Part 6—Managing Your Income

2. Part 6—Managing Your Income Chapter 26 Banking, Saving, and Investing

3. Chapter Objectives • Select the financial institutions and banking services that will best meet your financial needs. • Endorse, deposit, write, and cash checks correctly. • Balance a checkbook. • Describe the special types of checks that can be used in place of personal checks and cash. • Evaluate the basic types of savings plans. • Compare different types of investments.

4. Key Concepts • Commercial banks, savings banks, and credit unions provide financial services to consumers. • Online banking provides more electronic services for the consumer than any other form of banking. • Having a savings and checking account is a good method of establishing a credit rating and saving money. • Investments involve some degree of risk so you need to be sure to investigate before you invest.

5. Types of Financial Institutions • Commercial banks: • Offer checking and savings accounts, U.S. Savings Bonds, loans, and safe-deposit boxes. • Deposits are insured by the Federal Deposit Insurance Corporation (FDIC). • Savings banks: • Offer savings plans for investors, mortgage loans, and checking accounts. • Credit unions: • Offer members loans, savings accounts, and checking accounts. • Deposits are insured by the National Credit Union Association (NCUA).

6. Choosing a Financial Institution • Factors to consider: • Location. • Hours of operation. • Availability of online banking options. • Safety of the financial institution. • Service fees. • Services offered.

7. Electronic Banking • Electronic banking services include: • Online banking. • Electronic funds transfer. • Banking by phone. • Automated teller machines. • Debit cards.

8. Online Banking • Online banking: The use of a computer to manage finances through an Internet connection. • Online banking offers more electronic services than traditional banking. • Allows you to make transactions 24 hours per day.

9. Electronic Funds Transfer • Electronic funds transfer (EFT): The automatic transfer of funds to and from a person’s bank accounts electronically. • Direct deposit – with authorization, your paycheck is deposited directly into your checking and/or savings accounts each payday. • Electronic bill payments – with authorization, the bank will electronically pay certain bills for you each month.

10. Banking by Phone • Allows customers to handle certain transactions through a push-button phone. • Pay bills. • Transfer funds. • Check on the balance in an account. • Be sure to record these transfers as they occur so you have an up-to-date record and do not overdraw your account.

11. Automated Teller Machines • Automated teller machines (ATMs) are remote computer terminals that customers use to make financial transactions. • ATMs are positioned in convenient locations, such as shopping centers, office buildings, and airports. • You will need an ATM card and a PIN to use an ATM.

12. Debit Cards • Debit card: A card that allows the immediate withdrawal of funds from a checking account without writing a check. • Can be used at ATMs to withdraw money. continued

13. Debit Cards • Advantages of debit cards: • They help you avoid carrying lots of cash. • When you use them you do not have to give the store personal information. • They prevent you from running up big balances and interest charges on credit cards. • They provide you with a detailed receipt of every purchase. • They are easier to use than checks when you are out of town. continued

14. Debit Cards • Disadvantages of debit cards: • The money you spend is automatically deducted from your account. • Without accurate records, you may overdraw your account. • You might be tempted to buy something you do not need. • They can be used by another person if they are lost or stolen. continued

15. Debit Cards • Smart card: An advanced form of debit card with an embedded computer chip to track certain purchasing information. • Cash card: A prepaid type of debit card, also called a stored-value card.

16. Checking Accounts • Checking accounts provide: • A safe place to keep cash. • An easy way to withdraw cash. • A convenient way to make purchases and pay for them by mail. • A detailed record of spending and receipts of payment. • A method of establishing a credit rating.

17. Types of Accounts • A basic checking account allows you to deposit money and write checks. • Express checking is for people who use online banking, banking by phone, or ATMs to do all their banking. • An interest-bearing checking account allows you to earn interest and write checks on the same account. It is a savings and checking account all in one. • At credit unions, these accounts are called share drafts. • In commercial and savings banks, they are called a negotiable order of withdrawal (NOW) account.

18. Opening a Checking Account • To open a checking account, talk to the person in charge of new accounts, fill out a signature card, and make a deposit. • You will get a checkbook with personalized checks and a register after you open your account.

19. Filling out a deposit slip: Write in the date. Enter amount of deposit and record the total. Enter the amount of cash you want to receive, if any. Subtract the amount of cash from the total. Record that amount as the total deposit. Making Deposits

20. Endorsing Checks • Endorse: Signing one’s name on the back of the check along the left end within the area indicated. • Blank endorsement – requires only the payee’s signature. • A check with a blank endorsement can be cashed by anyone. • Restrictive endorsement – payee’s signature plus a statement indicating what to do with the check, such as “For deposit only” or “Pay to the order of.”

21. Name and address of person(s) authorized to use this check blank Bank’s identification number Check number Name and address of bank Account number Check routing symbol Bank’s identification number Writing Checks continued

22. Writing Checks • When you write a check, fill in the following information: • Date. • Name of the payee. • Amount of the check in numbers. • Amount of the check in words. • Purpose of the check. • Your signature. continued

23. Payee’s name Date Amount in numbers written close to the dollar sign Signature that matches your bank signature card Reason for writing the check Amount in words written as far to the left as possible and a line drawn through remaining space Writing Checks

24. Recording Changes to Your Account • Every time funds enter or leave your account you need to update your register. • If you do not know how much you have in your account, you run the risk of overdrawing. • You will be charged a fee for every overdraft.

25. Cashing Checks • Two forms of identification (ID) are usually necessary to cash checks. • When you are cashing a check, endorse it in front of the teller. • If you are cashing a two-party check, you may be asked to verify the other person’s signature as well as your own.

26. Balancing a Checkbook • Balancing your checkbook involves comparing your monthly bank statement to your register. • Be sure to enter any service charges or interest earned in your register. • Canceled check: A check that has been processed/paid by the bank.

27. Computerized Personal Financial Management • You can buy software that will help you manage your finances. • These programs help you keep track of your checking and savings accounts, investments, credit cards, and loans.

28. Special Types of Checks • Traveler’s check: A convenient type of check used by travelers that can be replaced if lost or stolen. • Cashier’s check: A check drawn on a bank’s own funds and signed by a bank officer. • Certified check: A personal check with a bank’s guarantee that the check will be paid. • Money order: An order for a specific amount of money payable to a specific payee.

29. Safe-Deposit Boxes • You can rent a safe-deposit box at a bank or other financial institution to protect your valuables. • When you use the box you have to sign your name, show ID, and give your key to the attendant.

30. Savings Accounts at Financial Institutions • You may want to put part of your money into some type of savings rather than keeping all of it in your checking account. • Saving money at a financial institution gives you a safe place to keep your money, pays interest, and can help you establish a good credit rating. continued

31. Savings Accounts at Financial Institutions • Types of savings programs: • Regular savings account. • Money market deposit account. • Certificate of deposit. • It is important to understand how interest is determined before choosing a savings plan.

32. Understanding Interest • Interest is the amount of money a financial institution pays you for the use of your money. • Two methods of calculating interest: • Simple interest: Interest is paid only on the money initially deposited in the account. • Compound interest: Interest paid on an initial deposit as well as on interest already earned. • Make sure you consider how often the interest is compounded, the amount of time you plan on investing, and whether you will make deposits or withdrawals.

33. Regular Savings Accounts • Only takes a few dollars to start and allows you to make deposits and withdrawals in varying amounts at any time. • Funds can be withdrawn at any time without a penalty fee. • This type of savings account pays the lowest rate of interest.

34. Money Market Deposit Accounts • Requires a minimum deposit, but pays a slightly higher interest rate than a regular savings account. • You can write checks, usually with restrictions, to make withdrawals from a money market account.

35. Certificates of Deposit • Certificate of deposit (CD): Money deposited for a set period of time that earns a set rate of interest. • Your rate of interest will be higher the longer you hold a CD. • If you cash in the certificate before the time period is over, you lose a significant amount of interest.

36. Investing Your Money • There are many investments that are safe and low risk that can yield higher returns than regular savings accounts. • Types of investments: • Securities. • Retirement accounts. • Real estate. continued

37. Investing Your Money • Inflation: A general increase in prices. • Consumer Price Index (CPI): A measure of the average change in prices for consumer goods and services over time. • CPI is used to provide a basis for calculating annual cost-of-living increases for many current and retired workers. • This adjustment to income gives consumers the same buying power from year to year, even though prices have risen.

38. Securities • Securities: Investments that represent either ownership or indebtedness. • Stock: A share in the ownership of a corporation. • Preferred stock: Stock that pays set dividends (profits) at set rates regardless of the amount of profits the company earns. • Common stock: Stock that pays dividends based on company earnings and economic conditions. • Bond: A certificate of debt or obligation issued by a corporation or a government. continued

39. Securities • Mutual fund: A company that collects money from many investors and invests it in securities. • Money market fund: A type of mutual fund that deals only in high-interest, short-term investments, such as government securities and certificates of deposit.

40. Retirement Accounts • 401(k) plan: Retirement savings plan offered through an employer. • Individual retirement account (IRA): A type of retirement savings plan for employed people. • Traditional IRA - you pay taxes on the money when it is withdrawn after retirement. • Roth IRA - the amount of money you contribute is taxed, but withdrawals and earnings are not if you follow all requirements. continued

41. Retirement Accounts • Keogh plan: A tax-deferred retirement plan for self-employed people or employees of unincorporated companies that do not have their own pension plans.

42. Real Estate • Real estate is an investment in land or buildings. • You may need a large amount of money to make the investment. • There is considerable risk in real estate, but it can yield big returns.

43. Making Investments • Investing tips: • Set an investment goal. Begin with a small investment and build from there. • Do not invest money you cannot afford to lose. Very few investments are completely safe from loss. • Thoroughly examine your investment plan first. Research the current outlook for the economy, and look for an investment that is expected to increase in value. • Find reliable professionals to help you make investments. Check their credentials and record of achievements.

44. Thinking Back • What is the correct way to endorse, deposit, write, and cash checks? • What are the types of special checks that can be used in place of personal checks and cash? • Explain the different types of savings plans and investments.