Banking Services and Managing Your Money Chapter 5 Banking Services and Managing Your Money

Chapter Objectives Provide a background on money management Compare the types of financial institutions Describe the banking services offered by financial institutions Explain how to select a financial institution Describe the savings alternatives offered by financial institutions

Background on Money Management Money management: describes the decisions you make over a short-term period regarding income and expenses Focuses on maintaining short-term investments to achieve both liquidity and an adequate return on investments

Background on Money Management (cont’d) Liquidity Refers to your access to ready cash to cover short-term and unexpected expenses Sources of liquidity: Chequing and savings accounts, credit cards and/or lines of credit, emergency funds Credit cards and lines of credit Emergency funds

Types of Financial Institutions Depository institutions: Financial institutions that accept deposits from and provide loans to individuals and businesses Chartered banks, trust and loan companies, credit unions and caisses populaires

Types of Financial Institutions (cont’d) Non-depository institutions: Financial institutions that do not offer federally insured deposit accounts but provide various other financial services Finance and lease companies, mortgage companies, investment dealers, insurance companies, mutual fund companies, payday loan companies, cheque cashing outlets, and pawnshops

Types of Financial Institutions (cont’d) Depository Institutions Chartered banks: financial institutions that accept deposits and use the funds to provide business and personal loans Deposits insured by Canada Deposit Insurance Corporation (CDIC) up to $100 000 per depositor

Types of Financial Institutions (cont’d) Schedule I banks: domestic banks Schedule II banks: foreign banks that have subsidiaries operating in Canada Schedule III banks: subsidiaries of foreign banks that are restricted in their authority to accept deposits 1: (e.g., Royal Bank of Canada, Scotiabank, CIBC) 2: (e.g., ING Bank of Canada) 3: (e.g., Citibank)

Types of Financial Institutions (cont’d) Financial Conglomerates: financial institutions that offer a diverse set of financial services to individual firms Aims to serve as a one-stop shop where individuals can conduct all of their financial services

Types of Financial Institutions (cont’d)

Types of Financial Institutions (cont’d) Trust and Loan Companies: financial institutions that, in addition to providing services similar to a bank, can provide financial planning services, such as administering estates and acting as trustee in the administration of trust accounts (e.g. RBC Estate and Trust Services)

Types of Financial Institutions (cont’d) Credit Unions and Caisses Populaires: provincially incorporated co-operative financial institutions that are owned and controlled by their members Created to serve the financial needs of groups that share a common bond (e.g. residential, religious) Accounts are eligible for deposit insurance protection through provincial deposit insurance agencies Do not operate outside provincial boundaries

Types of Financial Institutions (cont’d) Non-Depository Institutions Finance and Lease Companies: specialize in providing personal loans or leases to individuals Mortgage Companies: specialize in providing mortgage loans to individuals

Types of Financial Institutions (cont’d) Investment Dealers: facilitate the purchase or sale of various investments by firms or individuals by providing investment banking and brokerage services

Types of Financial Institutions (cont’d) Investment banking services include: assisting corporations and governments price securities and find investors to obtain financing for activities such as building projects and expansion plans Advising and evaluating mergers & acquisitions Brokerage services include: Facilitating the trading of existing securities by creating a market for stocks and bonds by matching willing buyers and sellers

Types of Financial Institutions (cont’d) Insurance Companies: non-depository institutions that sell insurance to protect individuals or firms from risks that can incur financial loss (e.g. RBC Insurance) Life an health insurance companies provide insurance in the event of a person’s death, disability, or critical illness Property and casualty insurance companies provide insurance damage to property, including automobiles and homes

Types of Financial Institutions (cont’d) Mutual Fund Companies: sell units to individuals and use the proceeds to invest in securities to create mutual funds (e.g. RBC Global Asset Management) Minimum investment amount is typically between $500 and $5000 Provide a means by which investors with a small amount of money can invest in a portfolio of securities

Types of Financial Institutions (cont’d) Payday Loan Companies Provide single payment , short-term loans High cost Cheque Cashing Outlets 3rd party cheques cashed for a fee (e.g. Money Mart) Pawnshops

Fringe Finance Institutions in Kamloops: 1998 - 2011

Banking Services Offered By Financial Institutions

Banking Services Offered By Financial Institutions (cont’d) Chequing Services Chequing accounts allow you to draw on funds by writing cheques Debit card: a card that is not only used for identification, but also allows you to make purchases that are charged against an existing chequing account

Banking Services Offered By Financial Institutions (cont’d) Monitoring Your Account Balance Monitor your account balance by recording cheques in your chequebook as you write them. Cheque register: a booklet in your chequebook where you record the details of each transaction you make, including deposits, cheque writing, withdrawals, and bill payments Alternatively, ask your bank to send you a monthly statement

Banking Services Offered By Financial Institutions (cont’d) Banks charge fees for NSF (not sufficient funds) cheques You may lose some credibility when writing a bad cheque Debit cards eliminate the possibility of NSF cheques

Banking Services Offered By Financial Institutions (cont’d) Overdraft Protection: an arrangement that protects a customer who writes a cheque for an amount that exceeds their chequing account balance It is a short-term loan from the depository institution where the chequing account is maintained Carries a fee every time you use the service High interest rates (e.g. 21 percent per year)

Banking Services Offered By Financial Institutions (cont’d) Stop Payment: a financial institution’s notice that it will not honour a cheque if someone tries to cash it You must provide accurate information Normally, a fee is charged for this service

Banking Services Offered By Financial Institutions (cont’d) No Interest Funds in a chequing account earn little or no interest You should not deposit more funds in your chequing than you think you may need Many financial institutions have introduced accounts that both earn interest and provide chequing services

Banking Services Offered By Financial Institutions (cont’d) Online Banking: a service offered by financial institutions that allows a customer to check the balance of bank, credit card, and investment accounts, transfer funds, pay bills electronically, and perform a number of administrative tasks

Banking Services Offered By Financial Institutions (cont’d) Credit Card Financing Allow you to finance your purchases through various financial institutions using MasterCard and Visa Safety Deposit Box: a box at a financial institution in which a customer can store documents, jewellery, and other valuables An annual fee is charged

Banking Services Offered By Financial Institutions (cont’d) Automated Banking Machine (ABM): a machine that individuals can use to deposit and withdraw funds at any time of day A convenience fee is charged when you use an ABM other than one from your own bank A service package may be purchased to reduce or eliminate regular account fees charged by your own bank

Banking Services Offered By Financial Institutions (cont’d) Certified Cheque: a cheque that can be cashed immediately by the payee without the payee having to wait for the bank to process and clear it The cheque writer’s bank has already withdrawn the money from the cheque writer’s account

Banking Services Offered By Financial Institutions (cont’d) Money Orders and Drafts: products that direct your bank to pay a specified amount to the person named on them Travellers Cheque: a cheque written on behalf of an individual that will be charged against a large, well-known financial institution or credit card sponsor’s account

Selecting a Financial Institution Convenience Deposit Rates and Insurance Fees

Savings Alternatives Offered By Financial Institutions Tax-Free Savings Account (TFSA) A registered investment account that allows you to purchase investments with after-tax dollars, without attracting any tax payable on your investment growth Withdrawals are tax-free Contribution room can be carried forward to subsequent years Withdrawals can be recontributed in subsequent years

Savings Alternatives Offered By Financial Institutions (cont’d) Savings Deposits Pay interest on deposits Funds can normally be withdrawn at any time Term Deposits Offered as short-term or long-term investments Offer slightly higher returns than savings deposits, but lower returns than GICs because they are cashable

Savings Alternatives Offered By Financial Institutions (cont’d) Guaranteed Investment Certificates (GICs): an instrument issued by a depository institution that specifies a minimum investment, an interest rate, and a maturity date A penalty is imposed for early withdrawal Covered, within limits, by the CDIC

Savings Alternatives Offered By Financial Institutions (cont’d) Canada Savings Bonds (CSBs): short-term to medium-term, high-quality securities issued by the Government of Canada Canada Premium Bonds (CPBs) offer a more competitive interest rate and are cashable once a year Virtually risk-free and highly liquid; Available for purchase from early October to April 1 each year CSBs are cashable at any time

Savings Alternatives Offered By Financial Institutions (cont’d) Two types of CSBs: Regular interest bond pays out interest every year Compound interest bond reinvests the interest earned Interest income earned every year is taxable, even if it is reinvested Money Market Funds (MMFs): accounts that pool money from individuals and invest in securities that have short-term maturities, such as one year or less

Savings Alternatives Offered By Financial Institutions (cont’d) Determining the Optimal Allocation of Short-Term Investments Anticipate upcoming bills and have adequate funds in your chequing account Estimate additional funds needed in the near future and invest in a liquid investment Use remaining funds in a way that will maximize your return, considering your risk tolerance

Savings Alternatives Offered By Financial Institutions (cont’d) Your optimal allocation will be different than the optimal allocation for another individual Your decision on how to invest your short-term funds should account for your willingness to tolerate risk