HUSC 3366 Chapter 4 Savings and Payment Services


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HUSC 3366 Chapter 4 Savings and Payment Services

  1. 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. 2. Objectives <ul><li>Identify commonly used financial services. </li></ul><ul><li>Compare the types of financial institutions. </li></ul><ul><li>Assess various types of savings plans. </li></ul><ul><li>Evaluate types of payment methods. </li></ul>
  3. 3. What Financial Services Do You Need? Lesson 1
  4. 4. 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
  5. 5. 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
  6. 6. 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 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>Access to a variety of investments. </li></ul></ul></ul><ul><ul><ul><li> or . </li></ul></ul></ul>5-4 (continued)
  7. 7. Electronic Banking Services <ul><li>Direct deposit of paychecks and other regular income. </li></ul><ul><li>Automatic payments transfer funds for savings or to pay bills. 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
  8. 8. 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
  9. 9. 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 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
  10. 10. Sources of Financial services Lesson 2
  11. 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. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. Comparing Savings Plans Lesson 3
  17. 17. 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. (p. 148) </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
  18. 18. Types of Savings Plans <ul><li>U.S. savings bonds. (p. 149) </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 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
  19. 19. Evaluating Savings Plans <ul><li>Rate of return or yield. Percentage increase in value due to interest. </li></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>Taxes – after-tax rate of return </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 $100,000 per person per financial institution (see ). </li></ul></ul>5-15
  20. 20. 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
  21. 21. 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
  22. 22. Comparing Payment Methods Lesson 4
  23. 23. Payment Methods <ul><li>Checks </li></ul><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
  24. 24. Checking Accounts <ul><li>A major portion of business transactions are conducted by check, making a checking account a necessity for most people. </li></ul><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 & deposits. </li></ul></ul>5-19
  25. 25. Checking Accounts <ul><li>Types of checking accounts include… (continued) </li></ul><ul><ul><li>Interest-earning or NOW accounts which usually require a minimum balance. </li></ul></ul><ul><ul><li>Share draft accounts are interest earning checking accounts at credit unions. </li></ul></ul><ul><li>Evaluating checking accounts. </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 (continued)
  26. 26. 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
  27. 27. 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
  28. 28. Types of 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
  29. 29. Online Activity <ul><li>Go to and explore money market account rates. </li></ul><ul><li>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? </li></ul>5-24