Banking Services: Savings Plans and Payment Accounts Chapter 5 Banking Services: Savings Plans and Payment Accounts McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

A Strategy for Managing Cash Cash, check, credit card or an ATM are the most common payment choices. 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. 5-2

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. 5-3

Types of Financial Services (continued) Asset management account. Also called a cash management account. Offered by brokers and financial institutions. Provides a complete financial services program for a single fee and includes... A minimum balance. A checking account and an ATM card. A credit card Online banking. Access to a variety of investments. www.schwab.com or www.americanexpress.com. 5-4

Electronic Banking Services Direct deposit of paychecks and other regular income. Automatic payments transfer funds for savings or to pay bills. Deduct them from your register. ATM access to obtain cash, check account balances, and transfer funds - check out the fees. A debit card - takes money out of your account. Lost card liability $50-$500. 5-5

Opportunity Costs of Financial Services 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. 5-6

Changing Interest Rates and Decisions Related to Financial Services The prime rate is what banks charge large corporations. See www.federalreserve.gov. When interest rates are rising... Use long-term loans to benefit from current low rates. Select short-term savings instruments to take advantage of higher rates when they mature. When interest rates are falling... Use short-term loans to take advantage of lower rates when you refinance the loans. Select long-term savings instruments to “lock in” earnings at current high rates. 5-7

Types of Financial Institutions Deposit type institutions Commercial banks are corporations that offer a full range of services including checking, savings, lending and other services. Savings and loan associations have checking accounts, 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 and provide comprehensive financial services. 5-8

Types of Financial Institutions (continued) Non-deposit type institutions. Life insurance companies offer insurance plus savings and investment features. Some offer financial planning and investing services. Investment companies 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. 5-9

Types of Financial Institutions (continued) Non-deposit type institutions Mortgage companies provide loans to customers so they can purchase homes. 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. 5-10

Comparing Financial Institutions Basic concerns of a financial services 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? 5-11

Choosing a Financial Institution Consider Services offered. Interest rates. Fees and charges. Financial advice. Safety (deposit insurance). Convenience. Locations. Online services. Special programs. 5-12

Types of Savings Plans Regular savings accounts. Certificates of deposit. Require you to leave your money on deposit for a set time period, otherwise you incur penalties. Several types to chose from. Consider all the earnings and all the costs. Interest earning checking accounts. Money market accounts and funds. Money market accounts are covered by the FDIC, but money market funds are not. 5-13

Types of Savings Plans U.S. savings bonds. Advantages (continued) U.S. savings bonds. Series EE sold at half of face value, with potential tax advantages if used to pay tuition and fees. Series HH pays interest every six months. I Bonds combine fixed rated and inflation rate. See www.savingsbonds.gov for rates. Advantages Exempt from state and local income taxes. You don’t have to pay federal income tax on interest until redemption. 5-14

Evaluating Savings Plans Rate of return or yield. Percentage increase in value due to interest. Frequent compounding means more interest earning interest Inflation - compare your APY with inflation rate. Taxes – after-tax rate of return Liquidity – early withdrawal penalties? Safety - FDIC and NCUA. FDIC insures up to $100,000 per person per financial institution (see www.fdic.gov). 5-15

After Tax 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%. 5-16

What is “Truth in Savings?” Requires Disclosure of... Fees on deposit account. The interest rate. The annual percentage yield. Other terms and conditions. Sets formulas for computing the APY. Requires disclosure of fees and APY on customer statements. Establishes rules for advertising accounts. Restricts method of calculating the balance on which interest is paid. 5-17

Payment Methods Checks Debit Cards Online Payments –most credit cards now offer this service Stored-value cards Smart Cards 5-18

Checking Accounts A major portion of business transactions are conducted by check, making a checking account a necessity for most people. Types of checking accounts include... Regular – many have minimum balances. Activity account-fees on checks & deposits. 5-19

Checking Accounts Types of checking accounts include…(continued) Interest-earning or NOW accounts which usually require a minimum balance. Share draft accounts are interest earning checking accounts at credit unions. Evaluating checking accounts. Restrictions, such as a minimum balance. Fees, and charges. Interest rate and computation method. Special services, such as overdraft protection. 5-20

Other Payment Methods Certified check. Cashier’s check. Money order. 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. 5-21

Reconciliation Change the bank statement balance to reflect deposits in transit and outstanding checks. Change the check register balance to reflect interest, bank fees, direct deposits, automatic payments, etc. 5-22

Types of Endorsements Blank – Just sign your name; the check is now bearer paper Restrictive – For deposit only Special – Endorse the check to someone else 5-23

Online Activity Go to www.bankrate.com and explore money market account rates. Also look at rates for one year and five year CD’s. If you had money to invest right now, which maturity of CD’s would you choose? 5-24