CHAPTER 5
Banking Services:
Savings Plans and Payment Accounts
Personal Finance 7e
Kapoor
Dlabay
Hughes
5-1
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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 (cash and
checking account) to pay current bills.
 Using savings or borrowing to pay for current
expenses.
 Failing to put unneeded funds in an interestearning savings account or investment plan
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for long-term goals.
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Types of Financial Services

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
Savings.
 Time deposits in savings and
in certificates of deposit.
Payment services.
 Checking accounts monies are
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 5-3
services you may use.
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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.
 A checking account and an ATM card.
 A credit card
 Online banking.
 A line of credit for quick cash loans.
 Access to a variety of investments.
 www.schwab.com or www.americanexpress.com.
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Electronic Banking Services
 Direct deposit of paychecks and
other regular income.
 Automatic payments transfer funds
such as for utilities. Remember to
deduct them from your register.
 ATM access to obtain cash, check
account balances, and transfer
funds - check out the fees.
 A debit card - takes money out of
your account. Lost card liability
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$50-$500.
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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 that requires a
$500 non-interest-bearing minimum balance
means lost interest of nearly $400 at 6
percent compounded over 10 years.
5-6
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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...
 Use short-term loans to take advantage of lower
rates when you refinance the loans.
 Select long-term savings instruments to
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“lock in” earnings at current high rates.
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Types of Financial Institutions
 Deposit type institutions
 Commercial banks are corporations that offer a full
range of services including checking, savings, lending
and other services.
 Savings and loan associations have checking accounts,
specialized savings plans, loans and financial planning
and investment services.
 Mutual savings banks specialize in savings accounts
and mortgage loans. They are owned by their
depositors, with profits going back to depositors by
paying a higher rate on savings.
 Credit unions are user-owned, nonprofit and provide
5-8
comprehensive financial services.
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Types of Financial Institutions
(continued)
 Non-deposit type institutions.
 Life insurance companies offer insurance plus
savings and investment features, with some
offering financial planning and investing
services.
 Investment companies 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.
5-9
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Types of Financial Institutions
(continued)

Non-deposit type institutions (continued).
 Mortgage companies provide loans to
customers so they can purchase homes.
 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.
 Title and payday loan companies - high
interest.
5-10
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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?
See Appendix 5A on information on Using a
Checking Account.
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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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Types of Savings Plans
 Regular savings accounts.
 Certificates of deposit.
 Require you to leave your money on deposit for a
set time period, otherwise you incur penalties.
 Several types to chose from.
 Consider all the earnings and all the costs.
 Interest earning checking accounts.
 Money market accounts and funds.
 Money market accounts are covered by the
FDIC, but money market funds are not.
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Types of Savings Plans
(continued)
 U.S. savings bonds.
 Series EE sold at half of face value, with
potential tax advantages if used to pay
tuition and fees.
 Series HH pays interest every six months.
 See www.savingsbonds.gov for rates.
 Advantages
 Exempt from state and local income taxes.
 You don’t have to pay federal income tax
on earnings until you redeem the bonds.
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Evaluating Savings Plans
 Rate of return or yield.
 Percentage increase in value due to interest.
 Compounding.
 Interest on previous interest earned.
 Inflation - compare the rate of return on your




savings with the inflation rate.
Restrictions and fees.
Liquidity.
Safety via FDIC and NCUA.
 FDIC insures up to $100,000 per person per
financial institution (see www.fdic.gov).
Tax considerations for interest earned.
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After Tax Rate of Return
 (1 - tax rate) x yield on savings
 (1 - .28) x .06
 .72 x .06
 4.32%
 This means that a person who is earning
6% on their savings, but has a 28%
marginal tax rate, is actually earning
4.32% rate of return after they pay
income taxes on the interest.
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What is “Truth in Savings?”
 Requires Disclosure of...
 Fees on deposit account.
 The interest rate.
 The annual percentage yield.
 Other terms and conditions.
 Sets formulas for computing the APY.
 Requires disclosure of fees and APY on customer
statements.
 Establishes rules for advertising accounts.
 Restricts the method of calculating the balance on
5-17
which interest is paid.
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Selecting Payment Methods

A major portion of business transactions are
conducted by check, making a checking account
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, and
sometimes for deposits.
5-18
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Selecting Payment Methods

(continued)
Types of checking accounts include…(continued)
 Interest-earning or NOW accounts which
usually require a minimum balance.
 Share draft accounts are interest earning
checking accounts kept in a credit union.

Evaluating checking accounts.
 Restrictions, such as a minimum balance.
 Fees, which are increasing, and charges.
 Interest rate and computation method.
 Special services, such as overdraft protection. 5-19
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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 travel5-20
card with ability
to get Companies,
local currency
at Reserved.
an
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