4 Savings and Payment Services

1. 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

2. 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

3. 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

4. Electronic and Online Banking Services Traditional banks  most offer online services Web-only banks (e.g., E*Trade Bank, ING Direct) Services Provided: • 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 4-4

5. Pros and Cons of Online Banking 4-5

6. Interest Rates & Financial Decisions Be aware of current trends and future prospects for interest rates 4-6

7. 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

8. Objective 2Compare the Types of Financial Institutions Basic questions to ask before choosing a financialinstitution: • Where can I get the best return on my savings? • How can I minimize costs for financial services? • 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? How did YOU choose your bank or credit union? 4-8

9. 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

10. Comparing Financial Institutions 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 4-10

11. Non-Deposit Financial Institutions • 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 4-11

12. Comparing Financial Institutions 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) 4-12

13. Comparing Financial Institutions 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 4-13

14. 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

15. 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 currentinterest 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

16. 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 • Seewww.savingsbonds.govfor rates 4-16

17. Evaluating Savings Plans Rate of Return or Yield • Percentage increase in value due to interest • Compounding frequency increases return (notice over time) Compounding- Earning interest on previously-earned interest 4-17

18. Evaluating Savings Plans “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? 4-18

19. 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

20. 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

21. 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

22. Managing a Checking Account Writing Checks • Record the date • Write the name of the person/organization receiving the check • Record the amount of the check in figures • Write the amount of check in words • Sign the check • Note the reason for the payment (memo) 4-22

23. Managing a Checking Account Bank Reconciliation • Compare written checks with those reported paid • Subtract the total of all checks written but not yet cleared • Determine deposits not on the statement; • Add the amount to the statement balance • Subtract fees or charges and ATM withdrawals from the checkbook balance • Add any interest to your checkbook balance What should you do if the balances don’t match? 4-23

24. 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