1. Financial Services: Savings Plans and Payment Accounts
Chapter 05
Financial Services: Savings Plans and Payment Accounts
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
5-1

2. Chapter 5 Learning Objectives
Analyze factors that affect selection and use of financial services
Compare the types of financial institutions
Compare the costs and benefits of various savings plans
Identify the factors used to evaluate different savings plans
Compare the costs and benefits of different types of payment accounts
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3. A Cash Management Strategy
Objective 1: Analyze factors that affect selection and use of financial services
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
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4. A Cash Management Strategy
MEETING DAILY MONEY NEEDS Cash, check, credit card, and debit cards are the most common payment choices
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5. 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
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6. A Cash Management Strategy (continued)
Common mistakes in managing cash include…(continued)
Using savings or borrowing to pay for current expenses
Failing to put unneeded funds in an interest-earning savings account or investment plan
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7. 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
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8. 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
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9. A Cash Management Strategy (continued)
Other types of financial services (continued)
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
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10. 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
notification regarding due dates
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11. A Cash Management Strategy (continued)
ONLINE BANKING
Concerns
Privacy and security
Costly ATM fees
Difficulty depositing checks and cash
Overspending potential
Online scams; phishing and scams
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12. 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
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13. 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.
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14. Financial Institutions
Objective 2: Compare the types of 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
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15. Financial Institutions
Objective 2: Compare the types of financial institutions
DEPOSIT INSTITUTIONS (continued)
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
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16. 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
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17. Financial Institutions (continued)
OTHER FINANCIAL INSTITUTIONS
Finance companies
Make short and medium term loans to consumers, but at higher rates
Mortgage companies
Provide loans to customers so they can purchase homes )
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18. Financial Institutions (continued)
OTHER FINANCIAL INSTITUTIONS
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 )
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19. 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.
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20. Savings Plans
Objective 3: Compare the costs and benefits of various savings plans
REGULAR SAVINGS ACCOUNTS
Usually involve a low or no minimum balance
Credit unions call them share accounts
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21. Savings Plans 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
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22. 5-22

23. Evaluating Savings Plans
Objective 4: Identify the factors used to evaluate different 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
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24. Evaluating Savings Plans (continued)
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)
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25. 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
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26. Evaluating Savings Plans (continued)
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
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27. 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
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.
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28. 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
= ( ) 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%.
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29. Payment Methods
Objective 5: Compare the costs and benefits of different types of payment accounts
ELECTRONIC PAYMENTS
Debit Cards
Online Payments –most credit cards now offer this service
Stored-value cards
Smart Cards
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30. Payment Methods (continued)
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
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31. Payment Methods (continued)
EVALUATING CHECKING ACCOUNTS
Need to be evaluated based on :
Restrictions
Fees and charges
Interest rate and computation method
Special services, such as overdraft protection
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32. Payment Methods (continued)
MANAGING YOUR CHECKING ACCOUNT
Opening a Checking Account
Individual or joint account
Making Deposits
Deposit ticket
Endorsement
Blank endorsement
Restrictive endorsement
Special endorsement
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33. Payment Methods (continued)
Writing Checks
Record the date
Write the name
Record the amount
Write the amount in words
Sign the check
Note the reason for payment
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34. Payment Methods (continued)
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
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35. 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
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36. Payment Methods (continued)
OTHER PAYMENT METHODS
Money order
Purchase at financial institution, post office, store
Traveler’s check
Sign each check twice
Electronic traveler’s checks - prepaid travel card
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