1. Banking
Chapter 5
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2. How to Manage Your Cash (5.1)
What are you cash needs?
Daily cash needs
Ex. Buying lunch, gas for car, or paying for routine activities
Paid w/cash , ATM card, or credit card
Consider added fees for use of ATM or credit card
Resist temptation to overspend and avoid buying on impulse
Sources of quick cash
Use your savings or borrow money…long-term goals may be delayed though
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3. Types of Financial Services
Savings
Safe storage of funds for future use. Essential for any personal finance plan
Time deposit – money that is going to be left in a financial institution for months or years
Payment services – transferring money out of your account for payments either electronically or by check.
Borrowing – credit cards or loans
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4. Electronic banking services
#1 issue for online customers…security
Use a security code, password, and customer identification name or number
Direct deposit- automatic deposit of net pay to an employee’s bank account
This replaces printed paycheck that you would take to bank
Saves time, money, and effort
Offers safe way to transfer funds
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5. Automated Teller Machines (ATM’s)
Computer terminal that allows a withdrawal of cash from an account
You can also make deposits and transfer money from one account to another
Debit card- cash card that allows you to withdraw money or pay for purchases from your checking or savings account
May be a small fee for use of the card
Unlike credit card, debit card enables you to spend only the money you have in your account
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6. Never give your PIN number to any business or individual
If your card is lost or stolen along w/your PIN, anyone could withdraw money from your account
ATM Fees – charge for convenience of using an ATM
Compare fees from bank to bank
Use your bank’s ATM machine in order to avoid additional fees
When away from home, consider using traveler’s checks, credit cards, & prepaid cash cards
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7. Lost Debit Cards Notify bank immediately
Most card issuers will not hold you responsible for stolen funds. Check w/your card issuer.
Some institutions require you to notify them within two days of losing your card
If you wait longer, you may be held responsible for up to $500 for its unauthorized use for up to 60 days
Beyond that time, your liability may be unlimited
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8. Plastic payments
Point-of-sale transactions – purchase by debit card of a good or service at a retail store, restaurant, etc.
Stored-value cards – prepaid cards that you can use for things like school lunches, phone calls, etc.
Can reload money onto the card
Electronic cash – some companies are working to develop this…the day may come when you will not handle currency at all
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9. Opportunity Costs of Financial Services
What are the trade-offs when you choose financial services?
Find a balance between short-term needs & future financial security
Remember to consider the value of your time
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10. Federal Deposit Insurance Corporation
Created in 1933 during the Great Depression to protect deposits in banks
FDIC insures each account in a federally chartered banks up to $100,000 per account
When you consider a financial institution, consider its safety record
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11. Types of Financial Institutions
Deposit institutions
Commercial banks – for-profit institution that offers a full range of financial services, including checking, savings, and lending
Serve individuals & business
Savings & Loan Associations – specializes in savings accounts and mortgage loans
Credit unions – nonprofit owned by its members & organized for their benefit.
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12. Non-Deposit Institutions
Life insurance companies
Main purpose is to provide financial security for dependents
Policies also contain savings & investment features
Investment companies
Combine your money w/funds from other investors in order to buy stocks and bonds.
They manage these combined investments (mutual funds)
Finance companies
Make higher-interest loans to consumers & small business
They cannot borrow elsewhere due to low credit ratings
Mortgage companies
Specialize in loans for the purchase of homes (covered in ch. 7)
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13. Comparing Financial Institutions
Consider the following questions:
Interest rate on savings account?
Checking account with lowest fees
Ability to borrow money w/a credit card or another type of loan when you need it
FDIC insured?
Convenient location?
Online banking services?
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14. Regular savings accounts (5.2)
Ideal if you plan to make frequent deposits & withdrawals
Require little or no minimum balance & allow you to withdraw money on demand
Low interest though
Statements arrive monthly or quarterly in the mail
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15. Certificates of Deposit (CD)
Money is left on deposit for a stated period of time (term) to earn a specific rate of return (interest)
Date when money is available to you is maturity date
Low-risk way to invest your money
Higher interest rate than regular savings account but can’t access money for a specified period of time
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16. CD Investment Strategies
Find out where you can get the best rate
Consider the economy as you decide what maturity date to choose
Never let your financial institution “roll over” a CD
Consider when you will need the money
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17. Money Market Accounts
Savings account that requires a minimum balance and earns interest that varies from month to month
Higher interest rate than regular savings account but requires a higher minimum balance (typically $1,000)
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18. Evaluating Savings Plans
How should you evaluate a savings plan?
Your selection of a savings plan will be influenced by: rate of return, inflation, tax considerations, liquidity, restrictions, & fees
Rate of return - % of increase in the value of your savings from earned interest
Compounding – interest is earned on both the principal (original deposit) & any previously earned interest
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19. Tax considerations- taxes reduce interest earned on savings
Inflation- compare interest rate for savings account to current inflation rate
Tax considerations- taxes reduce interest earned on savings
Liquidity- check to see if there is a penalty or a lower interest if you withdraw your funds early
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20. Types of Checking Accounts
Regular checking account
Usually don’t require a minimum balance
Activity accounts – if you only write a few checks each month & are unable to maintain a minimum balance…fee charged for each check you write
Interest-earning checking accounts – combination of checking & savings accounts…pay interest if you maintain a minimum balance.
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21. Evaluating checking accounts
Restrictions (min. balance?)
Fees & charges – monthly service charge, check printing fees, overdrafts, & stop-payment
Interest
Special services
Overdraft protection – automatic loan made to your account if the balance will not cover a written check. Bank will charge interest on that loan.
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22. Using a checking account
Opening a checking account – Individual or joint account
Writing checks
Stop-payment order – request that bank not cash a particular check. Fees range from $10-20 or more.
Used for lost of stolen checks
Making deposits
Endorsements – signature of payee (person who gets money)
Check clearing
Reconciliation – report that accounts for the differences between the bank statement & a checkbook balance “balancing your checkbook”
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