BankingChapter 5

How to Manage Your Cash

How to Manage Your Cash You have lots of alternatives

11,000 Banks 2,000 savings and loan associations 12,000 Credit Unions

Lots of different services Depend on your needs and goals

Daily Cash Needs Cash, Credit Cards, ATMs, Checks ATMs might have a fee Resist Temptation Consider your long-term goals

Overspending Overuse of credit cards Dip into savings

Sources of Quick Cash Regardless of how you

plan, you may sometime discover you need more cash. Use Savings Borrow Money

Both choices have trade-offs

Types of Financial Services Three Main Categories

Savings Payment Systems Borrowing

Savings Safe storage of funds is a basic need for everyone

Money left in financial institutions for months or years is called a time deposit

Savings accounts, Certificates of Deposit

Earn interest Bank pays you for the use of your money Bank uses that money to lend to others

Payment Services Transferring money

from your account to businesses or individuals for payment

Most common is a checking account – making a demand deposit.

Borrowing Most people use credit Short term Borrowing

Credit card, personal cash loan Long-Term Borrowing

House, car Pay interest

Interest When you deposit money in the bank, you earn interest

Bank uses that money to make loans to others

When you receive a loan, you pay interest What it costs for the use of the banks money

When consumers increase savings – the supply of money is available for others which decreases interest rates

When consumers borrow more money, the demand for money increases and interest rates rise.

Other Financial Services

Insurance Investment

accounts Tax help Financial planning

services

Assignment Bank Comparison Shopping

Electronic Banking Services Direct Deposit

Saves time money and effort Offers Safety

Automatic Payments Make sure you have enough money

Electronic Banking Services Cont.

Automated Teller Machines (ATMs) Withdraw cash,

transfer funds Where are ATMs? Debit Cards and

Your PIN ATM Fees Lost Debit Cards

• Let your bank know immediately

Electronic Banking Services Cont. Plastic Payments

Point-of-Sale transactions-Use your debit card

Store Value Cards-Prepaid cards Electronic Cash-Cashless society

Opportunity Costs of Financial Services Consider your money and your time Reevaluate your choices occasionally

Assignment Electronic Banking & Cashless Society

Types of Financial Institutions

Chapter 5

Federal Deposit Insurance Corporation Great Depression

Banks Failed People lost their money

1933-Fed Creates the FDIC Federal Deposit Insurance Corporation Protects deposits up to $100,000 per

account All Federal Charted banks must participate

in the FDIC

Deposit-Type Institutions Commercial Banks Savings and Loan

Associations Mutual Savings

Banks Credit Unions

Commercial Banks For-profit institution

that offers a full range of services, including checking, savings, and lending

Serve individuals and businesses

Authorized through a charter from fed or state gov.

Savings and Loan Associations Traditionally specialized in savings

accounts and mortgage loans. Today offer many of the same services as

banks Fed or State Charter

Mutual Savings Banks Specialize in savings accounts and mortgage loans Some offer auto loans Lower interest loans Sometimes pay higher interest rates on savings

accounts

Credit Unions A nonprofit institution that is owned by its members

and organized for their benefit. Traditionally members share common bond Offer full range of services Fees and loan rates generally lower

Nondeposit-Type Institutions Life Insurance Companies Investment Companies Finance Companies Mortgage Companies

Life Insurance Companies Main purpose is to provide financial security Many policies contain savings and

investment features Some offer retirement services

Investment Companies Combine your

money with other investors to buy stocks, bonds, and other securities

Manage investments

Called Mutual Funds

Finance Companies Make loans to consumers and small

businesses Provide loans to people who cannot borrow

elsewhere Rates are often higher Some offer financial planning services

Mortgage Companies Specialize in loans

for the purchase of homes

Assignments Financial Institutions Section 5.1 Assessment Page 132

1-6

Savings Plans and Payment Methods

Section 5.2

Regular Savings Account Traditionally called

passbook accounts Require little or no

minimum balance and allow you to withdraw money quickly

Earn low interest rate

Certificates of Deposit CD-A time deposit that requires you to leave your

money in a financial institution for a set amount of time Fixed period called the term Date when money comes available is called the

maturity date Low risk way to invest Higher interest rate than a regular savings account Have to leave your money for 1 month to five or more

years Pay penalty if money is taken out before maturity date

Tips for Investing in CDs Find the best rate-Anywhere in the

United states Consider the economy-What are the

current interest rates? Consider when you will need the

money (ex. Need money for college in 2 years)

Money Market Accounts Savings account in which the interest

rate varies from month to month The rates float, or go up or down, as

market rates change FDIC insured Higher minimum balance-$1,000

U.S. Savings Bond Series EE Savings

Bond Federal Gov. $25 to $5,000 $50 to $10,000 face

value Limited to $15,000 per

year Continues to earn

interest for 30 years

Savings Bonds Maturity date = date a bond reaches

its face valueDepends on the issue date and the

interest rateFor some, rate changes every six

monthsNo official maturity date for Series EE

Savings Bonds –

Evaluating Savings Plan-Rate of Return Rate of Return-

Percentage of increase in the value of your savings from earned interest

Compounding Compounding-The

process in which interest is earned on both the principal-the amount deposited and on any previously earned interest

Look at pages 137-138

Truth in Savings Financial institutions must inform you

of the terms and conditions of savings accounts.

Annual Percentage Yield-The amount of interest that a $100 deposit would earn, after compounding for one year.

Other Savings Evaluations Inflation Tax Considerations Liquidity

Penalties for withdrawing early? Restrictions and Fees

Types of Checking Accounts

Chapter 5

Regular Checking Accounts Usually don’t

require a minimum balance

If it does Drops below

minimum balance-you pay a fee

These fees can be avoided

Activity Accounts This could be right for you if:

You write only a few checks each month Unable to maintain a minimum balance

Financial Institution charges a fee for: each check you write sometimes for each deposit Monthly Service charge

You do not need to maintain a minimum balance

Interest Earning Checking A cross between checking and savings Pay a low interest rate if you maintain a

minimum balance If you go below the limit-No interest

Evaluating Checking Accounts

Restrictions Minimum balance # of transactions and checks

per month Fees and Charges Interest Special Services

Overdraft Protection-An automatic loan if you write a check for more money than you have in your account.

Could transfer money from another account

Using a Checking Account Opening an

account Joint or individual Signature card

verifies your signature

Writing Checks Make sure you record every

transaction in your check register Open books to page 145 Check Example Document

Video – How to write a check

Stop-Payment Order A request that an

institution not cash a particular check

Fees for this service range from $10 to $20

Make sure it is worth the charge

Making Deposits-Adding Money to Checking Account Fill out a deposit

ticket Endorse or sign

each check you are depositing

Endorsement-the signature of the payee, the party to whom the check has been written

Tips for endorsing a check Don’t endorse check until you are ready to

cash or deposit it Sign on left end of the back of the check,

lines are usually provided Use pen When depositing by mail write “For deposit

only” above your signature Sign your name as it is seen on the check, if

incorrect sign incorrect spelling followed by the correct spelling of your name

Check Clearing Bank will hold your deposit until the

check clears with the bank on which the check was drawn

Should not be able to hold your money for more than 2-5 business days

Check with your banks specifics

Maintaining a Checking Account

Endorsing Checks Blank/Basic Endorsement

Sign your name the same way it appears on the front of the check.

Cash or deposit it Restrictive Endorsement

“For deposit only” or “For deposit into account: ####”

Special Endorsement Sign your check over to someone else “Pay to the order of________”, then endorse

Making Deposits-Adding money to checking account Fill out a deposit

ticket Endorse or sign

each check you are depositing

Endorsement-the signature of the payee, the party to whom the check has been written

Bank Statements Each Month Bank Sends a

Statement Deposits Checks that you have written that

have come into the bank (Check #) ATM Withdrawals Debit Card charges Interest Earned Any Fees

Bank Statement vs. Check Register Balances will most likely be different

Checks may not have cleared Deposited money after the statement was prepared

Bank Reconciliation-is a report that accounts for the differences between the bank statement and your checkbook balance.

“Balancing Your Checkbook”

Bank Reconciliation Steps

1. Compare the checks you have written with those that are listed on the bank statement as paid, or cleared. List all outstanding checks-Written but have not cleared the bank

Subtract that amount from the bank statement2. Add any deposits not listed on the bank statement to the bank

statement balance3. Subtract Fees and Charges listed on the bank statement from

your checkbook balance4. Add any interest earned to your checkbook

Bank Reconciliation made simple

BankEnd Balance

-Outstanding Checks+Outstanding Deposits

Adjusted Balance

Checkbook BalanceEnd Balance

-Fees & Charges +Interest

Adjusted Balance

Should Be the Same

Assignment

Section 5.2 Assessment Page 149 1-7