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  1. 1. Banking Services: Savings Plans and Payment Accounts C HAPTER 5 7e Personal Finance Kapoor Dlabay Hughes 5-1
  2. 2. Types of Financial Services <ul><li>Savings. </li></ul><ul><ul><li>Time deposits in savings and in certificates of deposit. </li></ul></ul><ul><li>Payment services. </li></ul><ul><ul><li>Checking accounts monies are commonly 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
  3. 3. Types of Financial Services (continued) <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 minimum balance. </li></ul></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>A line of credit for quick cash loans. </li></ul></ul></ul><ul><ul><ul><li>Access to a variety of investments. </li></ul></ul></ul><ul><ul><ul><li> or </li></ul></ul></ul>5-4
  4. 4. Electronic Banking Services <ul><li>Direct deposit of paychecks and other regular income. </li></ul><ul><li>Automatic payments transfer funds such as for utilities. Remember to deduct them from your register. </li></ul><ul><li>ATM access to obtain cash, check account balances, and transfer funds - check out the fees. </li></ul><ul><li>A debit card - takes money out of your account. Lost card liability $50-$500. </li></ul>5-5
  5. 5. 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 that requires a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years. </li></ul>5-6
  6. 6. Changing Interest Rates and Decisions Related to Financial Services <ul><li>The prime rate is what banks charge large corporations. See </li></ul><ul><li>When interest rates are rising... </li></ul><ul><ul><li>Use long-term loans to take advantage of 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
  7. 7. 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 and financial planning and investment services. </li></ul></ul><ul><ul><li>Mutual savings banks specialize in savings accounts and mortgage loans. They are owned by their depositors, with profits going back to depositors by paying a higher rate on savings. </li></ul></ul><ul><ul><li>Credit unions are user-owned, nonprofit and provide comprehensive financial services. </li></ul></ul>5-8
  8. 8. 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, with some offering 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
  9. 9. Types of Financial Institutions <ul><li>Non-deposit type institutions (continued) . </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><ul><ul><li>Title and payday loan companies - high interest. </li></ul></ul>(continued) 5-10
  10. 10. 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><ul><li>See Appendix 5A on information on Using a Checking Account. </li></ul>5-11
  11. 11. 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
  12. 12. Types of Savings Plans <ul><li>Regular savings accounts. </li></ul><ul><li>Certificates of deposit. </li></ul><ul><li>Require you to leave your money on deposit for a set time period, otherwise you incur penalties. </li></ul><ul><ul><li>Several types to chose from. </li></ul></ul><ul><ul><li>Consider all the earnings and all the costs. </li></ul></ul><ul><li>Interest earning checking accounts. </li></ul><ul><li>Money market accounts and funds. </li></ul><ul><ul><li>Money market accounts are covered by the FDIC, but money market funds are not. </li></ul></ul>5-13
  13. 13. 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>See 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 earnings until you redeem the bonds. </li></ul></ul>(continued) 5-14
  14. 14. Evaluating Savings Plans <ul><li>Rate of return or yield. </li></ul><ul><ul><li>Percentage increase in value due to interest. </li></ul></ul><ul><li>Compounding. </li></ul><ul><ul><li>Interest on previous interest earned. </li></ul></ul><ul><li>Inflation - compare the rate of return on your savings with the inflation rate. </li></ul><ul><li>Restrictions and fees. </li></ul><ul><li>Liquidity. </li></ul><ul><li>Safety via FDIC and NCUA. </li></ul><ul><ul><li>FDIC insures up to $100,000 per person per financial institution (see ). </li></ul></ul><ul><li>Tax considerations for interest earned. </li></ul>5-15
  15. 15. 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>This means that a person who is earning 6% on their savings, but has a 28% marginal tax rate, is actually earning 4.32% rate of return after they pay income taxes on the interest. </li></ul>5-16