1. 4 Savings and Payment Services
Meeting Daily Money Needs
Routine spending activities require a cash management plan
Payment options: cash, check, credit cards, and debit cards
Common Mistakes:
Overspending
Insufficient liquid assets
Using savings or borrowing to pay for current expenses
Failing to put unneeded funds in an interest bearing or investment account
4-1

2. Objective 1 Identify Commonly Used Financial Services
Meeting Daily Money Needs
Sources of Quick Cash:
Liquidate savings
Savings account CD
Mutual fund
Borrow
Credit card advance
Personal loan
Both options reduce net worth
4-2

3. Types of Financial Services
Savings
Time deposits
Savings accounts and certificates of deposit
Payment services
Checking accounts = demand deposits
Automatic payments
Borrowing for the short- or long-term
Other financial services
Insurance, investments, real estate purchases, tax assistance, financial planning, and asset management (cash management) accounts
4-3

4. Electronic and Online Banking Services
Traditional banks  most offer online services
Web-only banks (e.g., E*Trade Bank, ING Direct)
Services Provided:
Direct deposit
Paychecks and other regular income
Automatic Payments and Fund Transfers
Recurring payments such as for utilities
Remember to deduct them from your check register
ATM Access
Obtain cash, check account balances, and transfer funds
Check out the fees! (use own bank ATM; larger sums)
Debit Card
Deducts money directly and immediately out of your checking account (no “float” time)
Lost card liability $50 (2 days) to $500 (up to 60 days); unlimited liability after 60 days
4-4

5. Pros and Cons of Online Banking
Benefits
Concerns
Time and money savings
Potential privacy and security violations
Convenience for transactions, comparing rates
ATM fees can become costly
No paper trail for identity thieves
Difficulty depositing cash, checks
Transfer access for loans, investments
Overspending due to easy access
notices of due dates
Online scams, “phishing,” and scams
4-5

6. Interest Rates & Financial Decisions
Be aware of current trends and future prospects for interest rates
4-6

7. Four Tools of Monetary (Cash) Asset Management
A low-cost, interest-earning checking account from which to pay monthly living expenses.
A small savings account in a local financial institution for irregular expenses and emergency cash (3-6 months of expenses- or more- is recommended)
When income begins to exceed expenses regularly, open a money market account.
Your monetary asset management plan is complete when you transfer some funds into longer-term savings instruments.
Examples: CDs, U.S. Savings Bonds

8. Objective 2 Compare the Types of Financial Institutions
Basic questions to ask before choosing a financial institution:
Where can I get the best return on my savings?
How can I minimize costs for financial services?
Will I be able to borrow money if I need it?
Determine the financial services you need before choosing a financial institution
Compare fees and convenience
Consider the safety (FDIC insurance) and rates for deposits and loans at different institutions
Other factors?
How did YOU choose your bank or credit union?
4-8

9. Comparing Financial Institutions
Deposit Institutions
Commercial Banks
Organized as corporations (answer to stockholders)
Offer a full range of services including checking, savings, lending and other services (e.g., trust management)
Savings and Loan Associations
Checking accounts, specialized savings plans, loans, and financial planning and investment services
4-9

10. Comparing Financial Institutions
Deposit Institutions
Mutual Savings Banks
Specialize in savings accounts and mortgage loans (mostly in northeastern U.S.)
Owned by their depositors, with profits going back to depositors by paying a higher rate on savings
Credit Unions
User-owned, nonprofit and provide comprehensive financial services
Lower fees and lower loan rates
4-10

11. Non-Deposit Financial Institutions
Life Insurance Companies
Investment Companies
Money Market Mutual Fund
Combination savings & investment; short-term securities
Not (normally) covered by FDIC (like bank MMDAs)
Brokerage Firms
Act as agent for buyers and sellers of financial products
Credit Card Companies
Specialize in short term loans
Finance Companies
Make short and medium term loans to consumers
Higher rates than most other lenders (use as a last resort)
Mortgage Companies
Provide home mortgage loans
4-11

12. Comparing Financial Institutions
Problematic Financial Businesses
Pawnshops
Loans on tangible possessions (e.g., jewelry)
High fees; 3% per month common
Short-term loans (e.g., days)
Used for quick cash (small dollar amounts)
Check-Cashing Outlets (Currency Exchanges)
Charge 1-20 % of check’s face value
1-3% fee is average
Many provide other services (e.g., money orders, bill paying, international remittances)
4-12

13. Comparing Financial Institutions
More Problematic Financial Businesses
Payday Loan Companies
A.k.a., “Cash advances,” “check advance loans,”
“postdated check loans,” “delayed deposit loans”
Very high interest rates (write $115 check to borrow $100 for 2 weeks; translates into 390% APR!)
Car Title Loans
High-cost short term loan secured with car title
Rent-to-Own Centers
Lease merchandise at high interest rates to low-income customers; small weekly payments add up
Often pay 3 to 4 times the cost of an item
4-13

14. Objective 3 Assess Various Types of Savings Plans
Regular Savings Accounts
A.k.a., Passbook savings and Statement accounts
Low minimum balance; easy withdrawal
FDIC Insured; fees and balance requirements vary
Low rate of return
Called “share accounts” at credit unions
Certificates of Deposit (CDs)
Required minimum deposit; required time on deposit
Penalties for early withdrawal
Take care when rolling over (check current interest rates)
Consider creating a “CD portfolio” (laddering)
4-14

15. Objective 3 Assess Various Types of Savings Plans
Interest-Earning Checking Accounts
Checking accounts paying low interest
Money Market Accounts and Funds
Floating interest rate (based on current interest rates)
Allows limited check writing
Higher minimum balance than regular savings
Money market accounts are covered by the FDIC, but money market funds are not (generally)
4-15

16. Types of Savings Plans U.S. Savings Bonds Series EE (Patriot Bonds)
Sold at half of face value
Face values $50 - $5,000
Fixed-rate interest compounded semiannually
Penalty if redeemed within 5 years
Continues earning interest for 30 years
Potential tax advantages if used to pay tuition
Series I Bonds (Inflation-Adjusted Bonds)
Earns a fixed rate plus an inflation rate
Twice-a-year inflation adjustment
Series HH
Current income bonds; no longer available
See for rates
4-16

17. Evaluating Savings Plans
Rate of Return or Yield
Percentage increase in value due to interest
Compounding frequency increases return (notice over time)
Compounding- Earning interest on previously-earned interest
4-17

18. Evaluating Savings Plans
“Truth in Savings Act”
Requires disclosure of:
Fees on deposit accounts; other terms and conditions
Interest rate paid on savings
Annual percentage yield (APY)
APY defined as the “total percent” based on annual interest and frequency of compounding
APY = Rate per period X # periods per year
“Total interest that would be received on a $100 deposit for a 365-day period, given an institution’s annual rate of simple interest and frequency of compounding”
APY must be in advertising and disclosures….WHY?
4-18

19. Objective 4 Evaluate Different Types of Payment Methods
Debit Card Transactions
Immediate account debit; DC usage > credit cards
Can use 2 ways: with a signature and PIN
Online Payments
PayPal, MyCheckFree (examples of third parties)
Stored-Value Cards
Prepaid cards for telephone, transit, tolls, etc.
Smart Cards
“Electronic wallets;” embedded data microchips (e.g., medical info)
4-19

20. Payment Methods Checking Accounts
Regular Checking Accounts (service charge; minimums)
Activity Accounts (charge a fee for each check written)
Interest-Earning Checking Accounts (called share draft accounts at credit unions)
Require a minimum balance
Evaluating checking accounts:
Restrictions, such as a minimum balance
Fees, which are increasing, and charges
Interest rate and computation method
Special services (e.g., overdraft protection)
Beware of “package” deals that include unneeded services; look for “relationship account” deals
4-20

21. Other Payment Methods Certified Check Cashier’s Check Money Order
Personal check with guaranteed payment
Shows that account has enough $; fee charged
Cashier’s Check
Check of a financial institution (backed by institution’s assets) you get by paying the face amount plus a fee
Money Order
Purchase at financial institution, post office, stores
Traveler’s Check
Sign check twice; becoming less common (fraud issues)
Electronic traveler’s checks - prepaid travel card with ability to get local currency at an ATM
4-21

22. Managing a Checking Account
Writing Checks
Record the date
Write the name of the person/organization receiving the check
Record the amount of the check in figures
Write the amount of check in words
Sign the check
Note the reason for the payment (memo)
4-22

23. Managing a Checking Account
Bank Reconciliation
Compare written checks with those reported paid
Subtract the total of all checks written but not yet cleared
Determine deposits not on the statement;
Add the amount to the statement balance
Subtract fees or charges and ATM withdrawals from the checkbook balance
Add any interest to your checkbook balance
What should you do if the balances don’t match?
4-23

24. Wrap Up Chapter Quiz Concept Check 4-1- Electronic Banking
Concept Check 4-2- Descriptions of Financial Institutions
Concept Check 4-3- Money Market Accounts and Funds; Benefits of U.S. Savings Bonds; Major Influences
Concept Check 4-4- Suggested Payment Methods