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

    • Chapter 5 Financial Services: Savings Plans and Payment Accounts McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    • 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 from impulse buying and using credit cards.
        • Not having enough liquid assets (cash and checking account) 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.
    • Types of Financial Services
      • Savings.
        • Time deposits in savings, CD’s.
      • Payment services.
        • Checking accounts are 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.
    • Types of Financial Services
      • 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 checking account and an ATM card
          • A credit card
          • Online banking
          • Line of credit
          • Access to a variety of investments
          • or .
      5-4 (continued)
    • Electronic & Online Banking
      • Obtain cash; check account balances
      • Direct deposit of paychecks, government payments
      • Preauthorized payments for insurance, mortgage, utilities, and other bills
      • Online transfer of funds from one account to another
      • Debit card retail purchases
    • Opportunity Costs of Financial Services
      • Higher rate of return may be obtained at the cost of lower liquidity.
      • Convenience of a 24-hour ATM should be considered against service fees.
      • 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.
    • Changing Interest Rates and Decisions Related to Financial Services
      • The prime rate is what banks charge large corporations. See .
      • When interest rates are rising...
        • Use long-term loans to benefit from current low rates.
        • Select short-term savings instruments to take advantage of higher rates when they mature.
      • When interest rates are falling...
        • Use short-term loans to take advantage of lower rates when you refinance the loans.
        • Select long-term savings instruments to “lock in” earnings at current high rates.
    • Types of Financial Institutions
      • Deposit type institutions
        • Commercial banks are corporations that offer a full range of services including checking, savings, lending and other services.
        • Savings and loan associations have checking accounts, specialized savings plans, loans including mortgages, and other financial planning services.
        • Mutual savings banks specialize in savings accounts and mortgage loans. They are owned by their depositors.
        • Credit unions are user-owned, nonprofit and provide comprehensive financial services.
    • Types of Financial Institutions
      • Non-deposit type institutions.
        • Life insurance companies offer insurance plus savings and investment features. Some offer financial planning and investing services.
        • Investment companies offer a money market fund on which you can write a limited number of checks.
        • Finance companies make short and medium term loans to consumers, but at higher rates.
      (continued) 5-9
    • Types of Financial Institutions
      • Non-deposit type institutions
        • Mortgage companies provide loans to customers so they can purchase homes.
        • Pawnshops make loans on possessions but charge higher fees than other financial institutions. Used for quick cash.
        • Check-cashing outlets charge 1-20% of the face value of a check. 2-3% is average.
      (continued) 5-10
    • 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?
    • When Choosing a Financial Institution
      • Consider:
        • Services offered
        • Interest rates
        • Fees and charges
        • Financial advice
        • Safety (deposit insurance)
        • Convenience
        • Locations
        • Online services
        • Special programs
    • Types of Savings Plans
      • Regular savings accounts
        • Involve a low or no minimum balance
        • Credit unions call them “share accounts”
      • Certificates of Deposit
        • Require you to leave your money on deposit for a set time period, otherwise you incur penalties
          • Several types to chose from
          • Consider all the earnings and all the costs
          • Check for current info
    • Types of Savings Plans
      • U.S. savings bonds.
        • Series EE sold at half of face value, with potential tax advantages if used to pay tuition and fees.
        • Series HH pays interest every six months.
        • I Bonds combine fixed rated and inflation rate.
        • See for rates.
      • Advantages
        • Exempt from state and local income taxes.
        • You don’t have to pay federal income tax on interest until redemption.
      (continued) 5-14
    • Evaluating Savings Plans
      • Rate of Return
        • Percentage or yield is the increase in value due to interest.
          • Example: a $100 savings account that earned $5 has a yield of 5%
        • Frequent compounding means more interest earning interest
      • Inflation - compare your APY with inflation rate.
      • Liquidity – early withdrawal penalties?
      • Safety - FDIC and NCUA.
        • FDIC insures up to $250,000 (temporarily) per person per financial institution (see ).
    • After Tax Rate of Return
      • (1 - tax rate) x yield on savings
      • (1 - .28) x .06
      • .72 x .06
      • 4.32%
      • A person earns 6% on savings, but has a 28% marginal tax rate. The after tax rate of return is 4.32%.
    • What is “Truth in Savings?”
      • Requires Disclosure of...
        • Fees on deposit account
        • The interest rate
        • The annual percentage yield
        • Other terms and conditions
      • Sets formulas for computing the APY.
      • Requires disclosure of fees and APY on customer statements.
      • Establishes rules for advertising accounts.
      • Restricts method of calculating the balance on which interest is paid.
    • Payment Methods
      • Debit Cards
      • Online Payments –most credit cards now offer this service
      • Stored-value cards
      • Smart Cards
    • Checking Accounts
      • Types of checking accounts include...
        • Regular – many have minimum balances
        • Activity account-fees on checks & deposits
        • Interest-earning or NOW accounts, which usually require a minimum balance
        • Interest Earning Checking accounts are also known as Share draft accounts at credit unions
    • Evaluating Checking Accounts
      • Checking accounts need to be evaluated based on:
        • Restrictions, such as a minimum balance.
        • Fees, and charges.
        • Interest rate and computation method.
        • Special services, such as overdraft protection.
    • 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.
    • Reconciliation
      • Change the bank statement balance to reflect deposits in transit and outstanding checks.
      • Change the check register balance to reflect interest, bank fees, direct deposits, automatic payments, etc.
    • Types of Check Endorsements
      • Blank – Just sign your name; the check is now bearer paper
      • Restrictive – For deposit only
      • Special – Endorse the check to someone else
    • Online Activity
      • Go to and explore money market account rates.
      • 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?