Unit 2: Banking, Checking, and Savings

Federal Reserve Bank (The “FED”) Our Nation’s Central Bank (HQ in DC)

Role of the Federal Reserve Bank (The FED) Federal reserve video Fed is our Nation’s “Central Bank” FED: Responsible for Monetary Policy, Regulating Banks, and Check Clearing

FED Monetary Policy (Money Policy) Monetary Policy Objectives: The FED regulates the amount of money (cash + checking) in circulation to set interest rates with the objectives of 1) keeping prices stable (little inflation) and 2) maintaining full employment. 1 and 2 are the “dual mandate” of FED Monetary Policy! Monetary Policy Strategy: Adjust Interest Rates FED lowers interest rates to get people to borrow and spend during recession (high unemployment) by increasing the money supply (higher money supply lowers interest rates), thus putting people back to work. FED raises interest rates to slow borrowing and spending during periods of high inflation by reducing the money supply (lower money supply raises interest rates)

How Does the FED Change Interest Rates? The 3 Tools of Monetary Policy Open Market Operations FED buys government securities to increase money supply, thus lowering interest rates. FED sells government securities to decrease money supply, thus raising interest rates. Reserve Ratio (% of deposits held & not loaned) FED lowers the reserve ratio to enable banks to lend more money (lowers interest rates) FED raises the reserve ratio to stifle banks from lending more money (raises interest rates)

How Does the FED Change Interest Rates? The 3 Tools of Monetary Policy Discount Rate Defined: the interest rate that the FED charges its member banks on loans to them The FED lowers the discount rate to entice banks to borrow from FED and use the money to loan to customers, FED trying to increase the money supply and lower interest rates. The FED raises the discount rate to discourage banks from borrowing from FED, thus limiting funds for new loans to customers, thus decreasing the money supply and raising interest rates.

What is a Depository Institution? Depository Institution – businesses that provide financial services (AKA “Banks” for short)

Types of Depository Institutions Two types of depository institutions are: Commercial Bank Credit Union For-profit (owned by stockholders) Not-for-profit (owned by members) Open to anyone Have membership qualifications – members must share a “common bond” (discuss NFCU) Offer numerous financial services Offer many services but often not as many as a bank Usually the largest depository institutions Are often able to pay higher interest rates and charge lower fees (since non profit) Each type is unique – choose wisely!

Location: Becoming less Important with Online & Mobile Banking! Locations all across the U.S. or only in your state or city/town? Do you have transportation to get to a location if needed? Physical location or only online? Multiple locations or just one?

Depository Institutions Keep Your Money Safe Offer a practical and secure place to store your money and other valuables Payment & Savings Enabler (checking, savings, debit & credit cards, other loans) FDIC Insurance: if Bank Fails (won’t lose money) Security Deposit Boxes (wills, stocks, deeds, etc.) Federal Deposit Insurance Corporation (FDIC) National Credit Union Administration (NCUA) Insures banks and other types of institutions (other than credit unions) Insures credit unions only $250,000 per depositor, per account, per insured institution (Discuss Example) Same as FDIC

Transaction and Savings Tools Special Needs Payment Instruments Credit: Cards & Loans Safe-Deposit Box Financial Advice

Accounts that help you manage your money May or may not earn interest The 2 most common accounts: Checking Account Savings Account

Should you look for a low or high interest rate on a savings account? Checking Account Savings Account Provides quick access to funds for transactions (expenses) An account for money not intended to be used for daily expenses but will be used in short-term. Use deposited money anytime by: Writing checks Using a debit card (fast check) Withdrawing cash (ATM) Electronically transferring money (bills, loan payoff, etc.) Access to money is more limited than a checking account Should you look for a low or high interest rate on a savings account? Many earn interest but all do not. Usually lower interest rate than savings account. Earn interest, but low rates (1% is average today)

Depository institutions offer the ability to earn interest Interest - the price paid for using someone else’s money You can earn interest (savings) or be charged interest (loans) The amount of interest earned or charged is determined by the interest rate (percentage rate used to calculate interest, usually quoted as an annual rate but earned monthly)

“Credit” (A Term for Borrowing Money) Loans Credit cards Mortgages (loan with property as collateral for loan) You will pay back the money borrowed plus interest

Other Services at a Financial Institution Information, advice, and assistance with a wide range of financial topics (budgeting, investing, insurance etc.) Store valuable personal items (deeds, wills, stocks, jewelry, personal finance notes) Guaranteed types of payments such as certified checks, cashier’s checks, and money orders

Special Needs Payment Instruments Guaranteed Payment Checks (Guaranteed to Clear / Will Not Bounce) Certified Check: Written on your own check stock, but bank “freezes” your funds so the check will clear. Bank stamps your check “certified” with seal. Cashier’s Check or Banker’s Check: Written on the Bank’s check stock with bank signature. Your money is transferred to the bank before check is written. Money Order: A check written by an institution guaranteed to clear. You must provide them the funds. Often used by those without a checking account. Offered by some post offices, banks, and merchants.

Features of Depository Institutions Services offered by depository institutions Credit Cards and Loans Online banking Mobile banking (phone) Debit cards ATMs

Online Banking You are able to complete certain transactions from a secured Internet site Access account information Transfer money Pay bills/set up recurring bill payment Use a username and password Apply for credit

Mobile Banking Apps that many depository institutions have developed that allow online banking access from devices such as smartphones and tablets Usually offers the same services as online banking plus depositing checks by phones (pics)

Debit Cards A plastic card that is electronically “linked” to the cardholder’s checking account (money transferred out immediately) Functions in the same manner as a checks but faster clearance of funds and safer to carry than cash. Use a Personal Identification Number (PIN) or signature to authorize transactions

Fees Different types of fees may be charged Fees will vary between institutions and within different services at the same institution One of the most important factors to consider when choosing a depository institution Some accounts have a minimum account balance; fee charged if you go below that balance Charged if you withdraw more money from your account than is available Charge for using an ATM that belongs to another depository institution

How do you manage fees? Research fees when choosing a depository institution When opening an account, ask for a list of fees Most fees are avoidable Manage your account responsibly

Summary Depository institutions offer many benefits: A safe place to store money A way to manage cash The opportunity to earn interest Services/features offered and fees charged vary between and within every depository institution Research different depository institutions and choose one that will help you reach your goals

How to Write a Check

Start by writing today’s date and the “payee” (don’t post date checks

Write the amount of the payment in numeric form (place amount to far left of box!)

Here’s an example of what can happen if you do not write numeric amount to the far left! Someone slipped a 9 in front of the 8!

Write out the amount of your payment using words instead of numerals (“and” represents decimal point). The written amount is superior to the numeric amount and a check can be cashed on the written amount if it differs from the numeric amount!

Draw a line through any excess space in the written amount after your payment amount is completed. Notice 15/100!

Finally, add a memo if you prefer and sign your check Finally, add a memo if you prefer and sign your check. Your check signature must match the “check signature card” at bank.

Keep track of the checks you write (and your account balance) in your check register. Write down immediately after you write the check!

http://www.youtube.com/watch?v=dIZWqIv_flA

Let’s Write a Check! Using today’s date, write a check for $225.14 to Dominion Power for your September 2018 Electric Bill. Sign you own name as the maker or drawer.

Endorsing and Depositing Checks

Endorsing a Check Endorsement Three types of endorsements: Made on the back of a check to enable it to be deposited or cashed A check must be endorsed to be deposited or cashed! Three types of endorsements: Blank Restrictive Special

Blank Endorsement Receiver of the check signs his/her name Can cash or deposit the check after it has been signed Not recommended since possessor of check can legally cash it once blank endorsed 

Restricted Endorsement More secure than a blank endorsement Receiver writes “for deposit only and their bank account number above his/her signature Allows the check to only be deposited into your account The recommended form of endorsement. 

Special Endorsement Receiver writes “pay to the order of”, designates a payee, and signs the check.” Allows the check money to be legally transferred to another party Not used very often. In effect, it turns a check into another check.

Endorsement Practice: Next Slide Now it’s your turn to practice Endorsement Practice: Next Slide

Blank Restrictive Special Endorse a $100 check made out to you. In the special endorsement, please transfer it to “Steve Latter” Blank Restrictive X Endorse Here X Endorse Here Special X Endorse Here

Making a Deposit Deposit Slip Allows money (cash or check) to be deposited into a checking or other account. Deposits can be made with a mobile app, at an ATM machine, or with a bank teller Don’t forget to record your deposit in your checkbook register!

Completing a Deposit Slip Date The date the deposit is being made

Completing a Deposit Slip Signature Line Sign this line to receive cash back only. Don’t need to sign if you are not taking a portion of your deposit back as cash.

Completing a Deposit Slip Cash The total amount of cash or currency being deposited. Place on this one line only. Rest of Slip is for checks.

Completing a Deposit Slip Checks List each check individually Identify each check number on the deposit slip and include the name of the check writer providing you the check.

Completing a Deposit Slip Checks (Back of Slip) If more checks are being deposited than the number of spaces on the front, use the back of the deposit slip List each check and amount. Add the total and enter it on the front

Completing a Deposit Slip Total from Other Side The total amount from all checks listed on the back of the deposit slip

Completing a Deposit Slip Subtotal The total amount of cash and checks (there is no cash deposit in this example)

Completing a Deposit Slip Less Cash Received The amount of cash back being received This amount is not deposited into account

Completing a Deposit Slip Net Deposit The amount being deposited into the account To calculate the amount, subtract the cash received from the subtotal

Reconciling Your Bank Account (“Balancing your Checkbook”)

Checking Account Register Place to record all transactions for a checking account Deposits, checks, ATM withdrawals, debit card purchases, bank fees, interest earned, etc. Provides all transaction activity plus a running balance of what you have left to spend. (Just like HR Block Spreadsheet!)

Reconciling your Checking Account Explaining differences between the balance in your checkbook register to the balance shown in your bank account. Knowing the correct balance can help to avoid bouncing checks. Bank Reconciliation Formula Balance per bank + Outstanding deposits (deposits in your checkbook but not picked up yet by bank) - Outstanding checks (checks taken out of your balance but not cleared bank) = Balance per checkbook register Thus, the bank balance and checkbook balance should only be different by the amount of outstanding checks and outstanding deposits. The two balances are seldom the same but they should be both correct. The checking account balance is superior as you know about the outstanding deposits and checks.

What is a cancelled check? A check that has cleared the depositor’s account and has been marked “canceled” by the bank Can be used as proof of purchase.proof of payment Canceled checks used to be returned in a mailed monthly statement to the maker, but no longer Current day – images of scanned canceled check copies (front and back) can be accessed online to support purchases. You own your canceled checks! A check that has cleared the depositor's account and has been marked as "canceled" by the bank. A canceled check has been paid by the drawee bank and endorsed by the payee, the payee's bank, and the Federal Reserve Bank. Canceled checks can also be used as proof of payment.  Investopedia explains 'Canceled Check' In the past, canceled checks used to be returned to the bank account holder each month with their monthly statement. That is now rare, and most check writers receive scanned copies of their canceled checks while the banks keep the physical copies for safekeeping. Customers that utilize online banking can also access copies of their canceled checks via the web. A canceled check, like any other financial information, should be safeguarded and stored in a safe place as it contains your bank account and routing number. These two numbers together could be used by identity thieves to gain access to the funds in your checking account. 

Reporting Lost/Stolen Cards If a checkbook, ATM, and/or debit card becomes lost or stolen, immediately report the loss to your financial institution! police Credit Card Loss and Fraudulent Charges. Your liability for unauthorized use of your credit card tops out at $50. However, if you report the loss of your credit card before your credit card is used, you are not responsible for any charges you didn't authorize. Most credit card companies will even waive the $50 if you ask. Debit Card Fraud: Someone “pirates” your debit card and pin. Report it to bank immediately. You are likely liable unless the bank was at fault (security breach at bank end). Use a “Pin” and keep it secure (never carry your Pin in an obvious place) Pay for transactions with a credit card, not a debit card. Build credit, gain rewards, and have no liability exposure. Steve Latter would never use a debit card for purchases!

Traveler’s Checks a check for a fixed amount that can be cashed or used in payment after endorsement with the holder's signature. Used in place of currency when traveling to foreign countries. Customers pay a small fee to purchase (1-2%)

Safety Deposit Box Located inside a bank - used to store valuables (documents, jewelry) Customers pay an annual rent and accessed with keys or PIN number Valuables are not insured by the FDIC The Truth About Safety Deposit Boxes Definition of 'Safe Deposit Box' A box - usually located inside a bank - which is used to store valuables. A safe deposit box is rented from the institution and can be accessed with keys, pin numbers or some other security pass. Valuables such as documents and jewelry are placed inside and customers rely on the security of the building to protect those valuables. Investopedia explains 'Safe Deposit Box' The contents of a safe deposit box are not insured in the same way bank deposits are. The Federal Deposit Insurance Corporation insures cash deposits up to a certain limit, but due to the fact that there is no way to verify the contents of a safe deposit box, banks will not insure their contents. Also, if heirs are not told about the location of the drawer, upon non-payment, the box is considered abandoned, and its contents are turned over to the state's unclaimed-property offices for auction.

Choose to Save Advanced Level

The Importance of Savings A “rule of thumb” is to pay yourself first! Meaning, savings is the first priority cause if you wait to see how much is left at the end at the end of the month, there may be none! Save 10% of each paycheck

Results in Savings – Saving – What is Saving? Saving – accumulation of excess funds by intentionally spending less than you earn Savings – portion of income not spent on consumption (purchase of goods and services) Results in

Specific purchases & expenses Why Save? Save for 3 Purposes: Emergency savings Cash set aside to cover the cost of unexpected events Loss of job, medical, etc.) Specific purchases & expenses Pay for items that aren’t part of a typical spending plan. New car, college, NY trip, etc. Financial security Lower stress Longer term freedom to decide life changes What are other examples of emergency expenses?

How Much in Emergency Funds Should be Saved? At least six months worth of expenses in emergency savings $2,000 monthly expenses 6 months $12,000 Depends on… Income Job security Insurance coverage Dependents

Savings Protects Your Financial…. Interest Rate Money Time … and can increase in value! Time Value of Money - $10,000 available today is worth more than $10,000 received in the future.

Interest: the price of money (principal) What is Interest? Interest: the price of money (principal) Interest rate: percentage rate used to calculate interest Principle x interest rate = interest earned Depository institutions offer several accounts to save money When you don’t withdraw interest earned from an account the interest earns additional interest Compound Interest: earning interest on previously earned interest Interest - the price of money Interest rate - percentage rate used to calculate interest Compounding interest – earning interest on interest

How Do Interest Rates Affect The Amount of Money Earned? More Money Earned $1,000 Saved for 5 Years with Compounding Interest

How Does The Amount of Money Saved Increase Interest Earned? More Interest Earned 3% interest for 5 years Principal Value of Savings $100 $115.00 $1,000 $1,150.00 $10,000 $11,500.00 Principal - original amount of money saved or invested

Types of Savings Vehicles Savings tools( vehicles) - secure and liquid accounts offered by depository institutions. They are all safe because they are all FDIC insured. Checkingg Accounts Savings Account Money Market Account Certificate of Deposit Types of Savings Vehicles

Ideal for Storing Emergency Savings Savings Accounts Are: Safe & Secure (FDIC Insured) “Liquid” quickly and easily can be converted into CASH The Bad News:

Savings Tools Characteristics Interest Liquidity Features Savings Tools Characteristics Why three different types of savings accounts? Each savings tool has different characteristics Goal: Determine the savings tool most appropriate for reaching a financial goal

Checking Account (Review) Definition Account that provides an easy method for withdrawing and depositing money Interest Many do not If interest offered, rates are lower than savings Liquidity Most liquid Near Cash! Checking accounts are not a wise place to save!

Liquidity: how quick an account can converted to cash! Definition Account designed to hold money not spent on current consumption Interest Earns interest Rates are lower than Certificate of deposits but higher than checking Liquidity Most liquid savings vehicle (except checking accounts if you consider them savings)) Savings Account Liquidity: how quick an account can converted to cash!

Savings Account Features Effective for storing emergency funds May require a minimum balance or have a limited number of withdrawals each month Savings Account Features

Money Market Account Definition Account that usually has minimum balance requirements and tiered interest rates Interest Often tiered interest rates – the amount of interest earned depends on the account balance Liquidity Less liquid than checking and savings accounts because of minimum balance requirements and transaction limits What would typically earn a higher interest rate? An account with a $10,000 balance or a $2,500 balance?

Money Market Account Features Usually have to deposit a minimum amount to open the account (typically $1,000) Similar to a savings account but earns higher interest and has higher minimum balance/deposit requirements

Certificate of Deposit (“CDs”) Definition Account that is used for a fixed period of time and allows restricted access to the funds Interest Varies (depending on both the time and the amount of money deposited) 3 mos., 6 mos., 1 year, 2 years, 5 years Liquidity Least liquid savings tool (if you withdraw money early, subject to early withdrawal penalties) Why would a depository institution typically offer higher interest rates for CD’s with a longer time period or more money invested?

Certificate of Deposit Features Deposits must be held for a certain length of time (usually 7 days to 10 years) Deposits can range from $100 to $250,000 If funds are held for the designated time period, then there is limited risk and no early withdrawal fees

You Decide: Which Savings Tool is Best? Avery’s goal is to create an emergency savings fund Savings account Funds are easily accessible Javier’s goal is to purchase a new car in about a year Money market account Higher interest rates available

CD, Checking, Savings, Money Market Account Liquidity Challenge CD, Checking, Savings, Money Market Account Rank which is most to least liquid

Rule of 72 Magic number used in calculating wow long it will take for a savings account or investment to double in value at various interest rates or rates of return. To determine this: Divide 72 by the interest rate or rate of return For example: $10,000 invested at 6% interest rate will take 12 years to double. (72/6) $1,000 invested in a savings account earning 1% will take 72 years to double. Stocks double in value approximately 7 years (72/10%) A 5-year CD at 3%, purchased for $1,000 and “rolled over” will double in value in 24 years.