Chapter 5 Financial Services: Savings Plans and Payment Accounts

Chapter 5

Financial Services:

Savings Plans and Payment

Accounts

Chapter 5

Financial Services:

Savings Plans and Payment

Accounts

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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 from impulse buying and using

credit cards. Not having enough liquid assets (cash and

checking account) 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

Types of Financial Services

• Savings. Time deposits in savings, CD’s.

• Payment services. Checking accounts are 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

• 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 checking account and an ATM card• A credit card• Online banking• Line of credit• Access to a variety of investments• www.schwab.com or

www.americanexpress.com.

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(continued)

Electronic & Online Banking

• Obtain cash; check account balances

• Direct deposit of paychecks, government payments

• Preauthorized payments for insurance, mortgage, utilities, and other bills

• Online transfer of funds from one account to another

• Debit card retail purchases

5-5

Opportunity Costs of Financial Services

• Higher rate of return may be obtained at the cost of lower liquidity.

• Convenience of a 24-hour ATM should be considered against service fees.

• The “no fee” checking account with a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years.

5-6

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 benefit from 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.

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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, lending and other services.

Savings and loan associations have checking accounts, specialized savings plans, loans including mortgages, and other financial planning services.

Mutual savings banks specialize in savings accounts and mortgage loans. They are owned by their depositors.

Credit unions are user-owned, nonprofit and provide comprehensive financial services.

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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?

5-11

When Choosing a Financial Institution

• Consider: Services offered Interest rates Fees and charges Financial advice Safety (deposit insurance) Convenience Locations Online services Special programs

5-12

Types of Savings Plans

• Regular savings accounts Involve a low or no minimum balance Credit unions call them “share 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• Check www.bankrate.com for current info

5-13

Evaluating Savings Plans

• Rate of Return Percentage or yield is the increase in value due to

interest.• Example: a $100 savings account that earned $5 has a

yield of 5% Frequent compounding means more interest

earning interest

• Inflation - compare your APY with inflation rate.

• Liquidity – early withdrawal penalties?• Safety - FDIC and NCUA.

FDIC insures up to $250,000 (temporarily) per person per financial institution (see www.fdic.gov).

5-15

Payment Methods

• Debit Cards

• Online Payments –most credit cards now offer this service

• Stored-value cards

• Smart Cards

5-18

Evaluating Checking Accounts

• Checking accounts need to be evaluated based on: Restrictions, such as a minimum

balance. Fees, and charges. Interest rate and computation method. Special services, such as overdraft

protection.

5-20

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.

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