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

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  • 1. Chapter 5 Financial Services: Savings Plans and Payment Accounts McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  • 2. A Strategy for Managing Cash <ul><li>Cash, check, credit card or an ATM are the most common payment choices. </li></ul><ul><li>Common mistakes in managing cash include… </li></ul><ul><ul><li>Overspending from impulse buying and using credit cards. </li></ul></ul><ul><ul><li>Not having enough liquid assets (cash and checking account) to pay current bills. </li></ul></ul><ul><ul><li>Using savings or borrowing to pay for current expenses. </li></ul></ul><ul><ul><li>Failing to put unneeded funds in an interest-earning savings account or investment plan. </li></ul></ul>5-2
  • 3. Types of Financial Services <ul><li>Savings. </li></ul><ul><ul><li>Time deposits in savings, CD’s. </li></ul></ul><ul><li>Payment services. </li></ul><ul><ul><li>Checking accounts are called demand deposits. </li></ul></ul><ul><ul><li>Automatic payments. </li></ul></ul><ul><li>Borrowing for the short- or long-term. </li></ul><ul><li>Other financial services. </li></ul><ul><ul><li>Insurance, investment, real estate purchases, tax assistance, and financial planning are additional services you may use. </li></ul></ul>5-3
  • 4. Types of Financial Services <ul><li>Asset management account. </li></ul><ul><ul><li>Also called a cash management account. </li></ul></ul><ul><ul><li>Offered by brokers and financial institutions. </li></ul></ul><ul><ul><li>Provides a complete financial services program for a single fee and includes... </li></ul></ul><ul><ul><ul><li>A checking account and an ATM card </li></ul></ul></ul><ul><ul><ul><li>A credit card </li></ul></ul></ul><ul><ul><ul><li>Online banking </li></ul></ul></ul><ul><ul><ul><li>Line of credit </li></ul></ul></ul><ul><ul><ul><li>Access to a variety of investments </li></ul></ul></ul><ul><ul><ul><li>www.schwab.com or www.americanexpress.com . </li></ul></ul></ul>5-4 (continued)
  • 5. Electronic &amp; Online Banking <ul><li>Obtain cash; check account balances </li></ul><ul><li>Direct deposit of paychecks, government payments </li></ul><ul><li>Preauthorized payments for insurance, mortgage, utilities, and other bills </li></ul><ul><li>Online transfer of funds from one account to another </li></ul><ul><li>Debit card retail purchases </li></ul>5-5
  • 6. Opportunity Costs of Financial Services <ul><li>Higher rate of return may be obtained at the cost of lower liquidity. </li></ul><ul><li>Convenience of a 24-hour ATM should be considered against service fees. </li></ul><ul><li>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. </li></ul>5-6
  • 7. Changing Interest Rates and Decisions Related to Financial Services <ul><li>The prime rate is what banks charge large corporations. See www.federalreserve.gov . </li></ul><ul><li>When interest rates are rising... </li></ul><ul><ul><li>Use long-term loans to benefit from current low rates. </li></ul></ul><ul><ul><li>Select short-term savings instruments to take advantage of higher rates when they mature. </li></ul></ul><ul><li>When interest rates are falling... </li></ul><ul><ul><li>Use short-term loans to take advantage of lower rates when you refinance the loans. </li></ul></ul><ul><ul><li>Select long-term savings instruments to “lock in” earnings at current high rates. </li></ul></ul>5-7
  • 8. Types of Financial Institutions <ul><li>Deposit type institutions </li></ul><ul><ul><li>Commercial banks are corporations that offer a full range of services including checking, savings, lending and other services. </li></ul></ul><ul><ul><li>Savings and loan associations have checking accounts, specialized savings plans, loans including mortgages, and other financial planning services. </li></ul></ul><ul><ul><li>Mutual savings banks specialize in savings accounts and mortgage loans. They are owned by their depositors. </li></ul></ul><ul><ul><li>Credit unions are user-owned, nonprofit and provide comprehensive financial services. </li></ul></ul>5-8
  • 9. Types of Financial Institutions <ul><li>Non-deposit type institutions. </li></ul><ul><ul><li>Life insurance companies offer insurance plus savings and investment features. Some offer financial planning and investing services. </li></ul></ul><ul><ul><li>Investment companies offer a money market fund on which you can write a limited number of checks. </li></ul></ul><ul><ul><li>Finance companies make short and medium term loans to consumers, but at higher rates. </li></ul></ul>(continued) 5-9
  • 10. Types of Financial Institutions <ul><li>Non-deposit type institutions </li></ul><ul><ul><li>Mortgage companies provide loans to customers so they can purchase homes. </li></ul></ul><ul><ul><li>Pawnshops make loans on possessions but charge higher fees than other financial institutions. Used for quick cash. </li></ul></ul><ul><ul><li>Check-cashing outlets charge 1-20% of the face value of a check. 2-3% is average. </li></ul></ul>(continued) 5-10
  • 11. Comparing Financial Institutions <ul><li>Basic concerns of a financial services customer. </li></ul><ul><ul><li>Where can I get the best return on my savings? </li></ul></ul><ul><ul><li>How can I minimize the cost of checking and payment services? </li></ul></ul><ul><ul><li>Will I be able to borrow money when I need it? </li></ul></ul>5-11
  • 12. When Choosing a Financial Institution <ul><li>Consider: </li></ul><ul><ul><li>Services offered </li></ul></ul><ul><ul><li>Interest rates </li></ul></ul><ul><ul><li>Fees and charges </li></ul></ul><ul><ul><li>Financial advice </li></ul></ul><ul><ul><li>Safety (deposit insurance) </li></ul></ul><ul><ul><li>Convenience </li></ul></ul><ul><ul><li>Locations </li></ul></ul><ul><ul><li>Online services </li></ul></ul><ul><ul><li>Special programs </li></ul></ul>5-12
  • 13. Types of Savings Plans <ul><li>Regular savings accounts </li></ul><ul><ul><li>Involve a low or no minimum balance </li></ul></ul><ul><ul><li>Credit unions call them “share accounts” </li></ul></ul><ul><li>Certificates of Deposit </li></ul><ul><ul><li>Require you to leave your money on deposit for a set time period, otherwise you incur penalties </li></ul></ul><ul><ul><ul><li>Several types to chose from </li></ul></ul></ul><ul><ul><ul><li>Consider all the earnings and all the costs </li></ul></ul></ul><ul><ul><ul><li>Check www.bankrate.com for current info </li></ul></ul></ul>5-13
  • 14. Types of Savings Plans <ul><li>U.S. savings bonds. </li></ul><ul><ul><li>Series EE sold at half of face value, with potential tax advantages if used to pay tuition and fees. </li></ul></ul><ul><ul><li>Series HH pays interest every six months. </li></ul></ul><ul><ul><li>I Bonds combine fixed rated and inflation rate. </li></ul></ul><ul><ul><li>See www.savingsbonds.gov for rates. </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Exempt from state and local income taxes. </li></ul></ul><ul><ul><li>You don’t have to pay federal income tax on interest until redemption. </li></ul></ul>(continued) 5-14
  • 15. Evaluating Savings Plans <ul><li>Rate of Return </li></ul><ul><ul><li>Percentage or yield is the increase in value due to interest. </li></ul></ul><ul><ul><ul><li>Example: a $100 savings account that earned $5 has a yield of 5% </li></ul></ul></ul><ul><ul><li>Frequent compounding means more interest earning interest </li></ul></ul><ul><li>Inflation - compare your APY with inflation rate. </li></ul><ul><li>Liquidity – early withdrawal penalties? </li></ul><ul><li>Safety - FDIC and NCUA. </li></ul><ul><ul><li>FDIC insures up to $250,000 (temporarily) per person per financial institution (see www.fdic.gov ). </li></ul></ul>5-15
  • 16. After Tax Rate of Return <ul><li>(1 - tax rate) x yield on savings </li></ul><ul><li>(1 - .28) x .06 </li></ul><ul><li>.72 x .06 </li></ul><ul><li>4.32% </li></ul><ul><li>A person earns 6% on savings, but has a 28% marginal tax rate. The after tax rate of return is 4.32%. </li></ul>5-16
  • 17. What is “Truth in Savings?” <ul><li>Requires Disclosure of... </li></ul><ul><ul><li>Fees on deposit account </li></ul></ul><ul><ul><li>The interest rate </li></ul></ul><ul><ul><li>The annual percentage yield </li></ul></ul><ul><ul><li>Other terms and conditions </li></ul></ul><ul><li>Sets formulas for computing the APY. </li></ul><ul><li>Requires disclosure of fees and APY on customer statements. </li></ul><ul><li>Establishes rules for advertising accounts. </li></ul><ul><li>Restricts method of calculating the balance on which interest is paid. </li></ul>5-17
  • 18. Payment Methods <ul><li>Debit Cards </li></ul><ul><li>Online Payments –most credit cards now offer this service </li></ul><ul><li>Stored-value cards </li></ul><ul><li>Smart Cards </li></ul>5-18
  • 19. Checking Accounts <ul><li>Types of checking accounts include... </li></ul><ul><ul><li>Regular – many have minimum balances </li></ul></ul><ul><ul><li>Activity account-fees on checks &amp; deposits </li></ul></ul><ul><ul><li>Interest-earning or NOW accounts, which usually require a minimum balance </li></ul></ul><ul><ul><li>Interest Earning Checking accounts are also known as Share draft accounts at credit unions </li></ul></ul>5-19
  • 20. Evaluating Checking Accounts <ul><li>Checking accounts need to be evaluated based on: </li></ul><ul><ul><li>Restrictions, such as a minimum balance. </li></ul></ul><ul><ul><li>Fees, and charges. </li></ul></ul><ul><ul><li>Interest rate and computation method. </li></ul></ul><ul><ul><li>Special services, such as overdraft protection. </li></ul></ul>5-20
  • 21. Other Payment Methods <ul><li>Certified check. </li></ul><ul><ul><li>Personal check with guaranteed payment. </li></ul></ul><ul><li>Cashier’s check. </li></ul><ul><ul><li>Check of a financial institution you get by paying the face amount plus a fee. </li></ul></ul><ul><li>Money order . </li></ul><ul><ul><li>Purchase at financial institution, post office, store. </li></ul></ul><ul><li>Traveler’s check. </li></ul><ul><ul><li>Sign each check twice. </li></ul></ul><ul><ul><li>Electronic traveler’s checks - prepaid travel card. </li></ul></ul>5-21
  • 22. Reconciliation <ul><li>Change the bank statement balance to reflect deposits in transit and outstanding checks. </li></ul><ul><li>Change the check register balance to reflect interest, bank fees, direct deposits, automatic payments, etc. </li></ul>5-22
  • 23. Types of Check Endorsements <ul><li>Blank – Just sign your name; the check is now bearer paper </li></ul><ul><li>Restrictive – For deposit only </li></ul><ul><li>Special – Endorse the check to someone else </li></ul>5-23
  • 24. Online Activity <ul><li>Go to www.bankrate.com and explore money market account rates. </li></ul><ul><li>Also look at rates for one year and five year CDs. If you had money to invest right now, which maturity of CD’s would you choose? </li></ul>5-24

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