1. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill C HAPTER 5 Banking Services: Savings Plans and Payment Accounts 6e Personal Finance Kapoor Dlabay Hughes 5-1

2. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill 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 as a result of impulse buying and using credit cards.  Not having enough liquid assets 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

3. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Types of Financial Services Savings.  Time deposits in savings and certificates of deposit. Payment services.  Checking accounts commonly 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

4. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill 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 of $5,000 or more.  A checking account and an ATM card.  All-purpose credit cards.  A line of credit for quick cash loans.  Access to a variety of investments.  Online services & one statement for all transactions.  A sweep feature - earns money market rates. 5-4

5. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Electronic Banking Services Obtain cash. Check account balances. Transfer funds. Point-of-sale payments. Direct deposit of paychecks and other regular income. Preauthorized payments. Web “cyberbanking.” 5-5

6. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Cyberbanking Banking through the telephone, personal computer, and on-line services. “Cyber” branches to do business on the Web. Access 24 hours a day, 7 days a week. Privacy and security are concerns. 5-6

7. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Automated Teller Machines A computer terminal that allows customers to conduct banking transactions.  Debit card or cash card activates transactions.  Linked to a bank account. Requires a PIN.  Liability if debit card is lost or stolen. To reduce ATM fees you can...  Compare ATM fees before opening an account.  Use your own bank’s ATM when possible.  Withdraw larger cash amounts as needed.  Use personal checks, traveler’s checks, credit cards, and pre-paid cash cards when traveling. 5-7

8. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Plastic Payments Point-of-sale transactions.  Online card requires a PIN to authorize, and includes instant transfer from your account.  Offline card transactions are processed like credit card charges. Stored-value cards.  For long distance, tolls, library fees. Smart cards have a microchip for prepaid goods and services and for data, such as your medical history. Electronic cash, ex. www.cybercash.com 5-8

9. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Opportunity Costs of Financial Services Higher rate of return may be obtained at the cost of lower liquidity. Convenience of a 24-hour ATM must be weighed against service fees. The “no fee” checking account that requires a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years. 5-9

10. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill 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 take advantage of current low rates.  Select short-term savings instruments to take advantage of higher rates when they mature.  When interest rates are falling...  If you refinance loans, use short-term loans.  Select long-term savings instruments to “lock in” earnings at current high rates. 5-10

11. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Types of Financial Institutions Deposit type institutions  Commercial banks are corporations that offer a full range of services including checking, savings and lending.  Savings and loan associations specialize in savings accounts and mortgage loans.  Mutual savings banks are like traditional savings and loan associations, but they are owned by their depositors.  Credit unions are user-owned and nonprofit. 5-11

12. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Types of Financial Institutions Non-deposit type institutions.  Life insurance companies offer insurance plus investment and retirement planning.  Investment companies offer a money market fund. You can write limited checks on your account.  Finance companies make personal loans.  Mortgage companies lend for home purchase.  Pawnshops make loans on possessions.  Check-cashing outlets change 2-3%.  Title and payday loan companies - high interest.  Cyberbanking via phone and on-line, such as bankamerica.com or wellsfargo.com. (continued) 5-12

13. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill 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? Cost of convenience and personal service. Consider safety and interest rates. 5-13

14. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Types of Savings Plans Regular savings accounts. Club accounts. Certificates of deposit.  Several types to chose from.  Managing by looking at earnings and costs. Interest earning checking accounts. Money market accounts and funds.  Money market accounts are covered by the FDIC, but money market funds are not. U.S. savings bonds (see www.savingsbonds.gov). 5-14

15. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Evaluating Savings Plans Rate of return or yield.  Percentage increase in value due to interest. Compounding - interest on interest. Inflation - compare return with inflation rate. Liquidity. Safety via FDIC and NCUA.  FDIC insures up to $100,000 per person per financial institution (see www.fdic.gov). Restrictions and fees. Tax considerations. 5-15

16. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill After Tax Rate of Return (1 - tax rate) x yield on savings (1 -.28) x.06.72 x.06 4.32% So even if you are earning 6%, after you pay taxes on the interest you earn you are actually earning only 4.32% after you pay taxes on the interest. 5-16

17. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill What is “Truth in Savings?” Requires Disclosure of...  Fees on deposit accounts.  The interest rate.  The annual percentage rate. Interest must be compounded on the full principal amount in the account each day. Sets formulas for computing the APY. Establishes rules for advertising accounts. 5-17

18. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Selecting Payment Methods Ninety percent of business transactions are conducted by check, making it a necessity for most people. Types of checking accounts include...  Regular.  Usually have a monthly service charge.  Activity account.  Charge a fee for each check written.  Package account - a variety of services for a set monthly fee. 5-18

19. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Selecting Payment Methods (continued)  Interest-earning.  Usually require a minimum balance.  Sometimes called NOW accounts.  Share draft - interest earning checking account in a credit union. Evaluating checking accounts.  Restrictions, such as a minimum balance.  Fees, which are increasing, and charges.  Interest.  Special services, such as home banking.  Overdraft protection. 5-19

20. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Other Payment Methods Certified check.  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 with ability to get local currency at an ATM. 5-20