Unit 3 Banking and Credit pg. 183

Chapter 7

Banking

How to Manage your Cash

• Now days, ATM’s and online banking are more common

• Choice of financial services will depend on daily cash needs and your savings goals

• How has banking changed and what do you see for banking in the future?

• See pg. 189 Figure 1

Daily Cash Needs

• Your day to day purchases will decide your cash patterns

• May carry currency, credit card, or go to ATM

• Pro’s and Con’s for each• Try not to dip into your savings• Have any extra money you have work for

you

Sources of Quick Cash

• No matter how well you plan, at times you may need more cash then you have available

• Two Options: Use savings or Borrow Money

• Careers that Count pg. 188

Types of Financial Services

• Main services that banks and financial institutions offer: Savings, payment services, borrowing, other

Savings

• Allow for safe storage of funds for future use (important for all)

• Time Deposit: Money that is going to be left in a financial institution for months or years.

• Ex: CD’s• Selection of savings plan based on: Interest

rates, liquidity, safety, convenience

Payment Services

• Ability to transfer money from your account to businesses or individuals for payments is a necessary part of day-to-day activity

• Most common payment service is checking account

• Demand Deposit: Money that you place in checking about, ready at any time

Borrowing

• Everyone will probably need credit at some time

• +If you need to borrow money you have many options

• Short term: Credit card or taking out a personal cash loan

• Long Term: Mortgage or auto loan

Other Financial Services

• Insurance Protection

• Stocks, bonds, mutual funds

• Tax assistance

• Financial Planning

Electronic Banking Services

• How have banks changed over the years?• Convenience • How many use an electronic banking service?

What are pro’s and cons?• Direct Deposit, Automatic Payments, ATMs,

Plastic Payments • Security is major factor with EBS• Online only banks (e*trade bank)• Figure 2 pg. 190 “services of online banking”

Direct Deposit

• Definition: Automatic deposit of net pay to an employees designated bank account.

• Don’t receive a paper check, just a stub

• Saves time, money, and effort and safe

• Taxes

Automatic Payments

• Authorization (permission) granted to allow businesses to automatically withdraw an amount of a monthly payment or bill from your bank account

• Pro’s/Cons?• Make sure you have enough money• Arrange around your paychecks if possible• Check statements often

Automated Teller Machines (ATMS)• Computer terminal that allows a withdrawal

of cash from an account along with other services

• Must have a debit card

• Debit Card: Cash card that allows you withdraw money or pay for purchases from your checking or savings account (may be a small fee)

• Contrast to a credit card

ATM Continued

• Personal Identification Number (PIN)

• Policies to follow with PIN?

• ATM Etiquette: Stand a few feet away from person using the machine, cover screen as your making transactions

ATM Fees

• Get a list of all fees in writing

• Use your banks ATM to avoid foreign ATM fees

• When away from home consider travels checks

Lost Debit Cards

• Notify immediately if lost or stolen• Most of the time your not responsible if fees

were incurred • Often 2 days is the time frame, after that

$500 responsibility, up to 60 days• After 60 days its all on you• Some banks now issue a new card instantly• Pg. 193 Document Detective

Plastic Payments

• Electronic Payments: Similar to direct deposit, electronically transfer money. (Text/Email)

• Online Payments: Usually don’t through a bank. Might charge a fee

• Stored-Value Cards: Gift cards, CTA, School lunch

• Smart Cards: Electronic wallet, contains variety of info on a microchip

Evaluating Financial Services• Find a balance between short term and long term

needs

• Also consider…..– Is higher interest rate on a CD worth giving up

liquidity?

– Is convenience more important than fees for an ATM?

– Checking account with no fees in exchange for keeping a minimum balance?

• Consider your time in making a decision

• Reevaluate from time to time

Types of Financial Institutions (safety)

• Federal Deposit Insurance Corporation: Came about because of the Great Depression

• Great Depression: Time of bank failure in the 1930’s, people lost all their money

• The FDIC was created (1933) to protect deposits in banks• Insures up to $100,00 per account (was $250,000)• Also administers the Savings Association Insurance Fund,

protects $100,000 as well• All federally chartered banks must participate in FDIC

programs

Deposit-Type Institutions

• 1) Commercial Banks: For-profit institution that offers a full range of financial services

• Includes checking, savings, and lending• Authorized to conduct business through a charter

or license that is granted by the federal or state government

• 2) Savings and Loan Association: Specialized in savings accounts and mortgage loans. Becoming more common to commercial banks. Require State or Federal Charter

Cont.

• (3) Mutual Savings Banks: Specialize in savings accounts and mortgage loans. Some offer personal and auto loans as well

• Interest rates may be lower then that of a commercial bank, sometimes pay higher interest rates as well

• (4) Credit Unions: A nonprofit financial institution that is owned by its members and organized for their benefit. Often set up through work or church group, their fees and rates are generally lower than commercial banks

Nondeposit-Type Institutions• Life insurance companies, investment companies,

finance companies, and mortgage companies• Life Insurance Companies: Provide financial security

for dependents. Also offer retirement services• Investment Companies: Combine your money with

other investors money in order to buy stocks, bonds and securities. Called mutual funds

• Finance Companies: Make loans to consumers and small businesses. Often provide loans to people with low income or few assets. Rates higher then most.

• Mortgage Companies: Specialize in loans for the purchase of a home

Problematic Financial Businesses

• Often used by people without access to financial services

• Usually high interest is involved

Pawnshop

• Makes loans based on the value of items

• Often used by low or moderate income families

• Usually smaller loans that must be repaid in 30-45 days

• Have option to sell or pawn

Check Cashing Outlets

• Most banks won’t cash a check unless you have an account with them

• Check cashing outlets will take 1%-20% of the check value

• Can be a big amount to a low income family• AKA: Currency exchange• Often offer other services: Tax filing, money

orders, private postal boxes, bill payment, transit cards

• http://www.cbsnews.com/video/watch/?id=6409098n

Payday Loans

• AKA: Cash advances, • Most organizations warn against using• Could charge as much as 780%• Most users of payday loans are in severe debt• Ex: You need to borrow $100. You write a

personal check for $115 and the lender will hold that check until the next pay period (usually a 14 day span). If you don’t have the money in 14 days the fee will roll over.

• Why are interest rates so high?

Rent to Own Centers

• Lease products to consumers who can own the item if they complete a certain number of monthly or weekly payments

• Can usually afford the payments but not the full price

• Quality of items has increased over the years

Comparing Financial Institutions

• Ask the questions found on pg. 200

Section 7.2

Savings Plans and Payment Methods

Applying for a Checking/Saving Account

• Needed info: Drivers license number, social security number, home address, phone number, mothers maiden name, and employment information

• Some age requirements

• Can apply at local branch or many times online

Types of Savings Plans

• Regular Savings Accounts, CD’s, Money Market Accounts, and Savings Bonds

Regular Savings Accounts• Commonly called passbook accounts

• Most useful when you plan to make frequent deposits and withdraws

• Require little or no minimum balance and allow you to withdraw funds quickly

• Lower interest rates as a return

• Statements usually mailed either quarterly (every 3 months) or sometimes monthly

• Credit unions usually refer to as share accounts

Certificates of Deposit

• Time deposit that requires you to leave your money in a financial institution for a set amount of time (term)

• Maturity date: Date which the money becomes available to you

• Higher interest rates, however must follow policies: (1) Leave money in for a month to five years or more (varies) (2) Pay penalty if you take out before maturity date (3) Deposit a certain minimum amount to buy a CD

CD Investment Strategies

• Find the best rate (put anywhere in the US)

• Consider the economy and current interest rates

• Never allow them to rollover

• Consider when the money is needed

• May want to make a CD portfolio (mature at different times)

Money Market Accounts

• Savings account in which the interest rate varies from month to month

• Rates change with the market

• Require higher minimum balance, usually $1000

• Pay penalty if go below that minimum balance

U.S. Savings Bonds• Face Value: Value a bond matures at• Series EE: $25-$5,000, limited to $15,000 ($30,000)

worth of bond purchases per year• Maturity Date: Date a bond reaches its face value,

depends on issue date, and the interest rate. For some, changes every 6 months. No official maturity date

• Penalty for cashing in early (5 years for 3 month penalty)

• 5 years doesn’t mean its full maturity• Can mature pass face value (matures for 30 years)

Taxes on Savings Bonds

• Series EE bonds are tax exempt (free of) local and state taxes

• Pay Federal taxes on the interest after you cash them in

• After maturing you can trade for a series HH bond and defer taxes

• Low/Middle income families who use money to pay for higher education pay no taxes

Evaluating Savings Plans

• Several Factors will influence your Savings Plan decision

• Rate of Return, Inflation, Tax Considerations, Liquidity, Restrictions, and Fees

Rate of Return

• Percentage of increase in the value of your savings from earned interest

• Divide total interest by the amount deposited into the account

• Ex: $2 interest / $50 deposit = 4% ROR

• See pg. 208

Compounding

• Process in which interest is earned on both the principal and on any previously earned interest

• Using Prior example: Your earned $2 interest for the first period, next period would be figured at $52 * Rate, and so on

• See pg. 207

• The more frequently your balance is compounded the greater your rate of return

Truth in Savings

• Financial institutions have to inform you of the terms and conditions of all savings accounts, including fees, interest rates, and the annual percentage yield (APY)

• Annual Percentage Yield: Amount of interest that a $100 deposit would earn after compounding for one year

• Pg. 207 APY is 4.07%• Higher the APY the better the return

Inflation

• Want an account that will change as the inflation rate changes

• Most accounts will change every few months

• Problem arises with CD’s because you are locked into for so long

Tax Considerations

• Taxes reduce the interest earned on savings

• Usually have to pay taxes on interest that you earn

• Tax exempt and tax deferred saving plans are offered

Liquidity

• Check to see if there is a penalty for withdrawing funds early (cash or lower interest rate)

• If you need to be able to withdraw at convenience, put into a low interest liquid account

• If saving for long term goals, liquidity not as important. Get the higher rate of return

Safety

• Most financial institutions are insured

• Protects against bank failure

• Either given your money or taken over by a new bank

• Protected by the FDIC, SAIF, and Credit Unions use NCUA

Restrictions and Fees

• Check for delays between the time interest is earned and when it is actually paid into your account

• Any fees for deposits or withdrawals ?

• Service charges for falling below minimum balance?

• Fee if you don’t use the account for a certain amount of time

Types of Checking Accounts

• Regular

• Activity

• Interest Earning

Regular Checking Accounts

• Usually don’t require a minimum balance

• If does require balance and fall below, usually $7 - $10 fee

• Fee sometimes waived if keep a certain balance in your savings account

Activity Accounts

• Useful if you write only a few checks each month and are unable to maintain a minimum balance

• Charged a fee for each check you write and sometimes a fee for each deposit + monthly service charge

Interest-Earning Checking Account

• Cross between checking and savings, pay a low interest rate if you maintain a minimum balance

• If you don’t maintain the min. balance may be charged a fee and given no interest

Evaluating Checking Accounts• Restrictions: Most common is the min. balance, # of

transactions allowed, # of checks allowed per month• Fees and Charges: May pay monthly service charge,

check printing fees, overdraft and stop-payment orders, annual fee (debit card)

• Interest: Which is best for you?• Special Services: ATM, online/telephone, reduction of

paper (microfilm checks and statements)• Overdraft protection: Automatic loan if you overdraft

your account or may be taken from your savings• Check Clearing for the 21st Century Act (check 21):

Took place in 2004 allows banks to transmit electronic images of checks after cleared instead of paper checks

Opening a Checking Account

• Decide if you want individual or joint account

• Signature Card

Writing Checks• Write date, number of the check, the name of the party

who the check is being wrote to, and the exact amount in your check register

• Record all checks you write, deposits, ATM withdrawals, debit charges, interest earned, fees in check register

• See figure pg. 212 and • See list pg.212 and Register pg. 211• If you make a mistake: If minor, correct and initial. If

major write a new check, tear up old check and write void in register

• Stop-payment order: Used when check is lost or need to stop the payment of a check. Charge is $10-$20

Making Deposits

• Fill out a deposit ticket

• Usually space for 4-5 checks and any cash you are depositing

• Have to endorse each check

• Blank, Restrictive, Special (see next slide)

• See pg. 213 for tips on endorsing

Check Clearing

• Ensures that the money you deposited in the account is available for withdrawal

• Bank holds until it knows you have enough money in your account

• By law: Local banks can’t hold more then 2 days. Non-local banks, no more then 5 days

Maintaining a Checking Account• Each month your bank sends a statement that

shows activity for the month• See lists pg. 214• Balance on the statement rarely matches current

balance, why?• Bank Reconciliation: Report that accounts for

the differences between the bank statement and your checkbook “balancing your checkbook”

• See pg. 215

Other Payment Methods

• Certified Check, Money Order, Travelers Check, Cashiers Check