Chapter 5
Financial Services:
Savings Plans and
Payment Accounts
Chapter 5
Learning Objectives
Analyze factors that affect selection and use of
financial services
2. Compare the types of financial institutions
3. Compare the costs and benefits of various
savings plans
4. Identify the factors used to evaluate different
savings plans
5. Compare the costs and benefits of different
types of payment accounts
1.
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A Cash Management Strategy
Objective 1: Analyze factors that affect selection
and use of financial services


Banks, saving and loan associations, credit unions,
and other financial institutions provide a variety
of financial services
Account aggregation: online banking -- deposits,
investments, credit cards, loans, mortgages,
rewards programs and IRAs
MEETING DAILY MONEY NEEDS
 Cash, check, credit card or an ATM are the most
common payment choices
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A Cash Management Strategy (continued)
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
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A Cash Management Strategy (continued)
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
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A Cash Management Strategy (continued)
Other types of financial services (continued)
 Trust

A legal agreement that provides for the management and
control of assets by one party for the benefit of another
 Asset management account
 Also called a cash management account
 Offered by brokers and financial institutions
 Provides a complete financial service program for a single
fee and includes:






A checking account and an ATM card
A credit card
Online banking
Line of credit
Access to a variety of investments
www.schwab.com or www.americanexpress.com
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A Cash Management Strategy (continued)
ELECTRONIC AND ONLINE BANKING
 Obtain cash; check account balances
 Direct deposit of paychecks, government payments
 Preauthorized payments for insurance, mortgage,
utilities, and other bills
 Online transfer of funds from one account to
another
 Debit card retail purchases
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ELECTRONIC AND ONLINE BANKING
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A Cash Management Strategy (continued)
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
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A Cash Management Strategy (continued)
FINANCIAL SERVICES AND ECONOMIC
CONDITIONS
1.
Changing interest rates, rising consumer prices
and other economic factors also influence
financial services
2.
Be aware of current trends and future prospects
for interest rates (Exhibit 5-3)
3.
Read Wall Street Journal, business section of daily
newspapers, and business periodicals, such as
BusinessWeek, and Forbes
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Financial Institutions
Objective 2: Compare the types of financial
institutions
DEPOSIT INSTITUTIONS
 Commercial banks
 Offer a full range of services including checking,
savings, lending and other services
 Savings and loan associations

Offer 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 cooperative financial
institutions
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Financial Institutions (continued)
OTHER FINANCIAL INSTITUTIONS
 Life insurance companies
 Offer insurance, plus savings and investment features; some
offer financial planning and retirement services
 Investment companies
 Are also referred to as Mutual Funds
 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
 Mortgage companies
 Provide loans to customers so they can purchase homes
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Financial Institutions (continued)
Beware of high-cost financial services
 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
 Payday loans
-- use personal check $115 to borrow $100 cash for 14 days
-- 391% annual
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Financial Institutions (continued)
COMPARING FINANCIAL INSTITUTIONS
 Basic concerns of a financial service 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?
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Financial Institutions (continued)
When choosing a financial institution
Consider:
 Services offered
 Interest rates
 Fees and charges
 Financial advice
 Safety (deposit insurance)
 Convenience
 Locations
 Online services
 Special programs
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Savings Plans
Objective 3: Compare the costs and benefits of various
savings plans
REGULAR SAVINGS ACCOUNTS
 Called passbook accounts, involve a low or no minimum
balance
 Credit unions call them share accounts
CERTIFICATES OF DEPOSITS
 Require you to leave your money on deposit for a set time
period, otherwise you incur penalties
 Several types (rising-rate, indexed, callable, global,
promotional)
 Consider all the earnings and all the costs
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Savings Plans (continued)
MONEYMARKET ACCOUNTS AND FUNDS
 Money market accounts are covered by the FDIC, but
money market funds are not
U.S. SAVINGS BONDS
 Series EE sold at half of face value, with potential tax
advantages
-- deductible if used to pay tuition and fees
-- Exempt from state and local income taxes
-- You don’t have to pay federal income tax on
interest until redemption
 Series HH are current-income bonds that pay interest
every six months
 I Bonds combine fixed rate and inflation rate
 See www.savingsbonds.gov for rates
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Evaluating Savings Plans
Objective 4: Identify the factors used to evaluate
different savings plans
RATE OF RETURN


Percentage or yield is the increase in value due to
interest
Example: a $500 savings account that earned $25 has
a yield of 5 percent
COMPOUNDING

Frequent compounding means more interest
earning on interest
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Evaluating Savings Plans
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Evaluating Savings Plans (continued)
TRUTH IN SAVINGS
 Requires Disclosure of...
 Fees on deposit account
 The interest rate
 The annual percentage yield (APY)
 Other terms and conditions
INFLATION
 Compare your APY with inflation rate
TAX CONSIDERATIONS
 Taxes reduce interest earned on savings
 Taxes are not withheld from savings and investments;
you may owe additional taxes at year-end as a result of
earnings on saving
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After Tax Savings 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%.
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Evaluating Savings Plans (continued)
LIQUIDITY
 Allows you to withdraw money on short notice without
penalty or fees
SAFETY
 FDIC insures up to $250,000 per person per financial
institution (see www.fdic.gov)
RESTRICTIONS AND FEES
 Several restrictions can affect the choice of a savings
program
 Delay in time between earned and posted, transactions
fees from deposits and withdrawals, time money has to
be left in a deposit account in order to receive a “free”
gift, etc.
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Payment Methods
Objective 5: Compare the costs and benefits of
different types of payment accounts
ELECTRONIC PAYMENTS
 Debit Cards
 Online Payments –most credit cards now offer this
service
 Stored-value cards
 Smart Cards
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Payment Methods (continued)
TYPES OF CHECKING ACCOUNTS
 Regular Checking Accounts– many have minimum
balances
 Activity Account -fees on checks & deposits
 Interest-earning or NOW accounts, which usually
require a minimum balance
 Interest Earning Checking accounts are also known as
Share draft accounts at credit unions
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Payment Methods (continued)
EVALUATING CHECKING ACCOUNTS
 Checking accounts need to be evaluated based on :
 Restrictions
 Fees and charges
 Interest rate and computation method
 Special services, such as overdraft protection
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Payment Methods (continued)
MANAGING YOUR CHECKING ACCOUNT

Opening a Checking Account
 Individual or joint account

Making Deposits
 Deposit ticket
 Endorsement
 Blank endorsement
 Restrictive endorsement
 Special endorsement
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Payment Methods (continued)
 Writing Checks
1.
Record the date
2.
Write the name
3.
Record the amount
4. Write
5.
the amount in words
Sign the check
6. Note the reason
for payment
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Payment Methods
(continued)
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
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Online Activity
 Go to www.bankrate.com and explore money
market account rates
 Also, look at rates for one year and five year CDs.
If you had money to invest right now, which
maturity of CDs would you choose?
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