Banking Savings Checking Credit Cards

Types of Savings: Savings Account Certificate of Deposit Market Money Account Consider Liquidity— how easily or quickly you can/want to withdraw your money

Savings Accounts Putting money aside for short-term goals & emergencies Interest rates are usually about 1% (maximum) Simple Interest Compound Interest Pros: low risk, high liquidity Cons: low interest rate

Money Market Account Similar to regular savings account Limited check writing may be allowed Higher interest rate than savings account Higher minimum balance to open and maintain the account. Pros: higher interest rate, high liquidity Cons: minimum balance, limited withdrawals

Certificate of Deposit (CD) Money must remain in the account for a fixed period of time (called the term) 3 months – 5 years Pay a penalty for withdrawing money early Minimum deposit Pros: low risk, higher interest rate Cons: low liquidity

Where does the interest come from? Banks pay interest to customers for the usage of their money. Banks will take the majority of these deposits (banks must keep a percentage of these deposits as reserves) and loan them out to other customers for mortgages, cars, school loans, businesses, etc… The interest charged for these loans is greater than the interest that is paid to customers on their savings, money market accounts, and certificates of deposit. This is the primary way that banks make money.

Final Thoughts on Savings Accounts: Individuals should use savings accounts, money market accounts, and/or certificates of deposit to save for emergencies and/or short-term financial goals. The money is safe and will be there when you need it. The interest rates paid on these accounts is typically much lower than what you would receive by investing your money. That is why it is appropriate to invest your money for longer-term financial goals. Also, the interest rates paid on these accounts typically does not keep pace with the rate of inflation.

Checking Accounts Used for “every day purchases” Usually do not pay any interest Single vs. Joint Checking Accounts Single : you are the only person with access to the account Joint: you share the account and money in the account with one or more persons Be careful about having joint checking accounts! Pros: low risk, high liquidity Cons: low/no interest rate, balance may be required to avoid fees

Debit Cards Debit Cards: Money spent using your debit card is withdrawn immediately from your checking account and sent straight to the company you are paying. PIN (Personal Identification Number): is a secret code that only you should know that grants access to the money in your account at ATMs and merchants Pros: Convenient, Allows you to carry less cash Cons: Can easily lose track of account balance, Opens checking account up to fraud, Others can gain access to account if card is lost and/or if PIN is known

Checks Never have your Social Security Number, Driver’s License Number, or Phone Number printed on your checks Many checks are now processed electronically Date Payee Name Amount in numbers Amount written in words Memo (optional) Payer Signature

Deposit Slips Available in the back of your checkbook or at the bank, used for making deposits at your bank

Direct Deposit Automatic deposit of wages into a consumer’s bank account Convenient and safer than paper check deposits

Fees Checking Fee – fee for having a checking account open Some banks offer free checking with direct deposit or certain minimum balances Minimum Balance Fee – fee for failing to keep a certain minimum balance in your checking account ATM Fee– fee charged for using another bank’s ATM NSF Fee – non-sufficient funds (bounced check) – fee for over withdrawing on your account around $35

Other Bank Policies and Services Automatic Withdrawals – bill payments are made automatically Best for fixed payments Overdraft Protection *See next slide.

Overdraft Protection Overdraft “Protection”: Bank will cover payment over the amount you have in your bank account Like a short-term loan from the bank to cover a purchase Expensive fees to cover overdrafting Overdraft Line of Credit: Purchase is covered by a line of credit. You must pay high interest No overdraft protection: Your debit card will be declined

Any Questions?