Banking Basics

Class Objectives The objectives of this session are to identify and discuss the following: What a bank account is and why it is important to have one The two types of financial institutions and the accounts that they offer What is needed to open an account and the questions to ask when opening one Different types of checking and savings accounts Other types of accounts that financial institutions offer Tips for managing your accounts Tips for budgeting your money

What is a bank account? Use this as an opportunity to get the class involved. Ask what participants know about bank accounts and write notes on a white board or notepad.

Why is it important to have a bank account? Keeps your money safe Proof that you paid your bills Makes it easier to track and manage your money Allows you to build a relationship with the financial institution, which can make it easier to obtain a loan Ask participants what some of the advantages are to having a bank account. Write down key concepts.

Choosing a Bank What is important to you? What benefits can the financial institution offer? What are the bank’s fees and policies? What kind of accessibility to they offer? Ask for the classes input. Encourage participation. If the students are not sure what’s important to them, suggest things like locations, banking center hours, prominence in the community, types of accounts, fees, etc.

What is the difference between a bank and a credit union? A credit union is a non-profit cooperative financial institution owned and controlled by its members. A bank is a for-profit company that makes money from charging fees and lending money. Encourage participants to brainstorm even if they are not sure of the differences between banks and credit unions. During the discussion of banks and credit unions, use examples of well-known banks and some local credit unions to illustrate your explanation.

Credit Unions… Serve groups that share something in common, such as their profession, place of worship or neighborhood. Provide checking and savings accounts and loans, often with better rates than banks. Mention that it is worth finding out if you can join a credit union, as membership requirements vary and you may be eligible to join without knowing it. RESOURCE: To find out if you are eligible to join a credit union, call the Credit Union National Association at 800-358-5710, or visit its web site (www.cuna.org).

Opening a Bank Account What should you bring with you to the bank when you are opening a new account? Ask this question to prepare participants for the experience of going to a bank or credit union to open a new account. You might want to suggest that they call first in case the institution has any peculiar ID requirements.

Identification When you go to the bank branch to open a new account, bring: Photo identification, such as a driver’s license, state ID card or passport Proof of your address, such as a utility bill or lease Your Social Security number for tax purposes

What to Ask When Opening an Account What are some questions you should ask when you are deciding on a bank or credit union? Ask this question to get the group thinking about how to get the best deal on a bank or credit union account.

Questions to ask: What is the minimum to open an account? What is the interest rate on the account? Is there a monthly fee? Is there any way to avoid monthly fees? Is there a minimum balance requirement? What happens if my balance falls below the minimum requirement? Review these sample questions to ask when applying for a new bank account (continued on the next slide).

Questions to ask: Is there a maximum number of checks I can write each month? Is there a fee for using your ATMs? Does the bank offer online banking? TIP: Use the worksheet in your folders as a guide when you apply for an account at a bank or credit union. Point out that the “Choosing a bank or credit union account” worksheet is in participants’ folders. Emphasize that participants can use the worksheet as a guide to help them find the best deal when they are applying for new accounts.

Checking and Savings Accounts

Checking Accounts What comes with a checking account? What are the benefits? Ask this question to get participants talking about the different features of checking accounts.

Checking Account Features Free checking Direct deposit Online banking and bill payment Low cost accounts for seniors or students ATM/Debit card Checks Discuss each of these features and types of checking accounts. Involve participants by asking them if they know what each kind of account or feature is. Free accounts are available at many banks if you use direct deposit to receive your paycheck or benefits check. This means you will not receive a paper check, but the money will go automatically into your account. Some banks also offer free accounts if you use an ATM machine for all deposits and withdrawals. Some states require that banks offer basic checking to accommodate low-income customers. Called "lifeline" or "basic" accounts, they tend to have no (or very low) minimum balance requirements—which means you won’t get hit with a monthly fee if your account dips too low. These accounts sometimes have limited check writing privileges.

Checking Accounts Checking accounts allow you to: Write checks Use your ATM/debit card to get cash at ATM machines and to make purchases at point-of-sale terminals (such as at the supermarket). In most cases, your ATM/debit card can be used to make purchases where credit cards are accepted

Check Writing Why is it important to enter the checks you write into your checkbook register? This is the “classroom discussion question” at the bottom of the check writing activity worksheet. Ask participants to share their suggestions with the class.

Keep a record of your checks: So that you don’t bounce checks. So that you know how much money you have in the bank. So that you can track your spending and stick to a budget. Discuss how entering checks in your checkbook can help with tracking spending and sticking to a budget: you have a record of how much you spend each month on rent, bills and anything else you use checks or your ATM card to pay for.

Debit Cards You can use your debit card in two ways: At an ATM or a point-of-sale (POS) terminal with your person identification number, or PIN. At stores and restaurants that accept credit cards, without providing your PIN. You may be asked to show your ID and sign a receipt. During the discussion of this slide, be sure to clarify the ways in which a debit card (or “check card”) is different from a credit card. Even though a debit/check card has the Visa or MasterCard logo on it, money is immediately taken out of the accountholder’s account. Even though debit cards work like credit cards in the second instance, the money will be immediately deducted from your checking account. You will not receive a bill later. Debit/check cards are convenient, but they do not help you to build a credit history. Stress that debit cards are like cash because you don’t need a PIN to use them. .

Debit Cards If your debit card is lost or stolen: Alert your bank as soon as possible. The longer you wait, the more money you might be responsible for if an unauthorized person uses your card to buy things.

What is the difference between a credit card and a debit card?

Credit Cards Every time you use a credit card you are borrowing money from a bank or financial institution. You must pay back the money that you borrow, in addition to any interest drawn on the amount borrowed. Allow you to build credit if used properly Zero liability on fraudulent charges

Debit Cards… Debit cards take funds directly from the money that you have in your bank account, preventing you from having to carry cash or checks Unlike with credit cards, if you do not report fraudulent charges to your account in a timely manner, you may be liable

Savings Accounts How is a savings account different from a checking account? Let the participants brainstorm for a few minutes.

What is interest? Interest is the cost of lending money. When a bank give you a loan, you pay interest to them. When you keep your savings in the bank, they pay interest to you. In a savings account, your money works for you by earning interest. You may want to point out that while some checking accounts accumulate interest like savings accounts do, most do not. Interest bearing checking accounts are rarely a good deal, either.

How to Figure Interest The annual percentage rate (APR) is the amount of money you would earn if you left your money on deposit for one year. For example, if you left $100 on depot for one year at 2% APR, you would earn $2 in interest at the end of the year.

Types of Interest There are two types of interest: Simple interest means that you earn interest on your initial deposit. Compound interest allows you to earn interest not only on your initial deposit, but also on the interest you earn as you go along. Simple interest = Principle x Interest Rate x Number of Years Compound interest = P( 1 + i )n P is the principal amount. i is the rate of interest per year. n is the number of years invested. A useful website for calculating compound interest can be found at http://math.about.com/library/blcompoundinterest.htm Move to the next slide for an example to make the concept of simple interest clearer.

Simple and Compound Interest Example: You deposit $100 into your savings account and earn 5% interest annually for the next 20 years. Let’s compute the difference between Simple and Compound.

Simple and Compound Interest Simple Interest Compound Interest Principle + Simple Interest Principle + Compound Interest 1 Year $5.00 $105.00 5 Years $25.00 $27.63 $125.00 $127.63 10 Years $50.00 $62.89 $150.00 $162.89 15 Years $75.00 $107.89 $175.00 $207.89 20 Years $100.00 $165.33 $200.00 $265.33

Other Types of Accounts and Services

Other Types of Accounts and Services What are some other types of accounts that banks and credit unions offer? Overdraft Protection Certificate of Deposit (CD) Safe Deposit Box Online Banking Ask participants if they can name some other types of accounts.

Overdraft Protection An optional bank service called overdraft protection can save you from bouncing checks. It can work with a loan or line of credit or with your savings account. There is usually a charge for this service and you must signup for it. Ask the class if they know how much banks charge for a bounced check. Use this to lead into your explanation of how overdraft protection works: your checking account is linked to your savings account or credit card, and money is deducted from this account if you overdraw your checking account. Emphasize that while overdraft protection is cheaper than bounced check fees, you are still charged when using this feature. Transfer fees and/ or interest usually apply but they are still a lot lower than bounced check fees. It’s useful, but overdraft protection is not a substitute for balancing your checkbook.

Certificates of Deposit (CDs) What is a certificate of deposit?

Certificates of Deposit (CDs) A CD is a kind of savings account in which you leave your money on deposit for a set period of time in order to earn interest. The longer the term of your CD, the higher the interest rate will be. If you withdraw your money before the term ends, you will lose the interest and might have to pay a penalty.

Safe Deposit Boxes What is a safe deposit box? What are some things that you might keep in a safe deposit box?

Safe Deposit Boxes Copies of insurance policies Birth, marriage and death certificates Mortgages, leases and other important contracts Stock and bond certificates Valuable jewelry Hard drive

Online Banking What are some advantages of online banking? Ability to view account balances and transfer money between accounts 24 hours a day Online bill pay

Managing Your Accounts

Common Bank Fees Overdraft charges Minimum balance requirements ATM fees Monthly maintenance fees

Example Bank Fees and Costs A monthly fee without a minimum balance can average anywhere between $5 and $15 per month, this is $60 to $180 a year!

Example Bank Fees and Costs Many banks charge $2 to $3 dollars for using another bank’s ATM, plus the bank that the ATM belongs to will also charge the same fee. A withdrawal for $20 may end up costing you $26!

Example Bank Fees and Costs Overdraft fees can cost you between $20 and $35 dollars per transaction. That means if you overdraw your account by just $10 with 5 transactions of $2, bank overdraft fees can be as much as $175!

How can you avoid these fees? Combine checking and saving balances to avoid monthly fees. Save on ATM fees by using your own bank’s machines. If you can’t avoid an ATM fee, take out larger sums less frequently. Discuss these ways to save on banking costs (continued on the next two slides). Encourage participants to bring up any other suggestions they have for ways to save on costs. - Combining balances in your checking and savings accounts can help you to meet the minimum balance requirement and avoid monthly fees. - Save on ATM fees by using your own bank’s machines or those owned by banks that don’t charge fees to non-customers. Emphasize the importance of avoiding ATM fees. These days, if you withdraw $20.00 from another bank’s ATM, your bank charges you $2.00 per foreign ATM transaction, and the foreign bank charges you $1.50, you end up with only $16.50. - If you can’t avoid a fee, take out larger sums less frequently to avoid repeat fees on numerous smaller withdrawal. As an alternative to using another bank’s ATM, advise participants to get money back at the supermarket or drug store when using their debit card.

How can you avoid these fees? Keep track of your spending! Set up direct deposit – many banks waive minimum balance requirements with direct deposit. Ask the bank to reverse the occasional late fee or bounced check fee. Other ideas?

Monitoring Your Accounts Monitoring your accounts can help identify bank errors, unauthorized charges and identity theft.

Banks make mistakes too! If your bank or credit union makes a mistake, such as a mixed-up deposit, no-show bill payment or double debit, you have the right to speak with the bank about the error. Point out that the best way to catch bank errors and to clear up errors if they do occur, is to keep your checkbook balanced and review bank statements as soon as you receive them.

Solving a Bank Problem Contact the bank as soon as you can. Always write down the name of the person who helped you. Offer a solution and ask the back to correct the problem. Don’t lose your temper. Send a summary letter (registered mail receipt requested) to prove you took timely action.

Identity Theft What is identity theft and how can you avoid it?

Keep Your Account Information Safe Shred unneeded bank documents rather than simply throwing them away. Be careful who you give your account information to. If you notice changes to your account that you did not make, contact your bank as soon as possible.

Maintain a Good Relationship with Your Bank It is important to maintain a good relationship with your bank. Failure to do so can affect your ability to have an account in the future.

Account Verification Services How do banks find out about your past account history?

ChexSystems… Is the major national account verification company. When you apply for a new checking account, the bank finds out if you are in the ChexSystems database. If you ever abandoned a checking account with a negative balance, you are probably listed in the ChexSystems database. You may want to note that there is a possibility that banks will check the ChexSystems database when you apply for a savings account as well. Reports about overdrafts or closed accounts remain in your file for five years. You can get a copy of your report by contacting ChexSystems You have the right to dispute inaccurate information in your account verification report.

Money Management

Cutting Back on Expenses What are some ways to cut back on expenses?

Ideas to help you cut back Shop around and compare prices. Make a shopping list and stick to it. Prepare meals and bag lunches at home. Don’t shop recreationally – you could be tempted to buy things you don’t need. Use the public library for books, magazines, videos. Walk instead of drive. Look for a free bank account.

Check Writing Activity In this activity you will practice writing a check and entering it into a sample checkbook register. Ask participants to take out the check writing activity sheet from their folders. In this activity, participants practice writing a check and then entering it into a sample checkbook register. Give participants five to 10 minutes to complete the worksheet. When participants have written the check to Peter Perkins and deducted it in the checkbook register, the new balance will be $1,343.87. A teacher’s key to this exercise can be found in the MoneyWi$e Banking Basics Lesson Plan.

Banking BINGO Banking Basics Interest $20 $60 Direct Deposit Debit Card APR Financial Beginnings Compound Interest Simple Interest ATM Withdrawal Savings Account Checking Account Bank Credit Union Balance Deposit