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  • 1. Managing Liquidity (Checking Accounts and Bank Savings) 9
  • 2. The Roles of Money Management and Savings
    • If you can’t manage your checking and savings accounts properly, you’ll have trouble managing more complicated investments, such as retirement accounts
    • Why maintain cash balances?
      • It’s expensive (because you’re forgoing interest income)
      • But we like the convenience
  • 3. The Roles of Money Management and Savings
    • Why savings are so important
      • Very liquid
      • Serves as an emergency fund
      • Allows us to achieve a certain goal (vacation, car down payment, etc .)
      • Americans save less than 2.5% of their income
        • Europeans save about 10%+
  • 4. The Roles of Money Management and Savings
    • How much savings do you need?
      • Emergency fund
        • Should have amount equal to about 3 to 6 months of after-tax income
      • Additional amount depends on your goals (short- and long-term)
        • Do you want to buy a house soon? Need to save for the down payment
    • Have money automatically transferred to your savings account from each paycheck
      • Treat it as a fixed expense
  • 5. The Roles of Money Management and Savings
    • How fast your savings will grow depends upon:
      • What interest rate your savings earn (stated or nominal rate)
      • Frequency of compounding
      • How much money you deposit periodically
      • How your account balance is determined
  • 6. What Determines How Fast Your Savings Will Grow?
    • The impact of time on interest earned
      • If interest is being compounded (earning interest on interest), time can have a significant impact
    • The frequency of compounding
      • The more frequently money is compounded, the more often interest is paid—so money grows faster
        • Your effective interest rate is greater the more often interest is compounded
    • The treatment of deposits and withdrawals
      • Most financial institutions use the day-of-deposit-to-day-of-withdrawal method of computing interest
        • Interest is based on the exact number of days the money is in your account
      • Other methods include minimum balance (will earn less interest this way)
  • 7. Choosing a Financial Institution
    • Financial institutions include banks and credit unions
    • Factors influencing your decision
      • How important is convenience to you?
        • Do you choose a bank just because it’s right around the corner from your house?
        • Convenience is important, but nowadays with electronic banking it’s not nearly as important
          • Direct deposit, online-banking, epay, etc .
  • 8. Choosing a Financial Institution
    • What services do you expect?
      • Electronic banking
      • Safe deposit box
      • Do you want good, personal service where the tellers know you by name?
    • What insurance safeguards are present?
      • Most financial institutions (banks, credit unions) are federally insured up to $250,000
  • 9. Choosing a Financial Institution
    • How much does it cost?
      • Before deregulation financial institutions offered many services for ‘free’
        • Charged a basic fee for having an account
        • Provided free checks, help with reconciliation, etc .
        • Banks competed on the basis of service because basically all banks paid customers same interest rate on deposits
        • The spread between interest paid to customers and interest charged on loans was large
      • Since deregulation banks compete for deposits based on interest rates
        • Spread on interest paid vs. charged has narrowed
        • Banks have eliminated ‘free’ services and now charge fees (sometimes very HIGH fees)
          • Banks collect about $20 billion in fees (up 200% from 10 years ago)
        • Fees vary widely from bank to bank
          • Shop around
  • 10. What are the Major Financial Institutions?
    • Commercial banks (AKA full-service banks)
      • Offer:
        • Checking and savings accounts
        • Personal and business loans
        • Trust services
        • Safe-deposit boxes
        • Mortgage loans
        • Discount brokerage serves (maybe)
      • Convenient (Over 65,000 branch offices across U.S.)
  • 11. What are the Major Financial Institutions?
    • Savings Banks (S&Ls)
      • Traditionally serve consumers
      • Mortgage loans (make about 40% of all mortgage loans)
      • Today are more similar to commercial banks
    • Credit Unions
      • Cooperative venture owned by depositors and borrowers
      • Organized to serve specific groups of people
      • Non-profit so offer lower interest rates on loans, pay higher interest rates on deposits
      • Generally don’t want to take a great deal of risk
  • 12. What are the Major Financial Institutions?
    • Brokerage Firms
      • Offer central asset management accounts
        • Combines a checking account, debt/credit card, and a money market fund with a traditional brokerage account
      • Cash earned from dividends, interest, etc . is automatically swept into a money market account
        • You start earning interest on your money immediately
      • You can write a check (or use debit/credit card) to access your funds
      • Minimum investment required, which varies across brokerage firms
        • Check out minimum investment amount and fees (if any), customer service, choice of money market funds, credit/debit card features, margin rates
  • 13. Checking Accounts
    • Regular checking accounts
      • Some banks require a minimum balance (average is $500) which give you unlimited check writing privileges
      • Some banks charge no fee unless you exceed a certain number of checks per month
      • Banks can pay interest on checking accounts but rarely do
    • Special checking accounts
      • Require no minimum balance
      • Most banks charge a per check fee ($0.10-$0.15 per check) plus monthly maintenance fee
        • May be a good choice for college student if write only a few checks
  • 14. Checking Accounts
    • Overdraft Protection
      • If you write a check for an amount greater than the balance in your checking account it is still covered
        • You pay a fee (essentially interest on a short-term loan)
    • NOW Accounts (Negotiable Order of Withdrawal)
      • Combined checking and savings account
        • Pays interest on balance (but lower rate than savings account)
        • Can write checks (actually are authorizations to take money from savings)
      • Minimum balance of about $1,000
        • If balance drops below the minimum a fee is charged
          • Shop around!
      • NOW accounts at credit unions are called Share-Draft Accounts
  • 15. Checking Account Basics
    • A checking account allows you to write checks to make payments.
      • A check is a written order to a bank to pay the amount stated to the person or business named on it.
      • A checking account is also called a demand deposit , because the money may be withdrawn at any time—that is, “on demand.”
  • 16. Checking Account Basics
    • Checks follow a process through the banking system.
      • The payee cashes your check.
      • The bank that cashed the check returns it to your bank.
      • Your bank withdraws the money from your account and sends it to the other bank.
      • Your bank then stamps the back of your check, indicating that it has cleared.
        • A canceled check is a check that has cleared your account.
    (continued)
  • 17. Checking Account Basics
    • Many banks no longer send paper checks to other banks for processing.
      • To make processing faster and more efficient, they exchange check information electronically by transmitting an image of the check, called a substitute check.
      • A substitute check can be used in the same way as an original check.
    (continued)
  • 18. Checking Account Basics
    • You must also maintain enough money in your account to cover all the checks you write.
    • A check written for more money than your account contains is called an overdraft .
      • A bank that does not honor a check usually stamps the check with the words “not sufficient funds” (NSF) and returns the check to the payee’s bank.
      • When this occurs, the check has bounced.
      • Your bank will charge you a fee for each NSF check processed.
    (continued)
  • 19. Checking Account Basics
    • Floating a check is writing a check and hoping to deposit money to cover it before the check clears.
    • Floating a check is very risky because today’s electronic systems allow checks to process very quickly.
    • Floating a check is illegal in most states.
    (continued)
  • 20. Checking Account Advantages
    • Convenience
    • Safety
    • Built-in record keeping system
    • Access to bank services
  • 21. Opening a Checking Account
    • Signature authorization form
    • Initial deposit
  • 22. Parts of a Check Check Number ABA Number Name and Address of Maker Date Payee Numeric Amount Written Amount Signature Account and Routing Numbers Memo
  • 23. Using Your Checking Account
    • Writing checks
    • Paying bills online
    • Making deposits
    • Using a checkbook register
      • A checkbook register is a booklet used to record checking account transactions.
  • 24. Bank Reconciliation
    • The process of matching your checkbook register with the bank statement is known as bank reconciliation .
  • 25. Reconciling Your Checking Account
    • 1. Write ending balance from bank statement.
    • 2. Add credits or deposits not on statement.
    • 3. Total lines 1 and 2.
    • 4. List checks, withdrawals, and debits made but not shown on statement.
    • 5. Total outstanding checks/debit transactions.
    • 6. Subtract line 5 from line 3. (Result should match checkbook balance)
  • 26. Endorsing Checks
    • A check generally cannot be cashed until it is endorsed.
    • To endorse a check, the payee signs the top part of the back of the check in ink.
    • There are three major types of endorsements.
      • Blank endorsement
      • Special endorsement
      • Restrictive endorsement
  • 27. Blank Endorsement
    • A blank endorsement is the signature of the payee written exactly as his or her name appears on the front of the check.
  • 28. Special Endorsement
    • A special endorsement , or an endorsement in full, is an endorsement that transfers the right to cash the check to someone else.
  • 29. Restrictive Endorsement
    • A restrictive endorsement restricts or limits the use of a check.
  • 30. Types of Checking Accounts
    • Joint accounts
    • Special accounts
    • Standard accounts
    • Interest-bearing accounts
    • Share accounts
  • 31. Banking Services and Fees
    • GOALS
    • Describe banking services available at most financial institutions.
    • List and explain fees charged by financial institutions for their services.
  • 32. Banking Services
    • A full-service bank is one that offers every possible kind of service, from savings and checking accounts to credit cards, safe deposit boxes, loans, and ATMs.
    • Other services commonly offered are online banking, telephone banking, certified checks, cashier’s checks, money orders, and debit cards.
    • Most banks offer FDIC (Federal Deposit Insurance Corporation) insurance, which protects the deposits of customers against loss up to $250,000 per account.
  • 33. Guaranteed-payment Checks
    • A certified check is a personal check that the bank guarantees or certifies to be good.
    • A cashier’s check , also called a bank draft, is a check written by a bank on its own funds.
    • Traveler’s checks are check forms in specific denominations that are used instead of cash while traveling.
  • 34. Money Orders
    • Banks sell money orders to people who do not wish to use cash or do not have a checking account.
    • A money order is like a check, except that it can never bounce.
    • There is a charge for purchasing a money order.
    • You also can purchase money orders through the post office and local merchants.
  • 35. Debit Cards
    • A debit card is a plastic card that deducts money from a checking account almost immediately to pay for purchases.
    • The debit card is presented at the time of purchase.
    • When a debit card is used, the amount of the purchase is quickly deducted from the customer’s checking account and paid to the merchant.
  • 36. Bank Credit Cards
    • You can apply to a full-service bank for a bank credit card, such as a Visa or MasterCard.
    • If you meet the requirements and are issued a card, you can use it instead of cash at any business that accepts credit cards.
    • Banks offering national credit cards usually charge both an annual fee for use of the card and interest on the unpaid account balance.
  • 37. Overdraft Protection
    • Overdraft protection allows you to cover checks or withdrawals up to a specified amount, usually between $100 and $1,000, depending on the typical balance in your account.
    • With overdraft protection , your checks will be covered even if you have insufficient funds in your checking account.
  • 38. Automated Teller Machines
    • An Automated Teller Machine is often called an ATM.
    • To use ATMs, you must
      • Have a card that is electronically coded
      • Know your personal identification number (PIN)
    • Getting cash is a common ATM transaction.
      • Using a debit card you can withdraw cash from your checking or savings account.
      • Using a Visa or MasterCard, you can receive a cash advance electronically.
  • 39. Online and Telephone Banking
    • Online and telephone banking services give you the ability to access your accounts from a computer or telephone anytime, day or night.
    • Services include:
      • Transferring money from one account to another
      • Paying bills by authorizing the bank to disburse money
      • Getting account balances
      • Seeing which checks have cleared and which deposits have been entered
  • 40. Online and Telephone Banking
    • Most banks also allow and encourage electronic transfers of money.
      • An electronic funds transfer (EFT) uses a computer-based system that enables you to move money from one account to another without writing a check or exchanging cash.
    (continued)
  • 41. Stop Payment Orders
    • A stop-payment order is a request that the bank not honor a specific check.
    • The usual reason for stopping payment is that the check has been lost or stolen.
    • Most banks charge a fee for stopping payment on a check.
  • 42. Safe Deposit Boxes
    • Financial institutions offer customers a safe deposit box to store valuable items or documents.
    • They charge a yearly fee based on the size of the box.
    • Keeping important documents and other items in a safe deposit box ensures that the items won’t be stolen, lost, or destroyed.
  • 43. Safe Deposit Boxes
    • Examples of items commonly kept in a safe deposit box include
      • Birth, marriage, and death certificates
      • Deeds and mortgage papers
      • Stocks and bonds
      • Jewelry
      • Coin collections
    (continued)
  • 44. Loans and Trusts
    • Financial institutions also make loans to finance the purchase of cars, homes, home improvements, vacations, and other items.
    • Banks can also provide advice for estate planning and trusts.
    • Banks can act as trustees of estates for minors and others.
      • A trustee is a person or an institution that manages property for the benefit of someone else under a special agreement.
  • 45. Notary Public
    • A notary public verifies a person’s identity, witnesses the person’s signature on a legal document, and then “notarizes” the signature as valid.
    • Financial institutions typically have a person on their staff who is a notary public.
      • This person provides notary services for account holders, usually without charge.
      • For noncustomers, however, there is typically a small fee.
  • 46. Financial Services
    • Purchasing or selling savings bonds
    • Investment brokerage services
  • 47. Bank Fees
    • Banks charge fees to their customers to help cover their operating costs.
    • The best way to avoid fees is to choose the right kind of account.
      • Shop around and find the account that is right for you.
      • Be aware of the rules of your account, so that you don’t violate them and be required to pay high fees.
  • 48. Examples of Bank Fees
    • Loan fees
    • Trustee fees
    • Check cashing fees
    • Per-check fees
    • Monthly service fees
    • Overdraft fees
    • NSF check charges
    • ATM transaction fees
    • Safe deposit box fees
    • Teller service fees
    • Minimum balance fees
    • Fees for guaranteed-payment checks
    • Notary service fees
    • Online bill payment fees
    • Fees to return canceled checks
  • 49. Consumer Loans
    • Car loans
    • Mortgage loans
    • College loans
    • Home improvement loans
    • Unsecured personal loan
  • 50. Bank Credit Cards
    • Allow consumers to purchase items in lieu of cash or check
    • Can also get a cash advance
    • Even pay your taxes
  • 51. Other Banking Services
    • Retirement Plans
      • IRAs and Keoghs
      • Trustee Services
      • Managing money for others
      • Estate planning and management
    • Safe-Deposit Boxes
      • Fees vary (up to  $100)
    • Bank Wire Transfers
      • Send money to someone (quickly & long distances)
    • Debt Management and Counseling
      • Often free
  • 52. Savings Options
        • Money Market Deposit Account (MMDA)
          • Interest rate fluctuates with the market rate
          • Initial deposit  $1,000
          • Only a certain number of withdrawals are allowed per month (penalty assessed if rules aren’t followed)
    • Fixed-Time Deposits
      • Saver agrees to keep money in account for a certain time period (earn higher interest)
        • Certificate of Deposit (CD)
          • Sacrifice liquidity
          • If interest rates are rising, and you’ve locked in a long-term CD, is it worth it to pay the interest penalty?
          • Some banks offer variable rate CDs
          • Shop around
  • 53. Money Market Mutual Funds
    • Pool many investors’ funds and invest in short-term, low-risk investments
    • Not federally insured
        • In practice this risk is very small
    • Require a minimum initial deposit (  $1,000)
    • Can write checks (minimum amount of check value is about $250)
      • Some funds limit the number of checks you can write each month
  • 54. U.S. Treasury Bills and Notes
    • Issued by the U.S. government (very safe)
    • Can be sold prior to maturity
    • Interest income is not subject to state taxes
      • T-bills have 3, 6 and 12 months until maturity
        • Minimum face value of $10,000
        • Interest is discounted
      • T-notes have 2, 3, 5, and 10 years to maturity
        • Pay fixed amount of interest 2x a year
        • Face value is as low as $1,000
  • 55. U.S. Savings Bonds
    • Face amounts range from $50 to $30,000
    • Can buy from financial institutions
    • Purchase price is ½ the face value
    • Bond will mature at some point (when exactly depends on the interest rate)
    • Interest accumulates (even after maturity) until 30 years after the issue date
    • Exempt from state taxes
    • Federal taxes are owed only when bond is cashed in or reaches 30 years from issue date
    • Series I bonds pay a fixed interest rate + the average rate of inflation
  • 56. Choosing the Best Savings Option
    • Need to evaluate:
      • Minimum investment
      • Liquidity
      • Yield
      • Safety
      • Taxation

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