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Chapter 05
Financial Services: Savings Plans and Payment Accounts
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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…
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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
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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.
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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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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.
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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.
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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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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
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For deposit
only
John Smith
Restrictive Endorsement
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Pay to the
order of
Wyatt Jones
John Smith
Special Endorsement
Allows you to transfer a check to someone else
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Bank Deposit Slip ExampleBank Deposit Slip Example
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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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Sample Check
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If the two amounts do not match, which one does the bank use?
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Name The Type of Endorsement
__________________ __________________
__________________
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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.
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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
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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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