How to Do your Banking Chapter 5

Savings Accounts Saving Investing Deposit Withdrawal Interest Interest rate Account balance Compounding of interest Future value Present value Discount factor Rule of 72

By saving even small amounts of money, you can build wealth slowly but steadily over time.

savings Money not intended for everyday expenses Purpose is to provide a safe place to save money that can be uses at a later date Large purchases Financial security Emergency fund

Savings account basics Goal of saving is to provide funds for emergencies, short-term goals, and eventually investment Save first, then begin investing it Keep in mind the difference between saving and investing

Savings The process of setting aside money for a future date instead of spending it today

investing The process of setting aside money to increase wealth over time and accumulate funds for long- term financial goals such as retirement

Deposits and withdrawals Have you ever tried to save up for something, but are unsuccessful because you are constantly taking out small amounts of cash that you were “saving”? Most of us have good intentions, but not the willpower when the money is accessible

Pail of water Think of a savings account like a pail of water Amount of water in the pail is your money When you add water, it is a deposit The hole at the bottom of the pail is a withdrawal How do you keep your pail full?

deposit Money you put into a savings account

withdrawal Money taken out of a savings account

Interest payments Little something extra you earn by saving money You are basically a lender to the bank and the bank is a borrower when you put money into a savings account The bank has use of your money until you choose to withdrawal it Make loans for other people Bank pays you money for giving up use of your money--interest

Money paid to you by the bank for being able to use your money interest Money paid to you by the bank for being able to use your money

Percentage you are paid for your money Interest rate Percentage you are paid for your money

Total amount of money that is in the account at a given point in time Account balance Total amount of money that is in the account at a given point in time

Pail of water Even if no additional water enters your bucket and water goes out the hole in the bottom you still have added water WhY?

You open a savings account with $1000 You don’t make any additional deposits or withdrawals Money stays in your account for one year Your interest rate is 3% per year paid monthly What is your monthly interest rate?

Month Interest Rate Beginning Balance Interest Payment Ending Balance 1 0.0025 1000 2.5 1002.5 2 2.50625 1005.00625 3 2.512515625 1007.518766 4 2.518796914 1010.037563 5 2.525093906 1012.562656 6 2.531406641 1015.094063 7 2.537735158 1017.631798 8 2.544079496 1020.175878 9 2.550439694 1022.726317 10 2.556815794 1025.283133 11 2.563207833 1027.846341 12 2.569615853 1030.415957

Interest rates Vary significantly Late 1970’s it was 16%

Interest payment=interest rate x beginning account balance Ending account balance=beginning account balance + interest payment beginning account balance = ending account balance from the previous month

Compounding of interest Why do interest payments increase over time? The bank credits interest to your account each month, and that interest is earned on the entire account balance, not just the original deposit. As the account balance grows over time, your interest earnings grow as well thanks to the compounding of interest

Future Value How much a set amount of money will be worth in the future

Future Value for 1 year 100=x * (1+rate)

The value of the money right now, today Present value The value of the money right now, today

Discount factor The amount that $1 at some point in the future is worth today In our example the discount factor is .9705 1000/1030.42 That means 97.05 cents is worth $1 in the future

Rule of 72 A formula designed to help people estimate how long it will take to double their money at a certain expected interest rate

Rule of 72 In our example we had $1000 with 3% interest How long will it take to double our money? 24 years 72/3 This is an estimate, not an exact calculation

practice How long will it take to double your money ($1000) at the interest rates? 2% 4% 8%

practice 1 .25% 0.00 1000.00 2.50 1002.50 Month Interest Rate Withdrawals Beginning Balance Interest Payments Deposits Ending Balance 1 .25% 0.00 1000.00 2.50 1002.50

practice You deposit $320, half the money you earn from your part-time job, monthly In Month 4 you withdraw $45 to purchase a video game In Month 7 you deposit $50 you received for your Birthday In month 10 you withdraw $200 to pay a registration fee for an upcoming activity

Checking accounts Check Deposit/Credit Debit Balance/Reconcile Statement Balance Debit Card Pin Interest Bearing Account EFT Online and smartphone Banking Automated Teller Machines Overdrawn Overdraft Penalty Identity Theft Overdraft Protection Minimum Account Balance

Checking accounts have changed Today’s checking accounts are designed to make it easy for people to Pay bills Purchase things Withdraw cash

Check Handwritten or computer generated order specifying the amount of money to be paid and the name of the person or company who should receive the funds

Checking accounts services Debit cards Electronic funds transfers Online banking

Checking v savings Money in a checking account is meant to be used

Checking account balances Keep track of deposits or credit and debits from your account

Deposit Or Credit Money you put into your account

Debit Withdrawal from your account

Parts of a check

Check register Records the date and amount of deposits, date, check number, payee, and amount check is written for

Check Register

Balance/Reconcile At the end of each month you should balance or reconcile your checkbook Compare the amount of money in an account, equal to the net of credits and debits at that point in time for that account

Reconcile check book Account balance = start of the month account balance + total amount of deposits – total amount of checks written or debits

Statement balance How much money you have in your checking account as of the statement date

practice The end of the month balance for august is $143.68 During September you make two deposits for $105.24 and $108.78 and your write nine checks totally $289.44 What is your account balance?

Now you practice Complete #12

Now you practice Beginning Balance $35 Total debits $53.20 Total credits $46.50 Ending Balance $28.30

Electronic, online, and smartphone banking Instead of writing checks—use debit card to pay for day-to-day transactions

Checks v debit cards Debits are easily completed by swiping a card that looks like a credit card Debit card funds are accessed immediate by the merchant and funds are automatically deducted from the cardholder’s account Debit cards can be used at ATMs to get cash immediately

Debit card A card that allows the user to withdraw money from a bank account to obtain cash or make a purchase

Personal Identification Number (PIN) Four digit code connected to the debit card; verifies your identity

Electronic Funds transfer The movement of funds using computer systems, telephones, or electronic terminals or smartphones

Online and smartphone banking Allows account holders to access their account information, view transaction history and perform banking transactions via the Internet or their mobile phone

Automatic Teller Machines (ATMS) Automated machine that tallows you to perform basic banking functions without the help of a teller

practice You have a beginning balance of $143.68 You make two deposits of $105.24 and $108.78 You wrote 9 checks totaling $289.44 You forgot to record a debit from a trip to the mall of $22.94 until you checked your account online In the meantime you sent a check for $62.97 to pay your cell phone bill what is your current balance? What do you think will happen when the cell phone company cashes your check? What will happen as a result of your failure to record the debit?

Overdrafts and overdraft protection It is important to remember to record transactions in your checkbook register when using a debit card to pay a merchants, use an ATM, and use EFT for paying bills Failure to record transactions can result in being overdrawn

Having a negative balance in your account overdrawn Having a negative balance in your account

A fee to cover the cost of processing your bad check Overdraft penalty A fee to cover the cost of processing your bad check

Overdraft protection Agreement with the bank to cover checks so they will not bounce Automatic transferring money from another account to the same bank to cover the amount Allowing you to overdraft your account up to a specified limit before assessing any penalties and bouncing your checks Lending you the amount of money by which you have overdrawn your account and charging you interest on the loan

practice Using the example: Your account balance is 45.32 and the cell phone company will receive a check for $62.97, which could overdraw the account to - $17.65 You don’t get paid for another week Not only will you be charged a late fee with your cell phone company and risk losing service You will be charged and overdraft penalty by the bank

Choosing a checking account When selecting a back, be sure to choose an account that meets your needs in terms of service that match your spending habits Read the fine print Pay attention to fees and requirements Minimum balance Interest bearing? Free checks Online bill pay Mobile phone apps Email statements Overdraft protection Limits debit transactions