Savings and Payment Services
Focus on Personal Finance, 2e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Savings and Payment Services
Chapter Objectives
1. Identify commonly used financial
2. Compare the different types of financial
3. Assess various types of savings plans
4. Evaluate different types of payment
Objective 1: Identify commonly used financial
What Financial Services Do You Need?
Banks, savings and loans associations, credit unions, and
other financial institutions provide, payment, savings and
credit services.
Meeting Daily Money Needs
Common mistakes made when managing current cash
needs include
– Overspending
– Insufficient liquid asset
– Using savings to pay for current expenses
– Failing to put extra funds in an interest bearing or
investment account
Sources of Quick Cash
 There are times when you need more cash
than you have available
 You have two basic choices
– Liquidate savings
– Borrow
 Using savings and increased use of borrowed
funds may reduce net worth and your potential
to achieve long-term stability
Types of Financial Services
 Savings.
– Time deposits in savings and
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
services you may use.
Types of Financial Services
 Asset management account.
– Also called a cash management account.
– Offered by investment companies and others
provide a complete line of financial services
program, which include.
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.
Electronic and Online Banking Services
Most banks are offering online services,
however the Web-only banks have started to
expand over the years e.g. E*Trade Bank.
These electronic branches and banks
provide the following services:
 Direct deposit of paychecks and other regular
 Automatic payments transfer funds such as for
utilities. Remember to deduct them from your
 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 $50-$500.
Financial Services and Economic conditions
For successful financial planning be aware of the following:
The prime rate is what banks charge large corporations. See
 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
“lock in” earnings at current high rates.
Objective 2: Compare the types of financial
3 questions to ask before choosing a financial institution
Where will I get the best return for savings?
Where can I minimize my costs for financial services?
Will I be able to borrow money when I need it?
Determine the financial services before choosing a financial institution
Compare the fees for financial services and convenience
Consider the safety and rates for deposits and loans at different institutions
Comparing 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
comprehensive financial services.
Types of Financial Institutions
 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.
– Brokerage firms which act as agent for buyers and sellers
of financial products
– Credit card companies which specialize in short term
– Finance companies make short and medium term loans
to consumers, but at higher rates.
Types of Financial Institutions
 Non-deposit type institutions (continued).
– Mortgage companies provide loans to customers so
they can purchase homes.
 Problematic Financial Businesses
– 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 loan companies - high interest.
– Rent-to –Own Centers leasing merchandise at high
interest rates to low-income customers
Objective 3: Assess various types of savings
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.
Types of Savings Plans
 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.
– I bonds which earns a fixed rate plus an inflation rate which
changes twice a year
– 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.
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.
 Taxes- reduce interest earned on savings
 Liquidity.
 Safety via FDIC and NCUA.
– FDIC insures up to $100,000 per person per financial
institution (see www.fdic.gov).
 Restrictions and fees
What is “Truth in Savings?”
 Requires Disclosure of...
– Fees on deposit account.
– The interest rate.
– The annual percentage yield.
– Other terms and conditions.
 It defines the APY as the total percent
 The total percent is based on annual interest
and frequency of compounding.
Objective 4: Evaluate different types of
payment methods
Comparing Payment Methods
 While check writing is the most common form of consumer
transactions, there is a considerable amount of electronic
payment used for retail transaction
Electronic Payments
Debit Card Transactions
Online Payments
Stored-value Cards
Smart Cards
Checking Accounts
 Types of checking accounts include...
– Regular Checking Accounts
• Usually have a monthly service charge.
– Activity account.
• Charge a fee for each check written, and sometimes for deposits.
Comparing Payment Methods
 Types of checking accounts include…(continued)
– Interest-earning or share draft accounts as they
are called at credit unions
– These accounts require a minimum balance.
 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.
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
with ability to get local currency at an ATM.
Managing your Checking Account
Obtaining and using a checking account
involves several activities
Opening a Checking Account:
• Individual vs. joint account
Making Deposits
• 3 types of endorsements
– Blank endorsement
– Restrictive endorsement
– Special endorsement
Writing Checks
• Steps for proper check writing
Record the date
Write the name of the person/organization receiving the check
Record the amount of the check in figures
Write the amount of check in words
Sign the check
Note the reason for the payment
Managing your Checking Account
4. Reconciling your checking account
Steps involved in reconciling bank
– Compare the written checks with those reported
paid. Subtract the total of all checks written but
not yet reported as cleared
– Determine deposits not on the statement. Add the
amount to the statement balance
– Subtract fees or charges and ATM withdrawals
from the checkbook balance
– Add any interest to your checkbook balance