Banking Services: Savings Plans and Payment Accounts

1. CHAPTER5 Banking Services:Savings Plans and Payment Accounts Personal Finance 6e Kapoor Dlabay Hughes 5-1

2. A Strategy for Managing Cash • Cash, check, credit card or an ATM are the most common payment choices. • Common mistakes in managing cash include… • Overspending as a result of impulse buying and using credit cards. • Not having enough liquid assets 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. 5-2

3. Types of Financial Services • Savings. • Time deposits in savings and certificates of deposit. • Payment services. • Checking accounts commonly 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. 5-3

4. Types of Financial Services (continued) • Asset management account. • Also called a cash management account. • Offered by brokers and financial institutions. • Provides a complete financial services program for a single fee and includes... • A minimum balance of $5,000 or more. • A checking account and an ATM card. • All-purpose credit cards. • A line of credit for quick cash loans. • Access to a variety of investments. • Online services & one statement for all transactions. • A sweep feature - earns money market rates. 5-4

5. Electronic Banking Services • Obtain cash. • Check account balances. • Transfer funds. • Point-of-sale payments. • Direct deposit of paychecks and other regular income. • Preauthorized payments. • Web “cyberbanking.” 5-5

6. Cyberbanking • Banking through the telephone, personal computer, and on-line services. • “Cyber” branches to do business on the Web. • Access 24 hours a day, 7 days a week. • Privacy and security are concerns. 5-6

7. Automated Teller Machines • A computer terminal that allows customers to conduct banking transactions. • Debit card or cash card activates transactions. • Linked to a bank account. Requires a PIN. • Liability if debit card is lost or stolen. • To reduce ATM fees you can... • Compare ATM fees before opening an account. • Use your own bank’s ATM when possible. • Withdraw larger cash amounts as needed. • Use personal checks, traveler’s checks, credit cards, and pre-paid cash cards when traveling. 5-7

8. Plastic Payments • Point-of-sale transactions. • Online card requires a PIN to authorize, and includes instant transfer from your account. • Offline card transactions are processed like credit card charges. • Stored-value cards. • For long distance, tolls, library fees. • Smart cards have a microchip for prepaid goods and services and for data, such as your medical history. • Electronic cash, ex. www.cybercash.com 5-8

9. Opportunity Costs of Financial Services • Higher rate of return may be obtained at the cost of lower liquidity. • Convenience of a 24-hour ATM must be weighed against service fees. • The “no fee” checking account that requires a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years. 5-9

10. Changing Interest Rates and Decisions Related to Financial Services The prime rate is what banks charge large corporations. See www.federalreserve.gov. • When interest rates are rising... • Use long-term loans to take advantage of current low rates. • Select short-term savings instruments to take advantage of higher rates when they mature. • When interest rates are falling... • If you refinance loans, use short-term loans. • Select long-term savings instruments to “lock in” earnings at current high rates. 5-10

11. Types of Financial Institutions • Deposit type institutions • Commercial banks are corporations that offer a full range of services including checking, savings and lending. • Savings and loan associations specialize in savings accounts and mortgage loans. • Mutual savings banks are like traditional savings and loan associations, but they are owned by their depositors. • Credit unions are user-owned and nonprofit. 5-11

12. Types of Financial Institutions (continued) • Non-deposit type institutions. • Life insurance companies offer insurance plus investment and retirement planning. • Investment companies offer a money market fund. You can write limited checks on your account. • Finance companies make personal loans. • Mortgage companies lend for home purchase. • Pawnshops make loans on possessions. • Check-cashing outlets change 2-3%. • Title and payday loan companies - high interest. • Cyberbanking via phone and on-line, such as bankamerica.com or wellsfargo.com. 5-12

13. Comparing Financial Institutions • Basic concerns of a financial services 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? • Cost of convenience and personal service. • Consider safety and interest rates. 5-13

14. Types of Savings Plans • Regular savings accounts. • Club accounts. • Certificates of deposit. • Several types to chose from. • Managing by looking at earnings and costs. • Interest earning checking accounts. • Money market accounts and funds. • Money market accounts are covered by the FDIC, but money market funds are not. • U.S. savings bonds (see www.savingsbonds.gov). 5-14

15. Evaluating Savings Plans • Rate of return or yield. • Percentage increase in value due to interest. • Compounding - interest on interest. • Inflation - compare return with inflation rate. • Liquidity. • Safety via FDIC and NCUA. • FDIC insures up to $100,000 per person per financial institution (see www.fdic.gov). • Restrictions and fees. • Tax considerations. 5-15

16. After Tax Rate of Return • (1 - tax rate) x yield on savings • (1 - .28) x .06 • .72 x .06 • 4.32% • So even if you are earning 6%, after you pay taxes on the interest you earn you are actually earning only 4.32% after you pay taxes on the interest. 5-16

17. What is “Truth in Savings?” • Requires Disclosure of... • Fees on deposit accounts. • The interest rate. • The annual percentage rate. • Interest must be compounded on the full principal amount in the account each day. • Sets formulas for computing the APY. • Establishes rules for advertising accounts. 5-17

18. Selecting Payment Methods • Ninety percent of business transactions are conducted by check, making it a necessity for most people. • Types of checking accounts include... • Regular. • Usually have a monthly service charge. • Activity account. • Charge a fee for each check written. • Package account - a variety of services for a set monthly fee. 5-18

19. Selecting Payment Methods (continued) • Interest-earning . • Usually require a minimum balance. • Sometimes called NOW accounts. • Share draft - interest earning checking account in a credit union. • Evaluating checking accounts. • Restrictions, such as a minimum balance. • Fees, which are increasing, and charges. • Interest. • Special services, such as home banking. • Overdraft protection. 5-19

20. 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 with ability to get local currency at an ATM. 5-20