Chapter 4
Financial Services:
Savings Plans
and
Payment Account
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Savings and Payment Accounts
Chapter Learning Objectives
LO4.1
LO4.2
LO4.3
LO4.4
Identify commonly used
financial services
Compare the types of
financial institutions
Assess various types of
savings plans
Evaluate different types of
payment methods
4-2
Learning Objective LO4.1
Identify Commonly Used Financial Services
Meeting Daily Money Needs
Common mistakes:
– Overspending (impulse buying, using credit)
– Insufficient liquid assets
– Using savings or borrowing to pay for
current expenses
– Failing to put unneeded funds in an interest
bearing or investment account
4-3
Learning Objective LO4.1
Identify Commonly Used Financial Services
Meeting Daily Money Needs
Sources of quick cash:
– Liquidate savings
• Savings account
• CD
• Mutual fund
– Borrow
• Credit card advance
• Personal loan
Both options
reduce net
worth
4-4
Types of Financial Services
• Savings
– Time deposits
• Savings and certificates of deposit
• Payment services
– Checking accounts = demand deposits
– Automatic payments
• Borrowing for the short- or long-term
• Other financial services
– Insurance, investment, real estate
purchases, tax assistance, trusts, and
financial planning
4-5
Types of Financial Services
• Asset management account
– Also called a cash management account
– Offered by investment companies and
others to provide a complete line of
financial services program, which include:
•
•
•
•
•
Checking account and ATM card
Credit card
Online banking
Line of credit for quick cash loans
Access to a variety of investments
4-6
Online Banking
Traditional banks  online services
Web-only banks (E*Trade Bank)
Services provided:
•
Direct deposit
– Paychecks and other regular income
•
Automatic payments transfer funds
– Recurring payments such as for utilities
– Remember to deduct them from your register
•
ATM access
– Obtain cash, check account balances, and transfer
funds
– Check out the fees
•
Debit card
– Deducts money directly and immediately out of your
account
– Lost card liability $50-$500
4-7
Online and Mobile Banking
4-8
Pros and Cons of Online Banking
Benefits
Time and money savings
Convenience for
transactions, comparing
rates
No paper trail for identity
thieves
Transfer access for loans,
investments
E-mail notices of due dates
Concerns
Potential privacy, security
violations
ATM fees can become costly
Difficulty depositing cash,
checks
Overspending due to easy
access
Online scams, “phishing,”
and e-mail scams
4-9
Financial Services and Economic
Conditions
For successful financial planning, be
aware of:
•
•
•
•
Prime rate = rate banks charge large corporations
Consumer interest rates
Rising consumer prices
Information sources:
• www.federalreserve.gov
• www.wsj.com
• http://finance.yahoo.com
4-10
Interest Rates & Financial
Decisions
4-11
Learning Objective LO4.2
Compare the Types of Financial Institutions
Basic questions to ask before
choosing a financial institution
1. Where can I get the best return
on my savings?
2. How can I minimize my costs for
financial services?
3. Will I be able to borrow money if
I need it?
4-12
Learning Objective LO4.2
Comparing Financial Institutions
• Determine the financial services you
need before choosing a financial
institution
• Compare fees and convenience
• Consider the safety and rates for
deposits and loans at different
institutions
4-13
Five Steps to Selecting a Financial
Institution
1.
2.
3.
4.
List features most important to you
Rank the top 3-4 most important features
List local, national & online institutions
Conduct research:
• Talk with friends
• Online research
• Personal visit
5. Balance your needs with information collected
4-14
Financial Services Research
•
•
•
•
•
•
Services offered
Fees disclosure
Minimum balance
Savings rate sheet
Sample loan application
Sufficient deposit insurance
4-15
Types of Financial Institutions
Deposit Institutions
• Commercial banks
– Organized as corporations
– Offer a full range of services including
checking, savings, lending, and other
services
• Savings and loan associations
– Checking accounts, specialized savings
plans, loans and financial planning and
investment services
4-16
Types of Financial Institutions
Deposit Institutions (continued)
• Mutual savings banks
– Specialize in savings accounts and mortgage
loans
– Owned by their depositors, with profits going
back to depositors by paying a higher rate on
savings
• Credit unions
– User-owned, nonprofit and provide
comprehensive financial services
– Lower fees and lower loan rates
4-17
Types of Financial Institutions
Non-Deposit Institutions
• Life insurance companies
– Insurance plus savings and investments
– Some offer financial planning and investing
services
• Investment companies
– Mutual funds
– Money market fund Mutual Fund
• Combination savings and investment plan
• Not covered by FDIC
4-18
Types of Financial Institutions
Non-deposit Institutions
• Brokerage firms
– Act as agent for buyers and sellers of financial
products
• Credit card companies
– Specialize in short term loans
• Finance companies
– Make short and medium term loans to
consumers
– Higher rates
• Mortgage companies
– Provide home mortgage loans
4-19
Problematic Financial Businesses
• Pawnshops
– Loans on possessions
– Higher fees; 3% per month common
– Used for quick cash
• Check-cashing outlets
– Charge 1-20 % of check’s face value
– 1-3% is average
– AKA: Currency exchanges
4-20
Problematic Financial Businesses
• Payday loan companies
– Cash advances
– High interest rates
• Rent-to-Own Centers
– Lease merchandise at high interest rates to
low-income customers
• Car Title Loans
4-21
Learning Objective LO4.3
Comparing Savings Plans
• Regular savings accounts
– Passbook savings / Statement accounts
– Low minimum balance
– Easy withdrawal
– Insured
– Low rate of return
– Credit Union = share accounts
4-22
Learning Objective LO4.3
Comparing Savings Plans
• Certificates of deposit
– Required minimum deposit
– Required time on deposit
– Penalties for early withdrawal
– Take care when rolling over
– Various CD types:
•
•
•
•
Rising-rate or bump
Stock-indexed
Callable
Promotional
4-23
Learning Objective LO4.3
Comparing Savings Plans
• Interest earning checking accounts
– Checking accounts paying low interest
• Money market accounts and funds
– Floating interest rate
– Allows limited check writing
– Higher minimum balance
– Money market accounts are covered by the
FDIC, but money market funds are not
4-24
Learning Objective LO4.3
Comparing Savings Plans
• U.S. Savings Bonds
– Series EE
• “Patriot Bonds”
• Sold at half of face value
• Face values $50 - $5,000
• Fixed-rate interest compounded semiannually
• Penalty if redeemed within 5 years
• Continues earning interest for 30 years
• Potential tax advantages if used to pay tuition
4-25
Learning Objective LO4.3
Comparing Savings Plans
• U.S. Savings Bonds
– Series HH – no longer sold
• Current income bonds
• Pays interest every six months
• Interest direct deposited and taxed as current
income
– I bonds
• Earns a fixed rate plus an inflation rate
• Twice-a-year inflation adjustment
– See www.savingsbonds.gov for rates
4-26
Learning Objective LO4.3
Managing Electronic Savings Bonds
• Registration:
– Single owner
– Co-owners with a primary owner
– With a beneficiary
• Treasury Direct
– Establish an account at
www.treasurydirect.gov
– 24/7 access to buy manage and redeem
electronic bonds
4-27
Learning Objective LO4.3
Savings Alternatives
4-28
Things to consider
Savings Alternatives
4-29
Evaluating Savings Plans
•
“Truth in Savings Act”
Requires disclosure of:
– Fees on deposit accounts
– Interest rate
– Annual percentage yield (APY)
• APY defined as the “total percent”
• Total percent is based on annual interest and
frequency of compounding
• APY = Rate per period x # periods per year
4-30
Evaluating Savings Plans
• Inflation
– Compare rate of return vs. inflation rate
• Taxes
– Reduces interest earned on savings
• Liquidity
– Quick availability of cash
– Without significant loss in value
4-31
Evaluating Savings Plans
• Safety via FDIC and NCUA
– FDIC insured up to $250,000 per person
per financial institution
– Up to $250,000 for certain retirement
accounts
– www.fdic.gov
• Restrictions and fees
– Minimum balance
– Fee for additional transactions
4-32
Payment Methods
Electronic Payments
• Debit Card Transactions
• Immediate account debit
• Online Payments
• PayPal, MyCheckFree
• Stored-value Cards
• Prepaid cards for telephone,
transit, tolls, etc.
• Smart Cards
• “Electronic wallets”
4-33
Credit vs. Debit Cards
Use a Credit Card to…
• Delay payment
• Build a credit history
• Buy online
• Major purchases
• Earn rewards
Use a debit card to …
• Limit spending to
available funds
• Avoid future bills
• Avoid interest or
annual fee
• Obtain better
protection
4-34
Payment Methods
Checking Accounts
• Regular Checking Accounts
– Monthly service charge usual
– Minimum balance
• Activity Accounts
– Fee charged for each check written,
and sometimes for deposits
• Interest-earning or share draft accounts
(credit unions)
– Require a minimum balance
4-35
Evaluating Checking and Payment
Accounts
• Restrictions, such as a minimum
balance
• Fees, which increase, and charges
• Interest rate and computation method
• Special services
– Overdraft protection
• Beware of “package” deals that include
unneeded services
4-36
Checking Account Selection Factors
4-37
Other Payment Methods
• Certified check
– Personal check with guaranteed payment
• Cashier’s check
– Check from a financial institution; you pay 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
4-38
Managing Your Checking Account
Opening a Checking Account
• Individual vs. joint account
Making Deposits
• 3 types of endorsements
Blank endorsement
– Signature only
Restrictive endorsement
– “For deposit only”
Special endorsement
– “Pay to the order of”
4-39
Managing Your Checking Account
Writing Checks
1. Record the date
2. Write the name of the
person/organization receiving the
check
3. Record the amount of the check in
figures
4. Write the amount of check in words
5. Sign the check
6. Note the reason for the payment
4-40
Managing Your Checking Account
Bank Reconciliation
1. Compare written checks with
those reported paid
Subtract the total of all checks
written but not yet cleared
2. Determine deposits not on the statement;
Add the amount to the statement balance
3. Subtract fees or charges and ATM
withdrawals from the checkbook balance
4. Add any interest to your checkbook
balance
4-41
Chapter Summary
Learning Objective LO4.1
•
Financial products such as savings
plans, checking accounts, loans, trust
services, and electronic banking are
used for managing daily financial
activities
4-42
Chapter Summary
Learning Objective LO4.2
•
Commercial banks, savings and loan
associations, mutual savings banks, credit
unions, life insurance companies,
investment companies, finance companies,
mortgage companies, pawn shops, and
check-cashing outlets may be compared on
the basis of:
–
–
–
–
–
Services offered
Rates and fees
Safety
Convenience
Special programs available to customers
4-43
Chapter Summary
Learning Objective LO4.3
Commonly used savings
plans include:
• Regular savings accounts
• Certificates of deposit
• Interest-earning checking
accounts
• Money market accounts
• Money market funds
• U.S. savings bonds
Evaluate savings plans
on the basis of:
•
•
•
•
•
•
•
Rate of return
Inflation
Tax considerations
Liquidity
Safety
Restrictions
Fees
4-44
Chapter Summary
Learning Objective LO4.4
• Debit cards, online payment systems, and
stored-value cards are increasing in use for
payment activities.
• Regular checking accounts, activity
accounts, and interest-earning checking
accounts can be compared with regard to:
–
–
–
–
Restrictions (such as a minimum balance)
Fees and charges
Interest
Special services
4-45