HUSC 3366 Chapter 4 Savings and Payment Services

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  • 1. Chapter 4 Banking Services: Savings Plans and Payment Accounts McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
  • 2. Objectives
    • Identify commonly used financial services.
    • Compare the types of financial institutions.
    • Assess various types of savings plans.
    • Evaluate types of payment methods.
  • 3. What Financial Services Do You Need? Lesson 1
  • 4. 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.
    5-2
  • 5. 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.
    5-3
  • 6. 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 minimum balance.
        • A checking account and an ATM card.
        • A credit card
        • Online banking.
        • Access to a variety of investments.
        • www.schwab.com or www.americanexpress.com .
    5-4 (continued)
  • 7. Electronic Banking Services
    • Direct deposit of paychecks and other regular income.
    • Automatic payments transfer funds for savings or to pay bills. Deduct them from your register.
    • ATM access to obtain cash, check account balances, and transfer funds - check out the fees.
    • A debit card - takes money out of your account. Lost card liability $50-$500.
    5-5
  • 8. 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.
    5-6
  • 9. Changing Interest Rates and Decisions Related to Financial Services
    • The prime rate is what banks charge large corporations. See www.federalreserve.gov .
    • 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.
    5-7
  • 10. Sources of Financial services Lesson 2
  • 11. 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?
    5-11
  • 12. 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.
    5-8
  • 13. 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
  • 14. 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
  • 15. Choosing a Financial Institution
    • Consider
      • Services offered.
      • Interest rates.
      • Fees and charges.
      • Financial advice.
      • Safety (deposit insurance).
      • Convenience.
      • Locations.
      • Online services.
      • Special programs.
    5-12
  • 16. Comparing Savings Plans Lesson 3
  • 17. Types of Savings Plans
    • Regular savings 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. (p. 148)
      • Consider all the earnings and all the costs.
    • Interest earning checking accounts.
    • Money market accounts and funds.
      • Money market accounts are covered by the FDIC, but money market funds are not.
    5-13
  • 18. Types of Savings Plans
    • U.S. savings bonds. (p. 149)
      • 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 www.savingsbonds.gov 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
  • 19. Evaluating Savings Plans
    • Rate of return or yield. Percentage increase in value due to interest.
      • Frequent compounding means more interest earning interest
    • Inflation - compare your APY with inflation rate.
    • Taxes – after-tax rate of return
    • Liquidity – early withdrawal penalties?
    • Safety - FDIC and NCUA.
      • FDIC insures up to $100,000 per person per financial institution (see www.fdic.gov ).
    5-15
  • 20. 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%.
    5-16
  • 21. 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.
    5-17
  • 22. Comparing Payment Methods Lesson 4
  • 23. Payment Methods
    • Checks
    • Debit Cards
    • Online Payments –most credit cards now offer this service
    • Stored-value cards
    • Smart Cards
    5-18
  • 24. Checking Accounts
    • A major portion of business transactions are conducted by check, making a checking account a necessity for most people.
    • Types of checking accounts include...
      • Regular – many have minimum balances.
      • Activity account-fees on checks & deposits.
    5-19
  • 25. Checking Accounts
    • Types of checking accounts include… (continued)
      • Interest-earning or NOW accounts which usually require a minimum balance.
      • Share draft accounts are interest earning checking accounts at credit unions.
    • Evaluating checking accounts.
      • Restrictions, such as a minimum balance.
      • Fees, and charges.
      • Interest rate and computation method.
      • Special services, such as overdraft protection.
    5-20 (continued)
  • 26. 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.
    5-21
  • 27. 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.
    5-22
  • 28. Types of Endorsements
    • Blank – Just sign your name; the check is now bearer paper
    • Restrictive – For deposit only
    • Special – Endorse the check to someone else
    5-23
  • 29. Online Activity
    • Go to www.bankrate.com and explore money market account rates.
    • Also look at rates for one year and five year CD’s. If you had money to invest right now, which maturity of CD’s would you choose?
    5-24