chapter 5 the banking system. ch. 5 objectives explain the purpose and use of checking accounts and...
TRANSCRIPT
Chapter 5
The Banking System
Ch. 5 Objectives
• Explain the purpose and use of checking accounts and savings accounts
• Prepare checks and deposit slips and maintain a checkbook register
• Prepare a bank reconciliation between checkbook register and bank statement
• Explain how you can grow your savings with compound interest
Slide 2
Financial Planning
Three main influences when considering financial planning:
• Life Situation
• Personal Values
• Economic Factors
Slide 3
Why Save and Invest Money?
• Allow your money to grow• Keep up with inflation • Earn interest on interest• Make your money work for you
Through:– Compounding interest– Investment growth
Slide 4
Time Value of Money
A dollar you receive in the future will be worth less than a dollar you receive today
Did You Know?
Small amounts saved and invested can easily grow into larger sums
– If a person saved a dollar each day by not having a candy bar or soda, they would save $365 per year, if the $365 was deposited into a certificate of deposit (CD) with 5% interest, the money could grow to nearly $400 in one year!
Cash Management
The daily routine of handling money to take care of individual or family needs
• Effective cash management includes having money available for:– Living expenses– Emergencies– Savings– Investing
Slide 7
Cash Management ToolsFinancial accounts used to assist with cash management
Tool Interest Special FeaturesChecking Account 1.5% •Checks used in place of cash
•Easy access
Saving Account 2.3% •Temporary holding place•Easy access
Money Market Account
2.6% •Minimum balance•Tiered interest rates•Limited withdrawals
Certificate of Deposit
4 – 5.4% •Penalty for early withdrawal•Not easy to access funds
Savings Bond 4 – 5.4% •Tax advantages•Not easy to access funds
Why Have Checking Account?
• Checking Account – A demand deposit account on which checks are drawn
•Check - a written order to a bank to pay a person or business.
Checking Accounts
Why open a checking account?– Safe place to keep money (Insured by the FDIC)– Easy to pay bills by mail (writing a check)– Easy access to money to make cash purchases
• Withdrawal money• Write checks against the account• Debit cards• Internet Banking
Checking Account Features• May be interest earning• Minimum balance requirements
– (Money Market Checking)• Charge transaction fees• Limited number of checks written
monthly• Reduces the need to carry large
amount of cash
Opening a Checking Account• What will I need?
– Money! ($50 or $100)– Personal information– Identification – Provide an official signature
• What will I be given?– Checkbook– Checkbook register– Debit card
Slide 13
Checkbook Register
5-1 Checking Accounts
A way to track your account transactions
Withdrawals and Deposits
• A withdrawal involves taking money from your account.o Writing checkso Using debit cards
• A deposit of money can be made to your account.o Endorsing checkso Direct deposit
Writing a Deposit Slip
Sally Smith500 Great StreetYourtown, NJ 55555
93-456-9540
Dollar Cents
CASH
CHECKS 154 . 01List Singly
Total From Other Side
SUBTOTAL 154 . 01
*Less Cash Received
NET DEPOSIT $ 154 . 01
Date: 9/2/2006
Sally Smith___________Sign here
Guardian Angel Banking423 South 15th
Yourtown, NJ 55555
0123456789 : 1234567890
Deposit Slip
(If you need some cash now)
Writing a Check
Sally Smith500 Great StreetYourtown, NJ 55555
93-456-954045086244786
503
Date: 9/6/2006
Pay to the
Order Of The Pizza Place $ 9.50
_Nine dollars_----------------------------------------------------------------50/100_ DollarsGuardian Angel Banking423 South 15th
Yourtown, NJ 55555
Memo __Pizza_ ___ Sally Smith____0123456789 : 1234567890 : 503
Endorsing A CheckSignature on the back of the check approving it for
deposit. Checks must be endorsed to be deposited*
Three Types• Blank• Restrictive• Special
*Safest way to endorse the check is to wait until going to the bank to deposit
Slide 17
Blank Endorsement
• Receiver of the check signs his/her name
• Anyone can cash or deposit the check after it has been signed
Slide 18
Endorse Here
X Sally Smith_________
DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE________________________________
Restrictive Endorsement
• More secure than blank endorsement
• Receiver writes “for deposit only” above his/her signature– Allows the check only to be
deposited, not cashed
Slide 19
Endorse Here
For Deposit Only – Acct. 654986
X Sally Smith_________
DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE_______________________________
Special Endorsement
• Receiver signs and writes “pay to the order of” (fill in person’s name)
• Allows the check to be transferred to a second party– Also known as a third-party
check
Slide 20
Endorse Here
Pay to the order of Mike Smith
X Sally Smith_________
DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE_______________________________
Check 21
• Check clearing for the 21st Century Act (check 21)– Current trend that changes how money is
withdrawn and deposited into accounts
How Check 21 Works
• Prior to Check 21– Paper checks physically moved from place to
place
• After Check 21– Paper checks scanned to computer to create a
“substitute check” (truncated)– Substitute check is transferred electronically from
place to place
Slide 22
Monthly Statement
• Comes from your bank
• Lists information about each transaction during the period
• Lists the current balance during the period
Reconcile a Bank Statement
Bank reconciliation - the process of adjusting the checkbook register and bank statement so they agree
• Consider the following:o deposits in transito outstanding checkso transposition errors
What Is the Purpose of Savings?
Savings Account - a demand deposit account for the accumulation of money
• It is a safe place to hold money to meet future needs and wants
• It pays interest at a low rate
5-2 Savings Accounts
Liquidity How quickly and easily an asset can be converted
into cash. Liquid assets are important for emergency situations
Investors should - Invest in both liquid and non-liquid tools
Liquidity Checking Account
Savings Account
Money Market Account
Certificate of Deposit(CD)
Savings Bond
IRA (401K)- Individual Retirement Account
Most Liquid
Least Liquid
Cash Management Tools
A financial account used to assist with daily cash management
Tool Interest Special Features
Checking Account 1.5% •Checks used in place of cash•Easy access
Saving Account 2.3% •Temporary holding place•Easy access
Money Market Account
2.6% •Minimum balance•Tiered interest rates•Limited withdrawals
Certificate of Deposit 4 – 5.4% •Penalty for early withdrawal•Not easy to access funds
Savings Bond 4 – 5.4% •Tax advantages•Not easy to access funds
Slide 29
Watch Your Money Grow!
5-2 Savings Accounts
How can you grow your savings?
Through…
• Principal
• Simple interest
• Compound interest
Computing Simple Interest –
Simple Interest – interest computed on principal once during a certain time period
• P = amount of money invested
• R = interest rate
• T = time period that money will be set aside
Simple Interest
Interest (I) = Principal (P) × Rate (R) × Time (T)
= $1,000 × 6% annual rate × 6 months
= $1,000 × 0.06 × 6/12 = $30
Computing Compound Interest- see Charts on page 165 and 166
Compound Interest – interest earned on both the principal and previously earned interest
Quarterly CompoundingAnnual Interest Rate 6%
Beginning Rate EndingYear Balance 6% Quarter Balance
1 2 3 4
1 $100.00 0.015 $1.50 $1.52 $1.55 $1.57 $106.14
2 $106.14 0.015 $1.59 $1.62 $1.64 $1.66 $112.65
3 $112.65 0.015 $1.69 $1.72 $1.74 $1.77 $119.57
Future Value of Money
Rule of 72
How long will it take to double my money?
• Divide annual interest rate into 72
Example: if you invest $50 at 6% interest, your money will grow to $100 in 12 years
( 72 ÷ 6 = 12 years)
Slide 33
Focus On . . .
The FDIC• Protects depositors of insured U.S. banks against
loss if the bank fails (up to $250k per account• Covers all types of deposits• Covers principal and accrued interest• Does not insure some items
o Examples: stocks, bonds, valuables• Insures deposits in different banks separately
5-2 Savings Accounts
Slide 34
Available Banking Services
• Safe deposit boxes
• Overdraft protection
• ATMs
• Cashier’s checks
• Financial advising
• Loans
• Internet banking
• Bank cards
5-3 Banking Services and Fees
Costs of Banking
• Monthly account fees• Nonsufficient fund fees• Special service fees
o Examples: stop payment, cashier’s check, money order
• ATM fees• Inactive account fees
What Are Consumer Responsibilities?• Maintain your balance.
o Avoid writing bad checks. o NSF means bounced check
• Monitor your account.o Reconcile your bank
account.• Know your rights.
o Be aware of consumer protection laws.
Slide 37
Success Skills
• Understand your position.• Understand the other party’s position.• Create a proposed solution.• Identify what is important and what you are
willing to give up.
5-3 Banking Services and Fees
NegotiatingIt is the process of reaching an agreement that benefits both parties.