Financial Planning Three main influences when considering financial planning: Life Situation Personal Values Economic Factors

Why Save and Invest Money? Allow your money to grow Keep up with inflation Earn interest on interest Make your money work for you Through: –Compounding interest –Investment growth Slide 2

Time Value of Money A dollar you receive in the future will be worth less than a dollar you receive today

Did You Know? Small amounts saved and invested can easily grow into larger sums –If a person saved a dollar each day by not having a candy bar or soda, they would save $365 per year, if the $365 was deposited into a certificate of deposit (CD) with 5% interest, the money could grow to nearly $400 in one year!

Cash Management The daily routine of handling money to take care of individual or family needs Effective cash management includes having money available for: –Living expenses –Emergencies –Savings –Investing Slide 5

Cash Management Tools A financial account used to assist with daily cash management ToolInterestSpecial Features Checking Account1.5%Checks used in place of cash Easy access Saving Account2.3%Temporary holding place Easy access Money Market Account 2.6%Minimum balance Tiered interest rates Limited withdrawals Certificate of Deposit4 – 5.4%Penalty for early withdrawal Not easy to access funds Savings Bond4 – 5.4%Tax advantages Not easy to access funds

Why Have Checking Account? Checking Account – A demand deposit account on which checks are drawn Check - a written order to a bank to pay a person or business.

Checking Accounts Why open a checking account? –Safe place to keep money (Insured by the FDIC) –Easy to pay bills by mail (writing a check) –Easy access to money to make cash purchases Withdrawal money Write checks against the account Debit cards Internet

Checking Account Features May be interest earning Minimum balance requirements Charge transaction fees Limited number of checks written monthly Reduces the need to carry large amount of cash

Opening a Checking Account What will I need? –Money! ($50 or $100) –Personal information –Identification –Provide an official signature What will I be given? –Checkbook –Checkbook register

Checkbook Register A way to track your account transactions

Withdrawals and Deposits A withdrawal involves taking money from your account. o Writing checks o Using debit cards A deposit of money can be made to your account. o Endorsing checks o Direct deposit

Endorsing A Check Signature on the back of the check approving it for deposit. Checks must be endorsed to be deposited Three Types Blank Restrictive Special Safest way to endorse the check is to wait until going to the bank to deposit

Blank Endorsement Receiver of the check signs his/her name Anyone can cash or deposit the check after it has been signed Endorse Here X Sally Smith_________ DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE ________________________________

Restrictive Endorsement More secure than blank endorsement Receiver writes “for deposit only” above his/her signature –Allows the check only to be deposited Endorse Here For Deposit Only – Acct X Sally Smith_________ DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE _______________________________

Special Endorsement Receiver signs and writes “pay to the order of (fill in person’s name) Allows the check to be transferred to a second party –Also known as a two-party check Endorse Here Pay to the order of Mike Smith X Sally Smith_________ DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE _______________________________

Check 21 Check clearing for the 21 st Century Act (check 21) –Current trend that changes how money is withdrawn and deposited into accounts

How Check 21 Works Prior to Check 21 –Paper checks physically moved from place to place After Check 21 –Paper checks scanned to computer to create a “substitute check” (truncated) –Substitute check is transferred electronically from place to place

Objectives: 1.Prepare a bank reconciliation 2.Explain how you can grow your savings with interest Warm Up: Explain the difference between the three different types of endorsement. Write this down. Quiz on Wednesday 11/19/12 Agenda: 1.Complete warm up 2.Bank reconciliation P.P. 3.Follow along notes 4.Chapter 5 activity packet Daily Information 11/15/12

Monthly Statement Comes from your bank Lists information about each transaction during the period Lists the current balance during the period

Reconcile a Bank Statement Bank reconciliation - the process of adjusting the checkbook register and bank statement so they agree Consider the following: o deposits in transit o outstanding checks o transposition errors

What Is the Purpose of Savings? Savings Account - a demand deposit account for the accumulation of money It is a safe place to hold money to meet future needs and wants It pays interest at a low rate

Cash Management Tools A financial account used to assist with daily cash management ToolInterestSpecial Features Checking Account1.5%Checks used in place of cash Easy access Saving Account2.3%Temporary holding place Easy access Money Market Account 2.6%Minimum balance Tiered interest rates Limited withdrawals Certificate of Deposit4 – 5.4%Penalty for early withdrawal Not easy to access funds Savings Bond4 – 5.4%Tax advantages Not easy to access funds

Liquidity How quickly and easily an asset can be converted into cash. Liquid assets are important for emergency situations Investors should: –Invest in both liquid and non-liquid tools

Liquidity Checking Account Savings Account Money Market Account Certificate of Deposit Savings Bond Most Liquid Least Liquid

Watch Your Money Grow! How can you grow your savings? Through… Principal Simple interest Compound interest

Computing Simple Interest Simple Interest – interest computed on principal once during a certain time period P = amount of money invested R = interest rate T = time period that money will be set aside Simple Interest Interest (I) = Principal (P) × Rate (R) × Time (T) = $1,000 × 6% annual rate × 6 months = $1,000 × 0.06 × 6/12 = $30

Computing Compound Interest Compound Interest – interest earned on both the principal and previously earned interest Quarterly Compounding Annual Interest Rate 6% Beginning Rate Ending YearBalance 6% QuarterBalance $ $1.50$1.52$1.55$1.57$ $ $1.59$1.62$1.64$1.66$ $ $1.69$1.72$1.74$1.77$ Future Value of Money

Rule of 72 How long will it take to double my money? Divide annual interest rate into 72 Example: if you invest $50 at 6% interest, your money will grow to $100 in 12 years ( 72 ÷ 6 = 12 years)

Focus On... The FDIC Protects depositors of insured U.S. banks against loss if the bank fails Covers all types of deposits Covers principal and accrued interest Does not insure some items o Examples: stocks, bonds, valuables Insures deposits in different banks separately

Available Banking Services Safe deposit boxes Overdraft protection ATMs Cashier’s checks Financial advising Loans Internet banking Bank cards

Costs of Banking Monthly account fees Nonsufficient fund fees Special service fees o Examples: stop payment, cashier’s check, money order ATM fees Inactive account fees

What Are Consumer Responsibilities? Maintain your balance. o Avoid writing bad checks. Monitor your account. o Reconcile your bank account. Know your rights. o Be aware of consumer protection laws.