chapter 4 financial services: savings plans and payment account copyright © 2013 by the mcgraw-hill...
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Chapter 4Financial Services:
Savings Plans and
Payment Account
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
4-4-22
Savings and Payment Accounts
Chapter Learning Objectives
LO4.1 Identify commonly used financial services
LO4.2 Compare the types of financial institutions
LO4.3 Assess various types of savings plans
LO4.4 Evaluate different types of payment methods
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Learning Objective LO4.1Identify Commonly Used
Financial ServicesMeeting Daily Money Needs
Common mistakes:
– Overspending (impulse buying, using credit)– Insufficient liquid assets– Using savings or borrowing to pay for
current expenses– Failing to put unneeded funds in an interest
bearing or investment account
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Learning Objective LO4.1Identify Commonly Used Financial
Services
Meeting Daily Money Needs
Sources of quick cash:– Liquidate savings
• Savings account• CD• Mutual fund
– Borrow• Credit card advance• Personal loan
Both options reduce net
worth
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Types of Financial Services
• Savings– Time deposits– Savings and certificates of deposit
• Payment services– Checking accounts = demand deposits– Automatic payments
• Borrowing for the short- or long-term• Other financial services
– Insurance, investment, real estate purchases, tax assistance, trusts, and financial planning
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Types of Financial Services
• Asset management account– Also called a cash management account– Offered by investment companies and
others to provide a complete line of financial services program, which include:
• Checking account and ATM card• Credit card• Online banking• Line of credit for quick cash loans• Access to a variety of investments
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Online Banking
• Direct deposit – Paychecks and other regular income
• Automatic payments transfer funds – Recurring payments such as for utilities– Remember to deduct them from your register
• ATM access – Obtain cash, check account balances, and transfer
funds – Check out the fees
• Debit card – Deducts money directly and immediately out of your
account– Lost card liability $50-$500
Traditional banks online services
Web-only banks (E*Trade Bank)
Services provided:
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Mobile Banking
• Text banking
• Mobile web banking
• Banking apps
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Online and Mobile Banking
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Pros and Cons of Online Banking
Benefits ConcernsTime and money savings Potential privacy, security
violations
Convenience for transactions, comparing rates
ATM fees can become costly
No paper trail for identity thieves
Difficulty depositing cash, checks
Transfer access for loans, investments
Overspending due to easy access
E-mail notices of due dates Online scams, “phishing,” and e-mail scams
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Financial Services and Economic Conditions
For successful financial planning, be aware of:
• Prime rate = rate banks charge large corporations
• Consumer interest rates• Rising consumer prices• Information sources:
• www.federalreserve.gov• www.wsj.com• http://finance.yahoo.com
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Interest Rates & Financial Decisions
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Learning Objective LO4.2Compare the Types of Financial
Institutions
Basic questions to ask before choosing a financial institution
1. Where can I get the best return on my savings?
2. How can I minimize my costs for financial services?
3. Will I be able to borrow money if I need it?
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Learning Objective LO4.2Comparing Financial Institutions
• Determine the financial services you need before choosing a financial institution
• Compare fees and convenience• Consider the safety and rates for
deposits and loans at different institutions
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Five Steps to Selecting a Financial Institution
1. List features most important to you
2. Rank the top 3-4 most important features
3. List local, national & online institutions
4. Conduct research:• Talk with friends• Online research• Personal visit
5. Balance your needs with information collected
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Financial Services Research
• Services offered
• Fees disclosure
• Minimum balance
• Savings rate sheet
• Sample loan application
• Sufficient deposit insurance
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Types of Financial Institutions
Deposit Institutions• Commercial banks
– Organized as corporations
– Offer a full range of services including checking, savings, lending, and other services
• Savings and loan associations – Checking accounts, specialized savings
plans, loans and financial planning and investment services
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Deposit Institutions (continued)
• Mutual savings banks – Specialize in savings accounts and
mortgage loans – Owned by their depositors, with profits going
back to depositors by paying a higher rate on savings
• Credit unions – User-owned, nonprofit and provide
comprehensive financial services– Lower fees and lower loan rates
Types of Financial Institutions
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Non-Deposit Institutions• Life insurance companies
– Insurance plus savings and investments– Some offer financial planning and investing
services• Investment companies
– Mutual funds– Money market fund
• Combination savings and investment plan• Not covered by FDIC
Types of Financial Institutions
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Non-deposit Institutions• Brokerage firms
– Act as agent for buyers and sellers of financial products
• Credit card companies – Specialize in short term loans
• Finance companies – Make short and medium term loans to
consumers– Higher rates
• Mortgage companies – Provide home mortgage loans
Types of Financial Institutions
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• Pawnshops – Loans on possessions
– Higher fees; 3% per month common
– Used for quick cash
• Check-cashing outlets – Charge 1-20 % of check’s face value
– 1-3% is average
– AKA: Currency exchanges
Problematic Financial Businesses
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• Payday loan companies – Cash advances – Check advance loans– Postdated check loans– Delayed deposit loans– High interest rates
• Rent-to-Own Centers – Lease merchandise at high interest rates to
low-income customers
• Car Title Loans
Problematic Financial Businesses
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Learning Objective LO4.3Comparing Savings Plans
• Regular savings accounts– Passbook savings– Statement accounts– Low minimum balance– Easy withdrawal– Insured– Low rate of return– Credit Union = share accounts
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Learning Objective LO4.3 Comparing Savings Plans
• Certificates of deposit– Required minimum deposit– Required time on deposit– Penalties for early withdrawal – Take care when rolling over– Various CD types:
• Rising-rate or bump• Stock-indexed• Callable • Promotional
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Learning Objective LO4.3 Comparing Savings Plans
• Interest earning checking accounts– Checking accounts paying low interest
• Money market accounts and funds– Floating interest rate
– Allows limited check writing
– Higher minimum balance
– Money market accounts are covered by the FDIC, but money market funds are not
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Learning Objective LO4.3 Comparing Savings Plans
• U.S. Savings Bonds– Series EE
• “Patriot Bonds”
• Sold at half of face value
• Face values $50 - $5,000
• Fixed-rate interest compounded semiannually
• Penalty if redeemed within 5 years
• Continues earning interest for 30 years
• Potential tax advantages if used to pay tuition
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• U.S. Savings Bonds– Series HH – no longer sold
• Current income bonds• Pays interest every six months• Interest direct deposited and taxed as current
income
– I bonds • Earns a fixed rate plus an inflation rate • Twice-a-year inflation adjustment
– See www.savingsbonds.gov for rates
Learning Objective LO4.3 Comparing Savings Plans
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Learning Objective LO4.3Managing Electronic Savings
Bonds• Registration:
– Single owner– Co-owners with a primary owner– With a beneficiary
• Treasury Direct– Establish an account at
www.treasurydirect.gov– 24/7 access to buy manage and redeem
electronic bonds
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Learning Objective LO4.3Savings Alternatives
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Learning Objective LO4.3Savings Alternatives
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Evaluating Savings Plans
• Rate of return or yield– Percentage increase in value due to interest– Frequency of compounding increases return
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“Truth in Savings Act” • Requires disclosure of:
– Fees on deposit accounts– Interest rate
– Annual percentage yield (APY)
• APY defined as the “total percent”
• Total percent is based on annual interest and
frequency of compounding
• APY = Rate per period x # periods per year
Evaluating Savings Plans
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Evaluating Savings Plans
• Inflation – Compare rate of return vs. inflation rate
• Taxes – Reduces interest earned on savings
• Liquidity– Quick availability of cash– Without significant loss in value
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Evaluating Savings Plans
• Safety via FDIC and NCUA– FDIC insured up to $250,000 per person
per financial institution – Up to $250,000 for certain retirement
accounts– www.fdic.gov
• Restrictions and fees– Minimum balance– Fee for additional transactions
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Learning Objective LO4.4Comparing Payment Methods
Electronic Payments
Checking Accounts
Other Payment Methods
Debit (cash) and Credit cards
Regular checking
Certified check
Online payments, transfer
Activity checking
Cashier's check
Stored-value (prepaid) cards
Interest-earning account
Money order
Smart cards ("electronic wallet")
Traveler's checks
Payment Methods
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Payment Methods Electronic Payments
• Debit Card Transactions• Immediate account debit
• Online Payments• PayPal, MyCheckFree
• Stored-value Cards• Prepaid cards for telephone,
transit, tolls, etc.
• Smart Cards• “Electronic wallets”
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Credit vs. Debit Cards
Use a Credit Card to…• Delay payment• Build a credit history• Buy online• Major purchases• Earn rewards
Use a debit card to …• Limit spending to
available funds• Avoid future bills• Avoid interest or
annual fee• Obtain better
protection
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Payment MethodsChecking Accounts
• Regular Checking Accounts– Monthly service charge usual– Minimum balance
• Activity Accounts– Fee charged for each check written,
and sometimes for deposits
• Interest-earning or share draft accounts (credit unions)– Require a minimum balance
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Evaluating Checking and Payment Accounts
• Restrictions, such as a minimum balance
• Fees, which increase, and charges
• Interest rate and computation method
• Special services – Overdraft protection
• Beware of “package” deals that include unneeded services
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Checking Account Selection Factors
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Other Payment Methods
• Certified check– Personal check with guaranteed payment
• Cashier’s check– Check from a financial institution; you pay 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 with
ability to get local currency at an ATM
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Managing Your Checking Account
Opening a Checking Account• Individual vs. joint account
Making Deposits• 3 types of endorsements
Blank endorsement – Signature only
Restrictive endorsement – “For deposit only”
Special endorsement– “Pay to the order of”
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Managing Your Checking Account
Writing Checks1. Record the date2. Write the name of the
person/organization receiving the check
3. Record the amount of the check in figures
4. Write the amount of check in words5. Sign the check6. Note the reason for the payment
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Managing Your Checking Account
Bank Reconciliation1. Compare written checks with those
reported paidSubtract the total of all checks written but not yet cleared
2. Determine deposits not on the statement; Add the amount to the statement balance
3. Subtract fees or charges and ATM withdrawals from the checkbook balance
4. Add any interest to your checkbook balance
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Chapter SummaryLearning Objective LO4.1
• Financial products such as savings plans, checking accounts, loans, trust services, and electronic banking are used for managing daily financial activities
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Chapter SummaryLearning Objective LO4.2
• Commercial banks, savings and loan associations, mutual savings banks, credit unions, life insurance companies, investment companies, finance companies, mortgage companies, pawn shops, and check-cashing outlets may be compared on the basis of:
– Services offered– Rates and fees – Safety– Convenience– Special programs available to customers
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Chapter SummaryLearning Objective LO4.3
Commonly used savings plans include:
• Regular savings accounts
• Certificates of deposit
• Interest-earning checking accounts
• Money market accounts
• Money market funds
• U.S. savings bonds
Evaluate savings plans on the basis of:• Rate of return• Inflation• Tax considerations• Liquidity• Safety• Restrictions• Fees
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Chapter SummaryLearning Objective LO4.4
• Debit cards, online payment systems, and stored-value cards are increasing in use for payment activities.
• Regular checking accounts, activity accounts, and interest-earning checking accounts can be compared with regard to:– Restrictions (such as a minimum balance)– Fees and charges– Interest– Special services