BankingBanking

Chapter 5Chapter 5

Section 5.1 ObjectivesSection 5.1 Objectives

Identify types of financial servicesIdentify types of financial servicesDescribe the various types of financial Describe the various types of financial

institutionsinstitutions

How to Manage Your CashHow to Manage Your Cash

Daily cash needsDaily cash needs Lunch and dinnerLunch and dinner GasGas MoviesMovies Routine activitiesRoutine activities

Sources of quick cashSources of quick cash ATM, debit card, checkATM, debit card, check Credit card or borrowCredit card or borrow

What about intermediate or long-term needs?What about intermediate or long-term needs?

Types of Financial ServicesTypes of Financial Services

Three main categoriesThree main categories SavingsSavings

Essential for financial planEssential for financial plan CD’s are time deposits left for a pre-determined timeCD’s are time deposits left for a pre-determined time

Payment ServicesPayment Services Checking account – demand depositChecking account – demand deposit

Borrowing Borrowing Credit card or loanCredit card or loan

Other Financial ServicesOther Financial Services Insurance protection, investments, tax assistance, Insurance protection, investments, tax assistance,

and financial planning assistance and financial planning assistance

Financial Services for Short-Term NeedsFinancial Services for Short-Term Needs

Daily PurchasesDaily Purchases

Living ExpensesLiving Expenses

Emergency FundEmergency Fund

Daily Cash NeedsDaily Cash Needs Check cashingCheck cashing ATMATM Prepaid cardsPrepaid cards

SavingsSavings Regular saving Regular saving

acct.acct. Money market Money market

acct.acct.

CheckingChecking Regular checking Regular checking

acct.acct. Online paymentsOnline payments Automatic paymentsAutomatic payments Pay by phonePay by phone Cashier’s checkCashier’s check Money ordersMoney orders

Credit CardsCredit Cards

Financial Services for Short-Term NeedsFinancial Services for Short-Term Needs

Major purchasesMajor purchases

Long-term financial securityLong-term financial security

SavingsSavings CD’sCD’s US Savings BondUS Savings Bond

Credit ServicesCredit Services Cash loans for cars Cash loans for cars

and educationand education Home loansHome loans

Investment ServicesInvestment Services Mutual fundsMutual funds Financial adviceFinancial advice

Other ServicesOther Services Tax preparationTax preparation InsuranceInsurance BudgetingBudgeting

Electronic Banking ServicesElectronic Banking Services

Direct DepositDirect DepositAutomatic PaymentsAutomatic PaymentsAutomated Teller Machines (ATMs)Automated Teller Machines (ATMs)

ATM FeesATM FeesLost Debit Cards – notify within a stated timeLost Debit Cards – notify within a stated time

Plastic PaymentsPlastic PaymentsPoint-of-Sale Transactions – debit cardsPoint-of-Sale Transactions – debit cardsStored-Value Cards – gift cardsStored-Value Cards – gift cardsElectronic Cash – in the future?Electronic Cash – in the future?

Types of Financial Institutions Types of Financial Institutions

Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation Insures up to $100,000 per accountInsures up to $100,000 per account

Savings and Association Insurance FundSavings and Association Insurance Fund Insures up to $100,000 per amountInsures up to $100,000 per amountFor savings and loansFor savings and loans

Deposit InstitutionsDeposit Institutions Commercial Banks – for-profit institution, offer Commercial Banks – for-profit institution, offer

wide range of services, granted by federal or wide range of services, granted by federal or state govt.state govt.

Savings and Loans Associations – traditionally Savings and Loans Associations – traditionally specialized in savings accts. and mortgage specialized in savings accts. and mortgage loansloans

Mutual Savings Banks – specialize in savings Mutual Savings Banks – specialize in savings and loans – interest rates better than and loans – interest rates better than commercial bankscommercial banks

Credit Unions – nonprofit, owned and organized Credit Unions – nonprofit, owned and organized for members, interest better than commercial for members, interest better than commercial banksbanks

Non-Deposit InstitutionsNon-Deposit Institutions

Life Insurance CompaniesLife Insurance CompaniesProvide savings and investment optionsProvide savings and investment optionsMay offer retirement planning servicesMay offer retirement planning services

Investment CompaniesInvestment CompaniesStocks, bonds, mutual fundsStocks, bonds, mutual funds

Finance CompaniesFinance CompaniesMake high interest loans to those with bad Make high interest loans to those with bad

creditcreditMortgage CompaniesMortgage Companies

Comparing Financial Institutions Comparing Financial Institutions What should you know to choose a financial institution?What should you know to choose a financial institution?

Where can you get the highest rate of interest on your Where can you get the highest rate of interest on your savings?savings?

Where can you obtain a checking account with low (or Where can you obtain a checking account with low (or no) fees?no) fees?

Will you be able to borrow money from the institutionWill you be able to borrow money from the institution—with a credit card or another type of loan—when —with a credit card or another type of loan—when you need it?you need it?

Do you need an institution that offers free financial Do you need an institution that offers free financial advice?advice?

Is the institution FDIC or SAIF insured?Is the institution FDIC or SAIF insured? Does the institution have convenient locations?Does the institution have convenient locations? Does it have online banking services?Does it have online banking services? Does it have special banking services that you might Does it have special banking services that you might

need?need?

Section 5.2 ObjectivesSection 5.2 Objectives

Compare the costs and benefits of Compare the costs and benefits of different savings plansdifferent savings plans

Explain features of different savings plansExplain features of different savings plansCompare the costs and benefits of Compare the costs and benefits of

different types of checking accountsdifferent types of checking accountsExplain how to use a checking account Explain how to use a checking account

effectivelyeffectively

Types of Savings PlansTypes of Savings PlansRegular Savings AccountsRegular Savings AccountsCertificates of DepositCertificates of DepositMoney Market Accounts Money Market Accounts US Savings BondsUS Savings Bonds

Savings AccountsSavings Accounts

Ideal for making frequent deposits and Ideal for making frequent deposits and withdrawalswithdrawals

Require little or no minimum balanceRequire little or no minimum balanceWithdraw money on demandWithdraw money on demandLow interest potentialLow interest potential

Certificates of DepositCertificates of DepositMoney left on deposit for a stated period Money left on deposit for a stated period

(term) with a specific rate of return at (term) with a specific rate of return at maturity datematurity date

Low risk with high interest ratesLow risk with high interest ratesThree limitationsThree limitations

Must leave for minimum of one month to five Must leave for minimum of one month to five yearsyears

Will receive a penalty if you take out earlyWill receive a penalty if you take out earlyMust deposit a minimum amountMust deposit a minimum amount

CD Investment StrategiesCD Investment Strategies

Find out where you can get the best rateFind out where you can get the best rateConsider the economyConsider the economyNever let the bank “roll over” CDNever let the bank “roll over” CDConsider when you need the moneyConsider when you need the money If you have enough funds to have several If you have enough funds to have several

accounts, create a CD portfolioaccounts, create a CD portfolio

Money Market AccountsMoney Market Accounts

Has minimum balance, typically $1000Has minimum balance, typically $1000 Interest varies from month to month as Interest varies from month to month as

market rates changemarket rates changeMay pay penalty if your balance goes May pay penalty if your balance goes

below minimumbelow minimumFDIC insuredFDIC insured

US Savings BondsUS Savings Bonds

Series EE Savings BondsSeries EE Savings Bonds$25 to $5,000 in cost (face values $50 to $25 to $5,000 in cost (face values $50 to

$10,000)$10,000)Have to wait 10 to 30 years for maturity and Have to wait 10 to 30 years for maturity and

pay taxespay taxesEarn interest up to 30 years if not cashedEarn interest up to 30 years if not cashedNo local or state tax on interest earned, but No local or state tax on interest earned, but

must pay federal tax until bond is cashedmust pay federal tax until bond is cashedCan defer taxes if bond is exchanged for Can defer taxes if bond is exchanged for

Series HH bondSeries HH bond

Regular Savings Regular Savings AccountsAccounts

Low minimum Low minimum

balancebalance Ease of Ease of

withdrawalwithdrawal InsuredInsured

Low rate of Low rate of

returnreturn

CDsCDs Guaranteed Guaranteed

rate of return for rate of return for

time of CDtime of CD

Possible penalty for Possible penalty for

early withdrawal early withdrawal Minimum depositMinimum deposit

Money Markets AccountsMoney Markets Accounts Good rate of Good rate of

returnreturn Some check Some check

writingwriting InsuredInsured

Minimum balanceMinimum balance No interest and No interest and

possible service possible service

charge if below a charge if below a

certain balancecertain balance

US Savings BondsUS Savings Bonds Low minimum Low minimum

depositdeposit

Lower rate of return Lower rate of return

when cashed in before when cashed in before

bond reaches maturity bond reaches maturity

datedate

Evaluating Savings PlansEvaluating Savings Plans Rate of returnRate of return

% of increase from earned interest ($75 invested and $3 interest % of increase from earned interest ($75 invested and $3 interest is 4% ($3 divided by $75)is 4% ($3 divided by $75)

Compounding interest – interest earned on principal (original Compounding interest – interest earned on principal (original amnt. deposited) and on any previously earned interest – using amnt. deposited) and on any previously earned interest – using this your interest earnings will be much greater, especially the this your interest earnings will be much greater, especially the more times compounded and for longer periods of timemore times compounded and for longer periods of time

Inflation – bad if you are locked in a low rate for a long Inflation – bad if you are locked in a low rate for a long timetime

Tax Considerations – look for tax-exempt or tax deferred Tax Considerations – look for tax-exempt or tax deferred savings planssavings plans

Liquidity – if you need to withdraw your money easily you Liquidity – if you need to withdraw your money easily you will have a low interest rate, for long-term savings a high will have a low interest rate, for long-term savings a high interest rate is importantinterest rate is important

Restrictions and Fees – delays between when interest is Restrictions and Fees – delays between when interest is earned and when it is added to account, fees for earned and when it is added to account, fees for deposits and withdrawals, service charges for balance deposits and withdrawals, service charges for balance drops or lack of account usagedrops or lack of account usage

Type of Account Type of Account Advantages Advantages Disadvantages Disadvantages

Regular Checking Regular Checking Account Account

Most have no Most have no

minimum balanceminimum balance

$10 service charge $10 service charge

for each month you for each month you

go below – can add go below – can add

upup

Activity Checking Activity Checking Accounts Accounts

No minimum No minimum

balance requiredbalance required

May charge fee for May charge fee for checks and depositschecks and depositsCan only write a few Can only write a few checks per month checks per month

Interest-Earning Interest-Earning Checking AccountsChecking Accounts

Pay interest if you Pay interest if you

have a minimum have a minimum

balancebalance

If go below If go below balance, balance,

you may not earn you may not earn

interest and may interest and may

have a service have a service

charge charge

Evaluating Checking Accounts Evaluating Checking Accounts Restrictions – most common is keeping a Restrictions – most common is keeping a

minimum balance, number of transactions minimum balance, number of transactions allowed, number of checks you may write in a allowed, number of checks you may write in a monthmonth

Fees and Charges – monthly service charge, Fees and Charges – monthly service charge, checking printing, overdrafts, stop-payment checking printing, overdrafts, stop-payment ordersorders

Interest – rates, frequency of compounding, way Interest – rates, frequency of compounding, way interest is calculatedinterest is calculated

Special Services – ATM, telephone, online Special Services – ATM, telephone, online banking, overdraft protection banking, overdraft protection

Using a Checking Account Using a Checking Account Opening a checking accountOpening a checking account

Individual or jointIndividual or joint Writing checksWriting checks

Know proper wayKnow proper way Making depositsMaking deposits Check clearingCheck clearing

Money deposited is on hold for no more than 2 days Money deposited is on hold for no more than 2 days from local banks, 5 days for non-localfrom local banks, 5 days for non-local

Keeping track of a checking accountKeeping track of a checking account Other payment methodsOther payment methods

Certified check, cashiers check, travelers Certified check, cashiers check, travelers

Financial Institutions and Your Financial Institutions and Your Money Money

Make money by making loansMake money by making loans Amount of money banks lend is affected by Amount of money banks lend is affected by

reserve requirement set by Federal Reservereserve requirement set by Federal Reserve Reserve requirement is 3% to 10% of bank’s Reserve requirement is 3% to 10% of bank’s

total depositstotal deposits When bank gets $100 deposit, they could lend When bank gets $100 deposit, they could lend

out $90 (with a 10% reserve)out $90 (with a 10% reserve) That $90 goes out into the economy and if it That $90 goes out into the economy and if it

gets deposited in another bank $81 of the $90 gets deposited in another bank $81 of the $90 (10% reserve) can be lent out and so on(10% reserve) can be lent out and so on