so they can purchase homes Pawnshops Make loans on possessions but charge higher fees than other financial institutions, used for quick cash Check-cashing outlets Charge 1-20% of the face value of a check: 2-3% is average http://www.youtube.com/watch?NR=1&feature=endscreen&v=bh6Uq G9nvQY http://afrodaddy.com/content/avoid-check-cashing-places-and-get- bank-account http://www.youtube.com/watch?v=CYHcXjJGyfc ) 5-13

Financial Institutions (continued) Choosing a financial institution, by step: Step 1: Prepare a list of important features. Step 2: Rank the top 3 or 4 features, for you. Step 3: Prepare a list of financial institutions. Step 4: Conduct research for decision. Step 5: Make decision based upon above. 5-14

FDIC: Federal Deposit Insurance Corporation Insurance that banks purchase to protect deposits of customers against loss up to $250,000 per depositor -in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor. FSLIC - Federal Savings and Loan Insurance Corporation.- Insures depositors of savings and loans up to $250,000.00 through 2013. Look for sign in institution.

Savings Plans REGULAR SAVINGS ACCOUNTS CERTIFICATES OF DEPOSITS Usually involve a low or no minimum balance Credit unions call them share accounts CERTIFICATES OF DEPOSITS Require you to leave your money on deposit for a set time period, otherwise you incur penalties Several types to chose from Consider all the earnings and all the costs 5-16

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Evaluating Savings Plans RATE OF RETURN Percentage or yield is the increase in value due to interest Example: a $100 savings account that earned $5 has a yield of 5 percent COMPOUNDING More frequent compounding means earning more interest on interest previously earned The annual percentage yield Purpose: to provide consistency when comparing different savings options. Formula: APY = 100 (Interest/Principal) NOTE: Formula is applicable when the number of days in the term is 365 or when the account does not have a stated maturity. Example: Interest of $60 on principal of $1,200 =100 (60/1200) = 5% (APY) 5-18

Evaluating Savings Plans (continued) TRUTH IN SAVINGS Requires Disclosure of... Fees on deposit account The interest rate The annual percentage yield Other terms and conditions INFLATION Compare your APY with inflation rate TAX CONSIDERATIONS Taxes reduce interest earned on savings Taxes are not withheld from savings and investments; you may owe additional taxes at year-end as a result of earnings on saving 5-19

Evaluating Savings Plans (continued) LIQUIDITY Allows you to withdraw money on short notice without penalty or fees SAFETY FDIC insures up to $250,000 per person per financial institution (see www.fdic.gov) RESTRICTIONS AND FEES Several restrictions can affect the choice of a savings program Delay in time between earned and posted, transactions fees from deposits and withdrawals, time money has to be left in a deposit account in order to receive a “free” gift, etc. 5-20

After Tax Savings Rate of Return Taxes reduce the actual rate of return Example: 6% savings yield, 28% tax rate Formula: (1 - tax rate) x yield on savings = (1 - .28) x .06 = .72 x .06 = 4.32% Thus, an individual earning 6% on a savings account with a 28% marginal tax rate, would actually have an after tax rate of return of 4.32%. 5-21

Payment Methods ELECTRONIC PAYMENTS Debit Cards Online Payments –most credit cards now offer this service Stored-value cards Smart Cards 5-22

Checking Account A banking service where you deposit money into an account and checks (drafts) can be written to withdraw money from the account when needed. Is known as a demand deposit, because you can demand portions of your deposited funds when you want. Only the depositor (maker) can write checks on the account Usually pay a fee for checking services unless you keep a minimum balance in your account. A check is a negotiable instrument, because it promises to pay a sum on a certain date.

Checking Accounts TYPES OF CHECKING ACCOUNTS Regular Checking Accounts– many have minimum balances Activity Account -fees on checks & deposits Interest-earning or NOW accounts, which usually require a minimum balance Interest Earning Checking accounts are also known as Share draft accounts at credit unions 5-24

Opening A Checking Account When you open up new checking account, you will fill out a signature card. A signature card provides the bank with important info and your official signature so they can verify checks you have written.

Checking Accounts EVALUATING CHECKING ACCOUNTS Need to be evaluated based on : Restrictions Fees and charges Interest rate and computation method Special services, such as overdraft protection 5-26

Checking Accounts Opening a Checking Account MANAGING YOUR CHECKING ACCOUNT Opening a Checking Account Individual or joint account Making Deposits Deposit ticket Endorsement Blank endorsement Just sign the check Restrictive endorsement For Deposit Only Special endorsement Pay to the order of 5-27

Blank Endorsement John Smith Should only be used when you are depositing or cashing a check, since a check can be cashed by anyone once it is signed

Restrictive Endorsement For deposit only John Smith Restrictive Endorsement

Allows you to transfer a check to someone else Pay to the order of Wyatt Jones John Smith Special Endorsement Allows you to transfer a check to someone else

Bank Deposit Slip Example 10

Checking Accounts Writing Checks Record the date Write the name Record the amount Write the amount in words Sign the check Note the reason for payment Record the check in your checkbook register 5-32

Sample Check

If the two amounts do not match, which one does the bank use?

Name The Type of Endorsement __________________ __________________ __________________ 36

Checking Accounts Reconciling your checking account Cancelled Checks – Checks that the bank has processed(cleared) Can use them as a receipt of payment Outstanding Checks – Checks that you have written that the bank has not processed yet. Reconciling your checking account Used to compare the bank’s balance and your checkbook balance. Reasons for differences: Interest earned Checks that have not cleared Deposits not yet received by bank 5-37

Checking Accounts Overdraft A check that cannot be covered by the funds in your account. When an overdraft occurs and the check is returned, the check has “bounced” (rubber checks) You also get charged a fee for each NSF(non-sufficient funds) check that is processed. When checks bounce, the bank notifies you in writing.

Payment Methods (continued) OTHER PAYMENT METHODS Certified check 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 5-39