Unit 3 Banking and Credit pg. 183

1. Unit 3 Banking and Credit pg. 183 Chapter 7 Banking

2. 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

3. 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

4. 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

5. Types of Financial Services • Main services that banks and financial institutions offer: Savings, payment services, borrowing, other

6. 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

7. 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

8. 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

9. Other Financial Services • Insurance Protection • Stocks, bonds, mutual funds • Tax assistance • Financial Planning

10. 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”

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. Problematic Financial Businesses • Often used by people without access to financial services • Usually high interest is involved

24. 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

25. 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

26. 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?

27. 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

28. Comparing Financial Institutions • Ask the questions found on pg. 200

29. Section 7.2 Savings Plans and Payment Methods

30. 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

31. Types of Savings Plans • Regular Savings Accounts, CD’s, Money Market Accounts, and Savings Bonds

32. 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

33. 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

34. 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)

35. 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

36. 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)

37. 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

38. Evaluating Savings Plans • Several Factors will influence your Savings Plan decision • Rate of Return, Inflation, Tax Considerations, Liquidity, Restrictions, and Fees

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. Types of Checking Accounts • Regular • Activity • Interest Earning

48. 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

49. 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

50. 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