1. Chapter 4 Financial Services: Savings Plans and Payment Accounts Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 4-2 Savings Plans and Payment Accounts Chapter Learning Objectives LO4.1 Identify commonly used financial services LO4.2 Compare the types of financial institutions LO4.3 Assess various types of savings plans LO4.4 Evaluate different types of payment methods Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3. 4-3 Learning Objective LO4.1 Identify Commonly Used Financial Services Managing Daily Money Needs Common mistakes: ◦ Overspending (impulse buying, using credit) ◦ Insufficient liquid assets ◦ Using savings or borrowing to pay for current expenses ◦ Failing to put unneeded funds in an interest bearing savings or investment account Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4. 4-4 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5. 4-5 Types of Financial Services Savings ◦ Time deposits ◦ Savings and certificates of deposit Payment services ◦ Checking accounts = demand deposits ◦ Automatic payments Borrowing for the short- or long-term Other financial services ◦ Insurance, investment, real estate purchases, tax assistance, trusts, and financial planning Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

6. 4-6 Types of Financial Services Asset management account ◦ Also called a cash management account ◦ Offered by investment companies and others to provide a complete line of financial services program, which include:  Checking account and ATM card  Credit card  Online banking  Line of credit for quick cash loans  Access to a variety of investments Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

7. 4-7 Online Banking Direct deposit ◦ Paychecks and other regular income Automatic payments transfer funds ◦ Recurring payments such as for utilities ATM access ◦ Obtain cash, check account balances, and transfer funds ◦ Check out the fees Debit card ◦ Deducts money directly and immediately out of your account ◦ Lost card liability $50-$500 Traditional and web-only banks Services provided: Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8. 4-8 Mobile Banking Text banking Mobile web banking Banking apps Potential drawbacks: o Privacy o Security o Fees Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

9. 4-9 Online and Mobile Banking Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10. 4-10 Pros and Cons of Online Banking BenefitsConcerns Time and money savingsPotential privacy, 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 E-mail notices of due dates Online scams, “phishing,” and e-mail scams Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11. 4-11 Financial Services and Economic Conditions For successful financial planning, be aware of: ◦ Prime rate = rate banks charge large corporations ◦ Consumer interest rates ◦ Rising consumer prices ◦ Information sources: www.federalreserve.gov www.wsj.com http://finance.yahoo.com Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12. 4-12 Interest Rates & Financial Decisions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13. 4-13 Learning Objective LO4.2 Compare the Types of Financial Institutions Basic questions to ask before choosing a financial institution 1. Where can I get the best return on my savings? 2. How can I minimize my costs for financial services? 3. Will I be able to borrow money if I need it? Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14. 4-14 Learning Objective LO4.2 Comparing Financial Institutions Determine the financial services you need before choosing a financial institution Compare fees and convenience Consider the safety and rates for deposits and loans at different institutions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

15. 4-15 Five Steps to Selecting a Financial Institution 1. List features most important to you 2. Rank the top 3-4 most important features 3. List local, national, and online institutions 4. Conduct research: Talk with friends Online research Personal visit 5. Balance your needs with information collected Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

16. 4-16 Financial Services Research Services offered Fees disclosure Minimum balance Savings rate sheet Sample loan application Sufficient deposit insurance Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17. 4-17 Types of Financial Institutions Deposit Institutions ◦ Commercial banks  Organized as corporations  Offer a full range of services including checking, savings, lending, and other services ◦ Savings and loan associations  Checking accounts, specialized savings plans, loans, and financial planning and investment services Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

18. 4-18 Deposit Institutions (continued) ◦ Mutual savings banks  Specialize in savings accounts and mortgage loans  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 Types of Financial Institutions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19. 4-19 Non-Deposit Institutions ◦ Life insurance companies  Insurance plus savings and investments  Some offer financial planning and investing services ◦ Investment companies  Mutual funds  Money market fund ◦ Combination savings and investment plan ◦ Not covered by FDIC Types of Financial Institutions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20. 4-20 Non-Deposit Institutions (cont’d) ◦ 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 ◦ Mortgage companies  Provide home mortgage loans Types of Financial Institutions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21. 4-21 Pawnshops ◦ Loans on possessions ◦ Higher fees; 3% per month common ◦ Used for quick cash Check-cashing outlets ◦ Charge 1-20 % of check’s face value ◦ 1-3% is average ◦ AKA: Currency exchange s Problematic Financial Businesses Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

22. 4-22 Payday loan companies ◦ Cash advances ◦ Check advance loans ◦ Postdated check loans ◦ Delayed deposit loans ◦ High interest rates Rent-to-Own Centers ◦ Lease merchandise at high interest rates to low-income customers Car Title Loans Problematic Financial Businesses Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

23. 4-23 Learning Objective LO4.3 Comparing Savings Plans Regular savings accounts ◦ Passbook savings ◦ Statement accounts ◦ Low minimum balance ◦ Easy withdrawal ◦ Insured ◦ Low rate of return ◦ Credit Union = share accounts Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24. 4-24 Certificates of Deposit Certificates of deposit ◦ Required minimum deposit ◦ Required time on deposit ◦ Penalties for early withdrawal ◦ Take care when rolling over ◦ Various CD types:  Rising-rate or bump-up  Liquid  Zero-coupon  Indexed  Callable  Promotional Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

25. 4-25 Liquid Accounts Interest earning checking accounts ◦ Checking accounts paying low interest Money market accounts and funds ◦ Floating interest rate ◦ Allows limited check writing ◦ Higher minimum balance ◦ Money market accounts are covered by the FDIC, but money market funds are not Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26. 4-26 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

27. 4-27 U.S. Savings Bonds Series HH – no longer sold ◦ Current income bonds ◦ Pays interest every six months ◦ Interest direct deposited and taxed as current income I bonds ◦ Earns a fixed rate plus an inflation rate ◦ Twice-a-year inflation adjustment See www.savingsbonds.gov for rateswww.savingsbonds.gov Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

28. 4-28 U.S. Savings Bonds Registration ◦ Single owner ◦ Co-owners with a primary owner ◦ With a beneficiary Treasury Direct ◦ Establish an account at www.treasurydirect.govwww.treasurydirect.gov ◦ 24/7 access to buy manage and redeem electronic bonds Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

29. 4-29 Evaluating Savings Plans Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

30. 4-30 Selecting a Savings Plan Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

31. 4-31 Evaluating Savings Plans Rate of return or yield ◦ Percentage increase in value due to interest ◦ Frequency of compounding increases return Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

32. 4-32 Requires disclosure of: ◦ Fees on deposit accounts ◦ Interest rate ◦ Annual percentage yield (APY)  APY defined as the “total percent”  Total percent is based on annual interest and frequency of compounding  APY = Rate per period × # periods per year “Truth in Savings Act” Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

33. 4-33 Evaluating Savings Plans Inflation ◦ Compare rate of return vs. inflation rate Taxes ◦ Reduces interest earned on savings Liquidity ◦ Quick availability of cash ◦ Without significant loss in value Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

34. 4-34 Evaluating Savings Plans Safety via FDIC and NCUA ◦ FDIC insured up to $250,000 per person per financial institution ◦ Up to $250,000 for certain retirement accounts ◦ www.fdic.gov www.fdic.gov Restrictions and fees ◦ Minimum balance ◦ Fee for additional transactions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

35. 4-35 Learning Objective LO4.4 Comparing Payment Methods Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

36. 4-36 P ayment Methods Electronic Payments Debit Card Transactions ◦ Immediate account debit Online Payments ◦ PayPal, MyCheckFree Stored-Value Cards ◦ Prepaid cards for telephone, transit, tolls, etc. Smart Cards ◦ “ Digital wallets” Peer-to-peer payments Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

37. 4-37 Credit vs. Debit Cards Use a Credit Card to… Delay payment Build a credit history Buy online Major purchases Earn rewards Use a Debit Card to … Limit spending to available funds Avoid future bills Avoid interest or annual fee Obtain better protection Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

38. 4-38 Payment Methods Checking Accounts Regular Checking Accounts ◦ Monthly service charge usual ◦ Minimum balance Activity Accounts ◦ Fee charged for each check written, and sometimes for deposits Interest-earning or share draft accounts (credit unions) ◦ Require a minimum balance Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

39. 4-39 Evaluating Checking and Payment Accounts Restrictions, such as a minimum balance Fees, which increase, and charges Interest rate and computation method Special services ◦ Overdraft protection Beware of “package” deals that include unneeded services Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

40. 4-40 Checking Account Selection Factors Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

41. 4-41 Other Payment Methods Certified check ◦ Personal check with guaranteed payment Cashier’s check ◦ Check from a financial institution; you pay 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 with ability to get local currency at an ATM Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

42. 4-42 Managing Your Checking Account Opening a Checking Account ◦ Individual vs. joint account Making Deposits ◦ 3 types of endorsements ◦ Blank endorsement ◦ Signature only  Restrictive endorsement ◦ “For deposit only”  Special endorsement ◦ “Pay to the order of” Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43. 4-43 Managing Your Checking Account Writing Checks 1. Record the date 2. Write the name of the person/organization receiving the check 3. Record the amount of the check in figures 4. Write the amount of check in words 5. Sign the check 6. Note the reason for the payment Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

44. 4-44 Managing Your Checking Account Bank Reconciliation 1. Compare written checks with those reported paid ◦ Subtract the total of all checks written but not yet cleared 2. Determine deposits not on the statement ◦ Add the amount to the statement balance 3. Subtract fees or charges and ATM withdrawals from the checkbook balance 4. Add any interest to your checkbook balance Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

45. 4-45 Example: Bank Reconciliation Will is balancing his checkbook. His online balance shows $1,250, and his spreadsheet (where he keeps a running total of his check register) shows $450. He has outstanding checks recorded on the spreadsheet that have not yet cleared, totaling $795.50. His online account shows interest of $0.50 and rewards credits of $4.00. Does his checkbook balance? Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

46. 4-46 Example: Bank Reconciliation First, subtract the uncleared checks from the online balance: $1250-795.50=$454.50 Now, add the interest and rewards balance to the spreadsheet total: $450+0.50+4.00=$454.50 Will’s checking account balances. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

47. 4-47 Chapter Summary Learning Objective LO4.1 Financial products such as savings plans, checking accounts, loans, trust services, and electronic banking are used for managing daily financial activities. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

48. 4-48 Chapter Summary Learning Objective LO4.2 Commercial banks, savings and loan associations, mutual savings banks, credit unions, life insurance companies, investment companies, finance companies, mortgage companies, pawn shops, and check-cashing outlets may be compared on the basis of: ◦ Services offered ◦ Rates and fees ◦ Safety ◦ Convenience ◦ Special programs available to customers Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

49. 4-49 Chapter Summary Learning Objective LO4.3 Commonly used savings plans include: Regular savings accounts Certificates of deposit Interest-earning checking accounts Money market accounts Money market funds U.S. savings bonds Evaluate savings plans on the basis of: Rate of return Inflation Tax considerations Liquidity Safety Restrictions Fees Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

50. 4-50 Chapter Summary Learning Objective LO4.4 Debit cards, online payment systems, and stored-value cards are increasing in use for payment activities. Regular checking accounts, activity accounts, and interest-earning checking accounts can be compared with regard to: ◦ Restrictions (such as a minimum balance) ◦ Fees and charges ◦ Interest ◦ Special services Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.