Chapter 4

 Meeting Daily Money Needs Buying groceries, paying the rent, completing other routine spending activities Cash, checks, credit cards, ATM cards Mistakes happen when managing current cash needs include: Overspending as a result of impulse buying and using credit Having insufficient liquid assets to pay bills Using savings or borrowing to pay for current expenses Failing to put unneeded funds in an interest earning savings account

 Sources of Quick Cash Liquidate savings account or borrow money Using either reduces your net worth  Types of Financial Services Savings—safe storage for funds Payment services—offer ability to transfer money to others for daily business activities Borrowing—short-term or long-term Other financial services—insurance, investments, tax assistance, and financial planning

 Electronic and Online Banking E-banks and e-branches provide: Direct deposit of paychecks and government payments Automatic payments to transfer funds to pay rent, mortgage, utilities, loans, and investment deposits ATM allow various banking activities and other types of transactions such as buying transit passes, postage stamps, and gift certificates Debit card activates ATM transactions and may also be used to make purchases

 Financial Services and Economic Conditions Changing interest rates, rising consumer prices, and other economic factors influence financial services For successful financial planning, be aware of current trends and future prospects for interest rates Wall Street Journal The Financial Times Business Week Forbes Fortune

 Comparing Financial Institutions 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 if I need it? What do you want from the organization? Convenience Personal service Fees and other charges Safety Interest rates

 Deposit-Type Institutions Commercial banks Offer a full range of financial services, including checking, savings, and lending Organized as corporations with investors contributing the capital the banks need to operate Savings and Loan associations Specialize in savings accounts and loans for mortgages Have expanded services to include checking accounts, specialized savings plans, loans to business, and investment services

 Deposit-Type Institutions Mutual Savings banks Owned by depositors and also specialize in savings accounts and mortgage loans Located mainly in the northeastern U.S. Profits of a mutual savings bank go to the depositors, paying higher rates on savings Credit Unions User-owned, nonprofit, cooperative financial institution Traditionally, credit union members had to have a common bond such as work, church, or community Offer the same services as commercial institutions

 Nondeposit Institutions Life insurance companies Main purpose is to provide financial security for dependents In recent years, have expanded to include investment and retirement planning services Investment companies (mutual funds) Money market funds—a savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments Not covered by federal deposit insurance

 Nondeposit Institutions Finance companies Make loans to consumers and small business Have short and intermediate terms with higher rates than most other lenders charge Offer other financial planning services Mortgage companies Organized primarily to provide loans for home purchases

 Pawnshops Make loans based on the value of tangible possessions such as jewelry or other valuable items While states regulate the interest rates charged by pawnshops, 3 percent a month or higher is common  Check cashing outlets The more than 6,000 check cashing outlets charge anywhere from 1 to 20% of the face value of a check Offer other services such as electronic tax filing, money orders, private postal boxes, utility bill payment, and sale of transit tokens

 Payday loans Cash advances, check advance loans, postdated check loans, delayed deposit loans Borrowers can pay annual interest rates of as much as 780%  Rent-to-Own centers Stores that lease products to consumers who can own the item if they complete a certain number of monthly or weekly payments Charge interest rates of up to 100%

 Regular savings accounts Usually involve a low or no minimum balance and allow you to withdraw money as needed Benefits Low minimum balance Ease of withdrawal Insured Drawbacks Low rate of return

 Certificates of Deposit (CDs) Savings plan requiring that a certain amount be left on the deposit for a stated time period to earn a specified interest rate (ranges from 30 days to five years) Types of CDs Rising-rate or bump-up—higher rates at various levels Stock-indexed—have earnings based on the stock market with higher earnings at times of strong stock performance Callable CDs—start with higher rates and long-term maturities Bank may “call” the account after a stipulated period When call option is exercised, saver receives the original investment principal and any interest earned Promotional CDs—attract savers with gifts or special rates in lieu of interest

 Certificates of Deposit (CDs) Managing CDs Investigate potential interests and costs Do not allow financial institution to roll over your money into another CD for the same term Consider creating a CD portfolio with CDs maturing at different times Benefits Guaranteed rate of return Insured Drawbacks Possible penalty for early withdrawal Minimum deposit

 Interest earning checking accounts Benefits Checking privileges Interest earned Insured Drawbacks Service charge for going below minimum balance Cost of printing checks; other fees

 Money Market Accounts and Funds A savings account offered by banks, savings and loan associations, and credit unions that requires a minimum balance and has earning s based on market interest rates May allow a limited number of checks to be written and generally impose a fee when account balance goes below a certain level

 Money Market Accounts and Funds Money market accounts are covered by federal deposit insurance Money market funds are not covered by federal deposit insurance Usually invest in short-term government and corporate securities and are quite safe

 Money Market Accounts and Funds Benefits Favorable rate of return Some check writing Drawbacks Minimum balance May not be insured

 U.S. Savings Bonds Series EE bonds (also called Patriot Bonds) Must hold bonds at least five years to earn the stated rate Continue to earn interest for 30 years Tax advantages Interest earned is exempt from state and local taxes You do not have to pay federal income tax on earnings until the bonds are redeemed May be exchanged for Series HH bonds to defer taxes

 Electronic Payments Debit card transactions Online payments Third party companies: Pay pal, check free, pay trust Stored-value cards Prepaid cards for telephone service, transit fares, highway tolls, school lunches Smart cards Imbedded microchip stores prepaid amounts as well as information with account balances, transaction records, insurance information, and medical history

 Checking Accounts Regular checking accounts May have to pay for checks May have to pay fee if below a certain balance Activity accounts Charge a fee for every check written May charge a fee to deposit money No minimum balance Interest-Earning checking Require a minimum balance Service charge for going below minimum balance

 Evaluating Checking Accounts Restrictions Minimum balance Holding period for deposited checks Fees and Charges Check printing Overdraft fees Stop payment orders Interest Special Services Overdraft protection

 Other Payment Methods Certified check Personal check with guaranteed payment Cashier’s check Check of the financial institution Money order Traveler’s checks/prepaid traveler’s card

 Opening a checking account  Making deposits Blank endorsement—your signature Restrictive endorsement—”for deposit only” followed by your signature Special endorsement—”pay to the order of” followed by the name of the other person and then your signature  Writing Checks  Reconciling your checking account