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

Objective 1Identify 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

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

Electronic and Online Banking Services

• 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

Traditional banks most offer online services

Web-only banks (e.g., E*Trade Bank, ING Direct)

Services Provided:

4-4

Pros and Cons of Online Banking

Benefits ConcernsTime 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

E-mail notices of due dates Online scams, “phishing,” and email scams

4-5

Interest Rates & Financial Decisions

4-6Be aware of current trends and future prospects for interest rates

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

Objective 2Compare the Types of Financial

InstitutionsBasic questions to ask before choosing a financial institution:

1. Where can I get the best return on my savings?

2. How can I minimize costs for financial services?

3. 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?

4-8How did YOU choose your bank or credit union?

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

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

Comparing Financial Institutions

4-10

• 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

Non-Deposit Financial Institutions

4-11

Problematic Financial Businesses

• Pawnshops – Loans on tangible possessions (e.g., jewelry)

– High fees; 3% per month common – Short-term loans (e.g., 30 -45 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)

Comparing Financial Institutions

4-12

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

Comparing Financial Institutions

4-13

Objective 3Assess 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

Objective 3Assess 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

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 www.savingsbonds.gov for rates 4-16

Evaluating Savings Plans

Rate of Return or Yield– Percentage increase in value due to interest– Compounding frequency increases return (notice over time)

End of Year

Daily Monthly Quarterly Annually

1 10,832.78$ 10,830.00$ 10,824.32$ 10,800.00$ 2 11,734.91$ 11,728.88$ 11,716.59$ 11,664.00$ 3 12,712.17$ 12,702.37$ 12,682.41$ 12,597.12$ 4 13,770.82$ 13,756.66$ 13,727.85$ 13,604.89$ 5 14,917.62$ 14,898.46$ 14,859.46$ 14,693.28$

Annual Yield

8.33% 8.30% 8.24% 8.00%

Compounding Method$10,000 at 8 percent APY

4-17

Compounding- Earning interest on previously-earned interest

“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?

Evaluating Savings Plans

4-18

Objective 4Evaluate 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

Payment MethodsChecking 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

Other Payment Methods

• Certified Check– 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

Managing a 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 (memo)

4-22

Managing a Checking Account

Bank Reconciliation1. 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

4-23What should you do if the balances don’t match?

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