1. Chapter 5 Financial Services: Savings Plans and Payment Accounts

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

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 aggregation: online banking -- deposits, investments, credit cards, loans, mortgages, rewards programs and IRAs
MEETING DAILY MONEY NEEDS
Cash, check, credit card or an ATM are the most common payment choices

4. 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
Using savings or borrowing to pay for current expenses
Failing to put unneeded funds in an interest-earning savings account or investment plan

5. 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

6. 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
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 and includes:
A checking account and an ATM card
A credit card
Online banking
Line of credit
Access to a variety of investments or

7. A Cash Management Strategy (continued)
ELECTRONIC AND ONLINE BANKING
Obtain cash; check account balances
Direct deposit of paychecks, government payments
Preauthorized payments for insurance, mortgage, utilities, and other bills
Online transfer of funds from one account to another
Debit card retail purchases

8. ELECTRONIC AND ONLINE BANKING

9. 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

10. 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 section of daily newspapers, and business periodicals, such as BusinessWeek, and Forbes

11. 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
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

12. 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
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

13. Financial Institutions (continued)
Beware of high-cost financial services
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
Payday loans
-- use personal check $115 to borrow $100 cash for 14 days
% annual

14. Financial Institutions (continued)
COMPARING FINANCIAL INSTITUTIONS
Basic concerns of a financial service customer
Where can I get the best return on my savings?
How can I minimize the cost of checking and payment services?
Will I be able to borrow money when I need it?

15. Financial Institutions (continued)
When choosing a financial institution Consider:
Services offered
Interest rates
Fees and charges
Financial advice
Safety (deposit insurance)
Convenience
Locations
Online services
Special programs

16. Savings Plans
Objective 3: Compare the costs and benefits of various savings plans
REGULAR SAVINGS ACCOUNTS
Called passbook accounts, involve a low or no minimum balance
Credit unions call them share accounts
CERTIFICATES OF DEPOSITS
Require you to leave your money on deposit for a set time period, otherwise you incur penalties
Several types (rising-rate, indexed, callable, global, promotional)
Consider all the earnings and all the costs

17. Savings Plans (continued)
MONEYMARKET ACCOUNTS AND FUNDS
Money market accounts are covered by the FDIC, but money market funds are not
U.S. SAVINGS BONDS
Series EE sold at half of face value, with potential tax advantages
-- deductible if used to pay tuition and fees
-- Exempt from state and local income taxes
-- You don’t have to pay federal income tax on interest until redemption
Series HH are current-income bonds that pay interest every six months
I Bonds combine fixed rate and inflation rate
See for rates

18. 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 $500 savings account that earned $25 has a yield of 5 percent
COMPOUNDING
Frequent compounding means more interest earning on interest

19. Evaluating Savings Plans

20. Evaluating Savings Plans (continued)
TRUTH IN SAVINGS
Requires Disclosure of...
Fees on deposit account
The interest rate
The annual percentage yield (APY)
Other terms and conditions
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

21. After Tax Savings Rate of Return
(1 - tax rate) x yield on savings
( ) x .06
.72 x .06
4.32%
A person earns 6% on savings, but has a 28% marginal tax rate. The after tax rate of return is 4.32%.

22. 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.

23. 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

24. 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

25. Payment Methods (continued)
EVALUATING CHECKING ACCOUNTS
Checking accounts need to be evaluated based on :
Restrictions
Fees and charges
Interest rate and computation method
Special services, such as overdraft protection

26. 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

27. 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

28. 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
Money order
Purchase at financial institution, post office, store
Traveler’s check
Sign each check twice
Electronic traveler’s checks - prepaid travel card

29. Online Activity
Go to and explore money market account rates
Also, look at rates for one year and five year CDs. If you had money to invest right now, which maturity of CDs would you choose?