Banking Services: Savings Plans and Payment Accounts

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CHAPTER 5Banking Services:

Savings Plans and Payment Accounts

6ePersonal FinanceKapoor Dlabay Hughes

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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 interest-earning savings account or investment plan. 5-2

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Types of Financial Services 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 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. 5-4

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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 are concerns. 5-6

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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

cards, and pre-paid cash cards when traveling.5-7

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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.

Electronic cash, ex. www.cybercash.com 5-8

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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.

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Changing Interest Rates and Decisions Related to Financial ServicesThe 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

“lock in” earnings at current high rates. 5-10

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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.

Credit unions are user-owned and nonprofit.5-11

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Types of Financial Institutions Non-deposit type institutions.

Life insurance companies offer insurance plus 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

bankamerica.com or wellsfargo.com.

(continued)

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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. 5-13

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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.

U.S. savings bonds (see www.savingsbonds.gov).5-14

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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. 5-15

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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 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. 5-20