Chapter 5
Banking
Services and
Managing
Your Money
5-1
Chapter Objectives
• Provide a background on money management
• Compare the types of financial institutions
• Describe the banking services offered by financial
institutions
• Explain how to select a financial institution
• Describe the savings alternatives offered by
financial institutions
5-2
Background on Money Management
• Money management: describes the
decisions you make over a short-term
period regarding income and expenses
• Focuses on maintaining short-term
investments to achieve both liquidity and
an adequate return on investments
5-3
Background on Money Management
(cont’d)
• Liquidity
• Refers to your access to ready cash to cover
short-term and unexpected expenses
• Sources of liquidity:
• Chequing and savings accounts, credit cards and/or
lines of credit, emergency funds
• Credit cards and lines of credit
• Emergency funds
5-4
Types of Financial Institutions
• Depository institutions: Financial
institutions that accept deposits from and
provide loans to individuals and businesses
5-5
Types of Financial Institutions
(cont’d)
• Non-depository institutions: Financial
institutions that do not offer federally
insured deposit accounts but provide
various other financial services
5-6
Types of Financial Institutions
(cont’d)
• Depository Institutions
• Chartered banks: financial institutions that
accept deposits and use the funds to provide
business and personal loans
5-7
Types of Financial Institutions
(cont’d)
• Schedule I banks: domestic banks
• Schedule II banks: foreign banks that have
subsidiaries operating in Canada
• Schedule III banks: subsidiaries of foreign banks
that are restricted in their authority to accept
deposits
5-8
Types of Financial Institutions
(cont’d)
• Financial Conglomerates: financial institutions
that offer a diverse set of financial services to
individual firms
5-9
Types of Financial Institutions
(cont’d)
5-10
Types of Financial Institutions
(cont’d)
• Trust and Loan Companies: financial
institutions that, in addition to providing
services similar to a bank, can provide financial
planning services, such as administering estates
and acting as trustee in the administration of
trust accounts
5-11
Types of Financial Institutions
(cont’d)
• Credit Unions and Caisses Populaires:
provincially incorporated co-operative financial
institutions that are owned and controlled by
their members
5-12
Types of Financial Institutions
(cont’d)
• Non-Depository Institutions
• Finance and Lease Companies: specialize in
providing personal loans or leases to individuals
• Mortgage Companies: specialize in providing
mortgage loans to individuals
5-13
Types of Financial Institutions
(cont’d)
• Investment Dealers: facilitate the purchase or
sale of various investments by firms or
individuals by providing investment banking
and brokerage services
5-14
Types of Financial Institutions
(cont’d)
• Investment banking services include:
• assisting corporations and governments price securities
and find investors to obtain financing for activities such as
building projects and expansion plans
• Advising and evaluating mergers & acquisitions
• Brokerage services include:
• Facilitating the trading of existing securities by creating a
market for stocks and bonds by matching willing buyers
and sellers
5-15
Types of Financial Institutions
(cont’d)
• Insurance Companies: non-depository
institutions that sell insurance to protect
individuals or firms from risks that can incur
financial loss (e.g. RBC Insurance)
5-16
Types of Financial Institutions
(cont’d)
• Mutual Fund Companies: sell units to
individuals and use the proceeds to invest in
securities to create mutual funds (e.g. RBC
Global Asset Management)
5-17
Types of Financial Institutions
(cont’d)
• Payday Loan Companies
• Provide single payment , short-term loans
• High cost
• Cheque Cashing Outlets
• 3rd party cheques cashed for a fee (e.g. Money Mart)
• Pawnshops
5-18
Fringe Finance Institutions in
Kamloops: 1998 - 2011
14
12
10
8
Number of Institutions
6
4
2
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
19
Banking Services Offered By
Financial Institutions
5-20
Banking Services Offered By
Financial Institutions (cont’d)
• Chequing Services
• Chequing accounts allow you to draw on funds
by writing cheques
• Debit card: a card that is not only used for
identification, but also allows you to make
purchases that are charged against an
existing chequing account
5-21
Banking Services Offered By
Financial Institutions (cont’d)
• Monitoring Your Account Balance
• Monitor your account balance by recording cheques
in your chequebook as you write them.
• Cheque register: a booklet in your chequebook
where you record the details of each transaction
you make, including deposits, cheque writing,
withdrawals, and bill payments
• Alternatively, ask your bank to send you a monthly
statement
5-22
Banking Services Offered By
Financial Institutions (cont’d)
• Banks charge fees for NSF (not sufficient funds)
cheques
• You may lose some credibility when writing a bad
cheque
• Debit cards eliminate the possibility of NSF cheques
5-23
Banking Services Offered By
Financial Institutions (cont’d)
• Overdraft Protection: an arrangement that
protects a customer who writes a cheque for
an amount that exceeds their chequing account
balance
5-24
Banking Services Offered By
Financial Institutions (cont’d)
• Stop Payment: a financial institution’s notice
that it will not honour a cheque if someone
tries to cash it
• You must provide accurate information
• Normally, a fee is charged for this service
5-25
Banking Services Offered By
Financial Institutions (cont’d)
• No Interest
• Funds in a chequing account earn little or no
interest
• You should not deposit more funds in your chequing
than you think you may need
• Many financial institutions have introduced
accounts that both earn interest and provide
chequing services
5-26
Banking Services Offered By
Financial Institutions (cont’d)
• Online Banking: a service offered by
financial institutions that allows a customer
to check the balance of bank, credit card,
and investment accounts, transfer funds,
pay bills electronically, and perform a
number of administrative tasks
5-27
Banking Services Offered By
Financial Institutions (cont’d)
• Credit Card Financing
• Allow you to finance your purchases through
various financial institutions using MasterCard
and Visa
• Safety Deposit Box: a box at a financial
institution in which a customer can store
documents, jewellery, and other valuables
• An annual fee is charged
5-28
Banking Services Offered By
Financial Institutions (cont’d)
• Automated Banking Machine (ABM): a
machine that individuals can use to deposit
and withdraw funds at any time of day
• A convenience fee is charged when you use an
ABM other than one from your own bank
• A service package may be purchased to reduce
or eliminate regular account fees charged by
your own bank
5-29
Banking Services Offered By
Financial Institutions (cont’d)
• Certified Cheque: a cheque that can be
cashed immediately by the payee without
the payee having to wait for the bank to
process and clear it
5-30
Banking Services Offered By
Financial Institutions (cont’d)
• Money Orders and Drafts: products that
direct your bank to pay a specified amount
to the person named on them
• Travellers Cheque: a cheque written on
behalf of an individual that will be charged
against a large, well-known financial
institution or credit card sponsor’s account
5-31
Selecting a Financial Institution
• Convenience
• Deposit Rates and Insurance
• Fees
5-32
Savings Alternatives Offered By
Financial Institutions
• Tax-Free Savings Account (TFSA)
• A registered investment account that allows you
to purchase investments with after-tax dollars,
without attracting any tax payable on your
investment growth
• Withdrawals are tax-free
• Contribution room can be carried forward to
subsequent years
• Withdrawals can be recontributed in subsequent
years
5-33
Savings Alternatives Offered By
Financial Institutions (cont’d)
• Savings Deposits
• Pay interest on deposits
• Funds can normally be withdrawn at any time
• Term Deposits
• Offered as short-term or long-term investments
• Offer slightly higher returns than savings deposits,
but lower returns than GICs because they are
cashable
5-34
Savings Alternatives Offered By
Financial Institutions (cont’d)
• Guaranteed Investment Certificates (GICs):
an instrument issued by a depository
institution that specifies a minimum
investment, an interest rate, and a maturity
date
5-35
Savings Alternatives Offered By
Financial Institutions (cont’d)
• Canada Savings Bonds (CSBs): short-term to
medium-term, high-quality securities issued by
the Government of Canada
• Canada Premium Bonds (CPBs) offer a more
competitive interest rate and are cashable once a
year
5-36
Savings Alternatives Offered By
Financial Institutions (cont’d)
• Two types of CSBs:
• Regular interest bond pays out interest every year
• Compound interest bond reinvests the interest earned
• Interest income earned every year is taxable, even if it is
reinvested
• Money Market Funds (MMFs): accounts that
pool money from individuals and invest in
securities that have short-term maturities,
such as one year or less
5-37
Savings Alternatives Offered By
Financial Institutions (cont’d)
• Determining the Optimal Allocation of
Short-Term Investments
1. Anticipate upcoming bills and have adequate
funds in your chequing account
2. Estimate additional funds needed in the near
future and invest in a liquid investment
3. Use remaining funds in a way that will
maximize your return, considering your
risk tolerance
5-38
Savings Alternatives Offered By
Financial Institutions (cont’d)
• Your optimal allocation will be different than
the optimal allocation for another individual
• Your decision on how to invest your short-term
funds should account for your willingness to
tolerate risk
5-39