Chapter 5 Financial Services: Savings Plans and Payment Accounts

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Chapter 5 Financial Services: Savings Plans and Payment Accounts. Chapter 5 Learning Objectives. Analyze factors that affect selection and use of financial services Compare the types of financial institutions Compare the costs and benefits of various savings plans
Chapter 5 Financial Services: Savings Plans and Payment Accounts Chapter 5Learning Objectives
  • Analyze factors that affect selection and use of financial services
  • Compare the types of financial institutions
  • Compare the costs and benefits of various savings plans
  • Identify the factors used to evaluate different savings plans
  • Compare the costs and benefits of different types of payment accounts
  • A Cash Management Strategy Objective 1: Analyze factors that affect selection and use of financial services
  • Banks, saving and loan associations, credit unions, and other financial institutions provide a variety of financial services
  • Account aggregation: online banking -- deposits, investments, credit cards, loans, mortgages, rewards programs and IRAs MEETING DAILY MONEY NEEDS
  • Cash, check, credit card or an ATM are the most common payment choices
  • A Cash Management Strategy (continued) 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
  • A Cash Management Strategy (continued) 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
  • A Cash Management Strategy (continued) Other types of financial services (continued)
  • Trust
  • A legal agreement that provides for the management and control of assets by one party for the benefit of another
  • Asset management account
  • Also called a cash management account
  • Offered by brokers and financial institutions
  • Provides a complete financial service program for a single fee and includes:
  • A checking account and an ATM card
  • A credit card
  • Online banking
  • Line of credit
  • Access to a variety of investments
  • or
  • A Cash Management Strategy (continued) ELECTRONIC AND ONLINE BANKING
  • Obtain cash; check account balances
  • Direct deposit of paychecks, government payments
  • Preauthorized payments for insurance, mortgage, utilities, and other bills
  • Online transfer of funds from one account to another
  • Debit card retail purchases
  • 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
  • A Cash Management Strategy (continued) FINANCIAL SERVICES AND ECONOMIC CONDITIONS
  • Changing interest rates, rising consumer prices and other economic factors also influence financial services
  • Be aware of current trends and future prospects for interest rates (Exhibit 5-3)
  • Read Wall Street Journal, business section of daily newspapers, and business periodicals, such as BusinessWeek, and Forbes
  • Financial Institutions Objective 2: Compare the types of financial institutions DEPOSIT INSTITUTIONS
  • Commercial banks
  • Offer a full range of services including checking, savings, lending and other services
  • Savings and loan associations
  • Offer 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 cooperative financial institutions
  • Financial Institutions (continued) OTHER FINANCIAL INSTITUTIONS
  • Life insurance companies
  • Offer insurance, plus savings and investment features; some offer financial planning and retirement services
  • Investment companies
  • Are also referred to as Mutual Funds
  • 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
  • Mortgage companies
  • Provide loans to customers so they can purchase homes
  • Financial Institutions (continued) Beware of high-cost financial services
  • 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
  • Payday loans -- use personal check $115 to borrow $100 cash for 14 days -- 391% annual
  • Financial Institutions (continued) COMPARING FINANCIAL INSTITUTIONS
  • Basic concerns of a financial service 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?
  • Financial Institutions (continued) When choosing a financial institution Consider:
  • Services offered
  • Interest rates
  • Fees and charges
  • Financial advice
  • Safety (deposit insurance)
  • Convenience
  • Locations
  • Online services
  • Special programs
  • Savings Plans Objective 3: Compare the costs and benefits of various savings plans REGULAR SAVINGS ACCOUNTS
  • Called passbook accounts, involve a low or no minimum balance
  • Credit unions call them share accounts CERTIFICATES OF DEPOSITS
  • Require you to leave your money on deposit for a set time period, otherwise you incur penalties
  • Several types (rising-rate, indexed, callable, global, promotional)
  • Consider all the earnings and all the costs
  • Savings Plans(continued) MONEYMARKET ACCOUNTS AND FUNDS
  • Money market accounts are covered by the FDIC, but money market funds are not U.S. SAVINGS BONDS
  • Series EE sold at half of face value, with potential tax advantages -- deductible if used to pay tuition and fees -- Exempt from state and local income taxes -- You don’t have to pay federal income tax on interest until redemption
  • Series HH are current-income bonds that pay interest every six months
  • I Bonds combine fixed rate and inflation rate
  • See for rates
  • Evaluating Savings Plans Objective 4: Identify the factors used to evaluate different savings plans RATE OF RETURN
  • Percentage or yield is the increase in value due to interest
  • Example: a $500 savings account that earned $25 has a yield of 5 percent COMPOUNDING
  • Frequent compounding means more interest earning on interest
  • Evaluating Savings Plans Evaluating Savings Plans (continued) TRUTH IN SAVINGS
  • Requires Disclosure of...
  • Fees on deposit account
  • The interest rate
  • The annual percentage yield (APY)
  • Other terms and conditions INFLATION
  • Compare your APY with inflation rate TAX CONSIDERATIONS
  • Taxes reduce interest earned on savings
  • Taxes are not withheld from savings and investments; you may owe additional taxes at year-end as a result of earnings on saving
  • After Tax Savings 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%.
  • Evaluating Savings Plans (continued) LIQUIDITY
  • Allows you to withdraw money on short notice without penalty or fees SAFETY
  • FDIC insures up to $250,000 per person per financial institution (see RESTRICTIONS AND FEES
  • Several restrictions can affect the choice of a savings program
  • Delay in time between earned and posted, transactions fees from deposits and withdrawals, time money has to be left in a deposit account in order to receive a “free” gift, etc.
  • Payment Methods Objective 5: Compare the costs and benefits of different types of payment accounts ELECTRONIC PAYMENTS
  • Debit Cards
  • Online Payments –most credit cards now offer this service
  • Stored-value cards
  • Smart Cards
  • Payment Methods(continued) TYPES OF CHECKING ACCOUNTS
  • Regular Checking Accounts– many have minimum balances
  • Activity Account -fees on checks & deposits
  • Interest-earning or NOW accounts, which usually require a minimum balance
  • Interest Earning Checking accounts are also known as Share draft accounts at credit unions
  • Payment Methods(continued) EVALUATING CHECKING ACCOUNTS
  • Checking accounts need to be evaluated based on :
  • Restrictions
  • Fees and charges
  • Interest rate and computation method
  • Special services, such as overdraft protection
  • Payment Methods(continued) MANAGING YOUR CHECKING ACCOUNT
  • Opening a Checking Account
  • Individual or joint account
  • Making Deposits
  • Deposit ticket
  • Endorsement
  • Blank endorsement
  • Restrictive endorsement
  • Special endorsement
  • Payment Methods(continued)
  • Writing Checks
  • Record the date
  • Write the name
  • Record the amount
  • Write the amount in words
  • Sign the check
  • Note the reason for payment
  • Payment Methods(continued) 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
  • Online Activity
  • Go to and explore money market account rates
  • Also, look at rates for one year and five year CDs. If you had money to invest right now, which maturity of CDs would you choose?
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