Chapter 05

Financial Services: Savings Plans and Payment Accounts

5-1

A Cash Management Strategy

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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A Cash Management StrategyMEETING DAILY MONEY NEEDS

Cash, check, credit card, and debit cards are the most common payment choices

Cash = Currency

No matter how carefully you manage your money, there may be times when you will need more cash than you currently have available. So you have two options:

1. Liquidate Savings

2. Borrow

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Uses a “debit card” activates ATM transaction and is linked to a bank

account

ATM convenience can be expensive…FEES!!!

Lost or stolen debit card: Notify within 2 days liability is $50 After that it could be $500 up to 60 days Beyond that is unlimited But some card issuers may treat it like a credit card

with a $50 maximum

ATM (Automatic Teller Machines):

Watch Video on how an ATM works…

A Cash Management Strategy (continued)

Common mistakes in managing cash include…

1.Overspending from impulse buying and using credit cards

2.Not having enough liquid assets (cash and checking account) to pay current bills

3.Using savings or borrowing to pay for current expenses

4.Failing to put unneeded funds in an interest-earning savings account or investment plan

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A Cash Management Strategy (continued)

TYPES OF FINANCIAL SERVICES:

SavingsTime deposits in savings, CD’s

Payment servicesChecking accounts are called demand depositsAutomatic 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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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,

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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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 E-mail notification regarding due dates

Concerns Privacy and security Costly ATM fees Difficulty depositing checks and cash Overspending potential Online scams; phishing and e-mail scams

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A Cash Management Strategy (continued)

OPPORTUNITY COSTS OF FINANCIAL SERVICES

Higher rate of return may be obtained at the costof 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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A Cash Management Strategy (continued)

FINANCIAL SERVICES AND ECONOMIC CONDITIONS

1. Changing interest rates, rising consumer prices and other economic factors also influence financial services

2. Be aware of current trends and future prospects for interest rates (Exhibit 5-3)

3. Read Wall Street Journal, business periodicals, such as BusinessWeek, and Forbes, and online resources.

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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

institutions5-11

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

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Financial Institutions (continued)

OTHER FINANCIAL INSTITUTIONSMortgage companies

Provide loans to customers so they can purchase homes

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 http://www.youtube.com/watch?NR=1&feature=endscreen&v=bh6Uq

G9nvQY http://afrodaddy.com/content/avoid-check-cashing-places-and-get-ba

nk-account http://www.youtube.com/watch?v=CYHcXjJGyfc

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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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FDIC: Federal Deposit Insurance Corporation

Insurance that banks purchase to protect deposits of customers against loss up to $250,000 per depositor -in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor.

FSLIC - Federal Savings and Loan Insurance Corporation.- Insures depositors of savings and loans up to $250,000.00 through 2013.

Look for sign in institution.

Savings PlansREGULAR SAVINGS ACCOUNTS

Usually 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 penaltiesSeveral types to chose fromConsider all the earnings and all the costs

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5-17

Evaluating 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

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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Evaluating Savings Plans (continued)

TRUTH IN SAVINGS

Requires Disclosure of...Fees on deposit accountThe interest rateThe annual percentage yieldOther 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

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Evaluating Savings Plans (continued)

LIQUIDITY Allows you to withdraw money on short notice without

penalty or fees

SAFETYFDIC insures up to $250,000 per person per financial

institution (see www.fdic.gov)

RESTRICTIONS AND FEESSeveral restrictions can affect the choice of a savings

programDelay 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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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

= (1 - .28) 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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Payment Methods

ELECTRONIC PAYMENTS

Debit Cards

Online Payments –most credit cards now offer this service

Stored-value cards

Smart Cards

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Checking AccountA banking service where you deposit money into an

account and checks (drafts) can be written to withdraw money from the account when needed.

Is known as a demand deposit, because you can demand portions of your deposited funds when you want.

Only the depositor (maker) can write checks on the account

Usually pay a fee for checking services unless you keep a minimum balance in your account.

A check is a negotiable instrument, because it promises to pay a sum on a certain date.

Checking Accounts

TYPES OF CHECKING ACCOUNTSRegular 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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Opening A Checking Account

When you open up new checking account, you will fill out a signature card.

A signature card provides the bank with important info and your official signature so they can verify checks you have written.

Checking Accounts

EVALUATING CHECKING ACCOUNTS

Need to be evaluated based on :

RestrictionsFees and charges Interest rate and computation methodSpecial services, such as overdraft protection

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Checking AccountsMANAGING YOUR CHECKING ACCOUNT

Opening a Checking Account Individual or joint account

Making Deposits Deposit ticket Endorsement

Blank endorsement Just sign the check

Restrictive endorsement For Deposit Only

Special endorsement Pay to the order of

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28

John Smith

Blank EndorsementShould only be used when you are depositing or

cashing a check, since a check can be cashed by anyone once it is signed

29

For deposit

only

John Smith

Restrictive Endorsement

30

Pay to the

order of

Wyatt Jones

John Smith

Special Endorsement

Allows you to transfer a check to someone else

31

Bank Deposit Slip ExampleBank Deposit Slip Example

10

Checking Accounts

Writing Checks

1.Record the date

2.Write the name

3.Record the amount

4.Write the amount in words

5.Sign the check

6.Note the reason for payment7.Record the check in your checkbook register

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33

Sample Check

35

If the two amounts do not match, which one does the bank use?

36

Name The Type of Endorsement

__________________ __________________

__________________

Checking Accounts

Reconciling your checking account

1.Used to compare the bank’s balance and your checkbook balance.

2.Reasons for differences:a. Interest earned

b. Checks that have not cleared

c. Deposits not yet received by bank 5-37

• Cancelled Checks – Checks that the bank has processed(cleared)• Can use them as a receipt of payment

• Outstanding Checks – Checks that you have written that the bank has not processed yet.

OverdraftA check that cannot be covered by the funds in your account.

When an overdraft occurs and the check is returned, the check has “bounced” (rubber checks)

You also get charged a fee for each NSF(non-sufficient funds) check that is processed.

When checks bounce, the bank notifies you in writing.

Checking Accounts

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

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