Banking and Financial Literacy

Flashcards summarizing key concepts about financial institutions, bank accounts, checks, interest, saving, investing, and retirement accounts.

Why is it beneficial to use financial institutions?

Financial institutions provide a safe place to store money, earn interest, and access financial services like loans and electronic payments.

What main products and services are offered by financial institutions?

Checking and savings accounts, loans (mortgages, auto, personal), credit cards, investment services, and ATMs.

What is the key difference between banks and credit unions?

Banks are for-profit corporations owned by shareholders. Credit unions are non-profit cooperatives owned by their members, often offering lower fees and better interest rates.

How do Brick & Mortar physical branches compare to Online Banks?

Brick & Mortar offers face-to-face customer service and cash services but lower interest rates. Online banks have no physical branches, lower overhead, and typically offer higher interest rates on savings.

How are bank and credit union deposits protected by government insurance?

Banks are insured by the FDIC (Federal Deposit Insurance Corporation) and Credit Unions are insured by the NCUA (National Credit Union Administration). Both protect deposits up to $250,000 per depositor.

What are the core purposes of Checking, Savings, CD, Money Market, and IRA / Roth IRA accounts?

Checking is for everyday spending and bills. Savings is for storing money and earning basic interest. Certificate of Deposit (CD) locks money for a set time for higher interest. Money Market is a hybrid savings account with limited check-writing. IRA / Roth IRA are retirement savings accounts with tax advantages.

What is the difference between deposits and withdrawals?

Deposits put money into an account (adds to balance), whereas withdrawals take money out of an account (subtracts from balance).

What is the distinction between a routing number and an account number?

A routing number is a $9$-digit code identifying your specific bank. An account number is your unique personal identifier (usually 8-12 digits) at that bank.

What requirements must be met to open a bank account?

You need a government-issued ID, proof of address, Social Security Number (SSN) or ITIN, and a minimum opening deposit.

What is the difference between an individual account and a joint account?

An individual account is owned by one person. A joint account is owned by two or more people who share equal access and responsibility for the funds.

What is a debit card and how does it function?

A plastic card linked directly to your checking account that deducts money immediately from your available balance when you make a purchase or withdrawal.

What is Direct Deposit?

An electronic transfer that automatically deposits your paycheck or benefits directly into your bank account.

What functions do bank apps and Remote Deposit Capture (RDC) provide?

Bank apps let you manage money on your phone. RDC lets you deposit paper checks remotely by taking a photo of them with your smartphone.

What is an ATM and what is the function of a PIN?

An ATM (Automated Teller Machine) lets you withdraw cash or deposit money. Your PIN (Personal Identification Number) is a secret $4$-digit password required to use it.

What is an Overdraft Fee and how does Overdraft Protection work?

An Overdraft Fee (typically $30-$35) is charged when you spend more money than you have. Overdraft Protection links your checking to a savings account or line of credit to cover the shortfall and avoid declines.

Why is it important to reconcile an account and set up alerts?

Reconciling ensures your records match the bank's statement to spot errors or fraud. Alerts notify you of low balances to prevent overdraft fees.

What are the 11 labeled parts of a check?

1. Name/Address of account holder 2. Date line 3. Payee line ("Pay to the order of") 4. Numerical amount box 5. Written amount line 6. Bank name 7. Memo line 8. Signature line 9. Routing number (bottom left) 10. Account number (bottom middle) 11. Check number (top right and bottom right).

Do checks expire?

Yes. Banks are legally allowed to refuse checks that are $6$ months ($180$ days) old or older (known as "stale-dated" checks).

What is check endorsement?

Signing the back of a check before depositing or cashing it to authorize the transfer of funds.

What is the difference between Interest Paid and Interest Charged?

Interest Paid is money the bank pays you for keeping funds in an account. Interest Charged is the fee you pay the bank for borrowing money (loans/credit cards).

How often is interest paid out, and can interest rates change?

Interest is typically calculated daily and paid out monthly. Interest rates on standard savings accounts are variable and can change at any time based on the Federal Reserve.

What is the difference between Simple Interest and Compound Interest?

Simple Interest is earned only on the original principal amount. Compound Interest is earned on the principal plus any interest already accumulated ("interest on interest").

What is the Time Value of Money and why is starting early important?

It is the concept that money available now is worth more than the same amount in the future due to its potential earning capacity. Starting early allows compound interest more time to multiply your savings.

What are the core challenges to saving?

Living paycheck to paycheck, inflation eroding purchasing power, social media pressure ("lifestyle creep"), easy spending via credit cards, and impulse shopping.

How do saving and investing differ in terms of time horizons and goals?

Saving is for short-term goals (3-5 years), keeping cash safe and liquid. Investing is for long-term goals ($>5$ years), buying assets like stocks to outpace inflation despite market risk.

How do Traditional IRAs, Roth IRAs, and Employer Plans compare for retirement investing?

Traditional IRA contributions are tax-deductible now and taxed when withdrawn. Roth IRA contributions use after-tax money and withdrawals are $100\%$ tax-free in retirement. 401k / 403b are employer-sponsored plans (401k for companies, 403b for non-profits/schools) that often offer free matching money.

What is The Rule of 72?

A shortcut formula to find how long it takes money to double: $72$ divided by the interest rate = years to double (e.g., at $6\%$ interest, money doubles in $12$ years).

What is the recommended size for an Emergency Fund?

You should save $3$ to $6$ months' worth of living expenses in a safe, accessible account.

What is a Payday Loan / Cash Advance and why should it be avoided?

A short-term, high-interest cash loan due on your next payday. They feature predatory interest rates (often $400\%$ APR or higher) and should be strictly avoided.