CHAPTER 5
Banking Services:
Savings Plans and Payment Accounts
Personal Finance 6e
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 to pay current
bills.
 Using savings or borrowing to pay for current
expenses.
 Failing to put unneeded funds in an interest5-2
earning savings account or investment plan.
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Types of Financial Services
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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 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 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.
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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.”
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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
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are concerns.
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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 5-7
cards, and pre-paid cash cards when traveling.
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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.
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 Electronic cash, ex. www.cybercash.com
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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
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
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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...
 If you refinance loans, use short-term 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 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.
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 Credit unions are user-owned and nonprofit.
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Types of Financial Institutions
 Non-deposit type institutions.
(continued)
 Life insurance companies offer insurance plus
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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
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bankamerica.com or wellsfargo.com.
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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?
 Cost of convenience and personal service.
 Consider safety and interest rates.
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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.
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 U.S. savings bonds (see www.savingsbonds.gov).
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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.
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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%
 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.
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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.
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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.
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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.
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Other Payment Methods
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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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with ability to get local currency at an ATM.
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