Chapter 5 Financial Services: Savings Plans and Payment Accounts

1. Chapter 5 Financial Services: Savings Plans and Payment Accounts

2. Chapter 5Learning Objectives • Analyze factors that affect selection and use of financial services • Compare the types of financial institutions • Compare the costs and benefits of various savings plans • Identify the factors used to evaluate different savings plans • Compare the costs and benefits of different types of payment accounts

3. A Cash Management Strategy Objective 1: Analyze factors that affect selection and use of financial services • Banks, saving and loan associations, credit unions, and other financial institutions provide a variety of financial services • Account aggregation: online banking -- deposits, investments, credit cards, loans, mortgages, rewards programs and IRAs MEETING DAILY MONEY NEEDS • Cash, check, credit card or an ATM are the most common payment choices

4. A Cash Management Strategy (continued) Common mistakes in managing cash include… • Overspending from impulse buying and using credit cards • Not having enough liquid assets (cash and checking account) to pay current bills • Using savings or borrowing to pay for current expenses • Failing to put unneeded funds in an interest-earning savings account or investment plan

5. A Cash Management Strategy (continued) TYPES OF FINANCIAL SERVICES • Savings • Time deposits in savings, CD’s • Payment services • Checking accounts are called demand deposits • Automatic 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

6. 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 and includes: • A checking account and an ATM card • A credit card • Online banking • Line of credit • Access to a variety of investments • www.schwab.com or www.americanexpress.com

7. A Cash Management Strategy (continued) ELECTRONIC AND ONLINE BANKING • Obtain cash; check account balances • Direct deposit of paychecks, government payments • Preauthorized payments for insurance, mortgage, utilities, and other bills • Online transfer of funds from one account to another • Debit card retail purchases

8. ELECTRONIC AND ONLINE BANKING

9. A Cash Management Strategy (continued) OPPORTUNITY COSTS OF FINANCIAL SERVICES • Higher rate of return may be obtained at the cost of 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

10. A Cash Management Strategy (continued) FINANCIAL SERVICES AND ECONOMIC CONDITIONS • Changing interest rates, rising consumer prices and other economic factors also influence financial services • Be aware of current trends and future prospects for interest rates (Exhibit 5-3) • Read Wall Street Journal, business section of daily newspapers, and business periodicals, such as BusinessWeek, and Forbes

11. Financial Institutions Objective 2: Compare the types of 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 institutions

12. 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 • Mortgage companies • Provide loans to customers so they can purchase homes

13. Financial Institutions (continued) Beware of high-cost financial services • 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 • Payday loans -- use personal check $115 to borrow $100 cash for 14 days -- 391% annual

14. Financial Institutions (continued) COMPARING FINANCIAL INSTITUTIONS • Basic concerns of a financial service customer • Where can I get the best return on my savings? • How can I minimize the cost of checking and payment services? • Will I be able to borrow money when I need it?

15. Financial Institutions (continued) When choosing a financial institution Consider: • Services offered • Interest rates • Fees and charges • Financial advice • Safety (deposit insurance) • Convenience • Locations • Online services • Special programs

16. Savings Plans Objective 3: Compare the costs and benefits of various savings plans REGULAR SAVINGS ACCOUNTS • Called passbook accounts, 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 penalties • Several types (rising-rate, indexed, callable, global, promotional) • Consider all the earnings and all the costs

17. Savings Plans(continued) MONEYMARKET ACCOUNTS AND FUNDS • Money market accounts are covered by the FDIC, but money market funds are not U.S. SAVINGS BONDS • Series EE sold at half of face value, with potential tax advantages -- deductible if used to pay tuition and fees -- Exempt from state and local income taxes -- You don’t have to pay federal income tax on interest until redemption • Series HH are current-income bonds that pay interest every six months • I Bonds combine fixed rate and inflation rate • See www.savingsbonds.gov for rates

18. Evaluating Savings Plans Objective 4: Identify the factors used to evaluate different savings plans RATE OF RETURN • Percentage or yield is the increase in value due to interest • Example: a $500 savings account that earned $25 has a yield of 5 percent COMPOUNDING • Frequent compounding means more interest earning on interest

19. Evaluating Savings Plans

20. Evaluating Savings Plans (continued) TRUTH IN SAVINGS • Requires Disclosure of... • Fees on deposit account • The interest rate • The annual percentage yield (APY) • Other 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

21. After Tax Savings Rate of Return • (1 - tax rate) x yield on savings • (1 - .28) x .06 • .72 x .06 • 4.32% • A person earns 6% on savings, but has a 28% marginal tax rate. The after tax rate of return is 4.32%.

22. Evaluating Savings Plans (continued) LIQUIDITY • Allows you to withdraw money on short notice without penalty or fees SAFETY • FDIC insures up to $250,000 per person per financial institution (see www.fdic.gov) RESTRICTIONS AND FEES • Several restrictions can affect the choice of a savings program • Delay 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.

23. Payment Methods Objective 5: Compare the costs and benefits of different types of payment accounts ELECTRONIC PAYMENTS • Debit Cards • Online Payments –most credit cards now offer this service • Stored-value cards • Smart Cards

24. Payment Methods(continued) TYPES OF CHECKING ACCOUNTS • Regular 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

25. Payment Methods(continued) EVALUATING CHECKING ACCOUNTS • Checking accounts need to be evaluated based on : • Restrictions • Fees and charges • Interest rate and computation method • Special services, such as overdraft protection

26. Payment Methods(continued) MANAGING YOUR CHECKING ACCOUNT • Opening a Checking Account • Individual or joint account • Making Deposits • Deposit ticket • Endorsement • Blank endorsement • Restrictive endorsement • Special endorsement

27. Payment Methods(continued) • Writing Checks • Record the date • Write the name • Record the amount • Write the amount in words • Sign the check • Note the reason for payment

28. 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

29. Online Activity • Go to www.bankrate.com and explore money market account rates • Also, look at rates for one year and five year CDs. If you had money to invest right now, which maturity of CDs would you choose?