Savings and Payment Services

Chapter 4

What Financial Services Do You Need?

Meeting Daily Money Needs Buying groceries, paying the rent, completing other

routine spending activities Cash, checks, credit cards, ATM cards Mistakes happen when managing current cash

needs include: Overspending as a result of impulse buying and using

credit Having insufficient liquid assets to pay bills Using savings or borrowing to pay for current expenses Failing to put unneeded funds in an interest earning

savings account

What Financial Services Do You Need?

Sources of Quick Cash Liquidate savings account or borrow money Using either reduces your net worth

Types of Financial Services Savings—safe storage for funds Payment services—offer ability to transfer money

to others for daily business activities Borrowing—short-term or long-term Other financial services—insurance, investments,

tax assistance, and financial planning

What Financial Services Do You Need?

Electronic and Online Banking E-banks and e-branches provide:

Direct deposit of paychecks and government payments Automatic payments to transfer funds to pay rent,

mortgage, utilities, loans, and investment deposits ATM allow various banking activities and other types

of transactions such as buying transit passes, postage stamps, and gift certificates

Debit card activates ATM transactions and may also be used to make purchases

What Financial Services Do You Need?

Financial Services and Economic Conditions Changing interest rates, rising consumer prices,

and other economic factors influence financial services

For successful financial planning, be aware of current trends and future prospects for interest rates

www.wsj.com Wall Street Journal www.ft.com The Financial Times www.businessweek.com Business Week www.forbes.com Forbes www.fortune.com Fortune

Selecting a Financial Institution Comparing Financial Institutions

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 if I need it? What do you want from the organization?

Convenience Personal service Fees and other charges Safety Interest rates

Selecting a Financial Institution Deposit-Type Institutions

Commercial banks Offer a full range of financial services, including

checking, savings, and lending Organized as corporations with investors contributing

the capital the banks need to operate Savings and Loan associations

Specialize in savings accounts and loans for mortgages Have expanded services to include checking accounts,

specialized savings plans, loans to business, and investment services

Selecting a Financial Institution Deposit-Type Institutions

Mutual Savings banks Owned by depositors and also specialize in savings

accounts and mortgage loans Located mainly in the northeastern U.S. Profits of a mutual savings bank go to the depositors,

paying higher rates on savings Credit Unions

User-owned, nonprofit, cooperative financial institution

Traditionally, credit union members had to have a common bond such as work, church, or community

Offer the same services as commercial institutions

Selecting a financial institution

Nondeposit Institutions Life insurance companies

Main purpose is to provide financial security for dependents

In recent years, have expanded to include investment and retirement planning services

Investment companies (mutual funds) Money market funds—a savings-investment plan

offered by investment companies, with earnings based on investments in various short-term financial instruments

Not covered by federal deposit insurance

Selecting a financial institution

Nondeposit Institutions Finance companies

Make loans to consumers and small business Have short and intermediate terms with higher rates

than most other lenders charge Offer other financial planning services

Mortgage companies Organized primarily to provide loans for home

purchases

Problematic financial business

Pawnshops Make loans based on the value of tangible

possessions such as jewelry or other valuable items While states regulate the interest rates charged by

pawnshops, 3 percent a month or higher is common Check cashing outlets

The more than 6,000 check cashing outlets charge anywhere from 1 to 20% of the face value of a check

Offer other services such as electronic tax filing, money orders, private postal boxes, utility bill payment, and sale of transit tokens

Problematic financial business

Payday loans Cash advances, check advance loans, postdated

check loans, delayed deposit loans Borrowers can pay annual interest rates of as much

as 780% Rent-to-Own centers

Stores that lease products to consumers who can own the item if they complete a certain number of monthly or weekly payments

Charge interest rates of up to 100%

Comparing savings plans Regular savings accounts

Usually involve a low or no minimum balance and allow you to withdraw money as needed

Benefits Low minimum balance Ease of withdrawal Insured

Drawbacks Low rate of return

Comparing savings plans Certificates of Deposit (CDs)

Savings plan requiring that a certain amount be left on the deposit for a stated time period to earn a specified interest rate (ranges from 30 days to five years)

Types of CDs Rising-rate or bump-up—higher rates at various levels Stock-indexed—have earnings based on the stock market with

higher earnings at times of strong stock performance Callable CDs—start with higher rates and long-term maturities

Bank may “call” the account after a stipulated period When call option is exercised, saver receives the original investment

principal and any interest earned Promotional CDs—attract savers with gifts or special rates in lieu

of interest

Comparing savings plans Certificates of Deposit (CDs)

Managing CDs Investigate potential interests and costs Do not allow financial institution to roll over your money into

another CD for the same term Consider creating a CD portfolio with CDs maturing at

different times Benefits

Guaranteed rate of return Insured

Drawbacks Possible penalty for early withdrawal Minimum deposit

Comparing savings plans Interest earning checking accounts

Benefits Checking privileges Interest earned Insured

Drawbacks Service charge for going below minimum balance Cost of printing checks; other fees

Comparing savings plans Money Market Accounts and Funds

A savings account offered by banks, savings and loan associations, and credit unions that requires a minimum balance and has earning s based on market interest rates

May allow a limited number of checks to be written and generally impose a fee when account balance goes below a certain level

Comparing Savings Plans Money Market Accounts and Funds

Money market accounts are covered by federal deposit insurance

Money market funds are not covered by federal deposit insurance

Usually invest in short-term government and corporate securities and are quite safe

Comparing savings plans Money Market Accounts and Funds

Benefits Favorable rate of return Some check writing

Drawbacks Minimum balance May not be insured

Comparing savings plans U.S. Savings Bonds

Series EE bonds (also called Patriot Bonds) Must hold bonds at least five years to earn the stated

rate Continue to earn interest for 30 years Tax advantages

Interest earned is exempt from state and local taxes You do not have to pay federal income tax on earnings until

the bonds are redeemed May be exchanged for Series HH bonds to defer taxes

Comparing payment methods Electronic Payments

Debit card transactions Online payments

Third party companies: Pay pal, check free, pay trust Stored-value cards

Prepaid cards for telephone service, transit fares, highway tolls, school lunches

Smart cards Imbedded microchip stores prepaid amounts as well as

information with account balances, transaction records, insurance information, and medical history

Comparing payment methods Checking Accounts

Regular checking accounts May have to pay for checks May have to pay fee if below a certain balance

Activity accounts Charge a fee for every check written May charge a fee to deposit money No minimum balance

Interest-Earning checking Require a minimum balance Service charge for going below minimum balance

Comparing payment methods Evaluating Checking Accounts

Restrictions Minimum balance Holding period for deposited checks

Fees and Charges Check printing Overdraft fees Stop payment orders

Interest Special Services

Overdraft protection

Comparing payment methods

Other Payment Methods Certified check

Personal check with guaranteed payment Cashier’s check

Check of the financial institution Money order Traveler’s checks/prepaid traveler’s card

Managing your checking account

Opening a checking account Making deposits

Blank endorsement—your signature Restrictive endorsement—”for deposit only” followed

by your signature Special endorsement—”pay to the order of” followed

by the name of the other person and then your signature

Writing Checks Reconciling your checking account