Chapter 5 - Financial Services: Savings Plans & Payment Accounts

common mistakes when managing current cash needs

overspending as a result of impulse buying & using credit, having insufficient liquid assets to pay current bills, using savings or borrowing to pay for current living expenses, failing to put unneeded funds in an interest earning savings account or investment program

types of financial services

savings, payment services, borrowing, investment & other financial services

opportunity costs of financial services

higher returns for longterm savings at the cost of low liquidity, convenience of nearby ATMs or local bank branches , no fee checking account that requires non interest earning $500 minimum balance means lost interest earnings

what is the relationship between financial services & overall financial planning?

Financial planning is the plan put in place to achieve financial satisfaction and financial services help you complete that plan.

what are the major categories of financial services?

savings, payment services, borrowing, investment & other financial services

why shouldn't you select financial services only on the basis of monetary factors?

Services vary from provider to provider and it is not only monetary factors that matter.

how do changing economic conditions affect the use of financial services?

interest rates affect whether people borrow money or not

deposit institutions

commercial banks, savings and loan associations, mutual savings banks, credit unions

commercial bank

a financial institution that offers a full range of financial services to individuals, businesses, and government agencies

savings & loan association

specialize in savings accounts and home mortgage loans

mutual savings bank

owned by the depositors and specialize in savings and mortgage loans

credit union

a user-owned, nonprofit, cooperative financial institution that is organized for the benefit of its members

Other Financial Institutions

life insurance companies, investment companies, brokerage firms, finance companies, credit card companies, mortgage companies

what are examples of deposit financial institutions?

Commercial Banks, Savings and Loan Associations, Mutual Savings Banks

what factors do consumers usually consider when selecting a financial institution?

Services, Costs, Fees, Earnings, Convenience, Online/Mobile Banking

share accounts

savings accounts at credit unions

certificate of deposit (CD)

a savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate

types of CDs

Rising-rate or bump-up CDs - higher rates at various intervals

Liquid CDs - w/minimum balance offer an opportunity to w/draw money w/o a penalty

Zero-coupon CDs - purchased at a deep discount w/no interest payments. $5,000 for $10,000 in 10 yrs

Indexed CDs - have earnings based on the stock market. Based on CPI higher returns as inflation increases

Callable CDs - start w/higher rates, long maturities Bank may "call" (close) acct after set period - receives the original deposit and any interest.

Promotional CDs - attract savers w/gifts or special rates.

money market account

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

savings bonds

ee bonds, I bonds

EE bonds

-discount bonds

-when you buy these bonds, you pay only half their face value

-each year that you keep the bond, its value increases as interest adds up

-even after the bond reaches the value printed on it, it will continue to earn interest for 30 years from the date it was purchased

I bonds

-these bonds are sold at face value

-they are tax free

-can earn interest, but interest rates change every 6 months

what are the main types of savings plans offered by financial institutions?

Regular Savings Accounts- Certificates of Deposit- Money Market Accounts and Funds- Savings Bonds

how does a money market account differ from a money market fund?

safety - MMA: banks & credit unions covered by fed insurance VS. not true for money market funds

what are the benefits of U.S. savings bonds?

- Low Risk- Guaranteed by the federal government

savings plan selection factors

rate of return, inflation, taxes, liquidity, safety, restrictions/fees

rate of return

the percentage of increase in the value of your savings from earned interest (also called yield)

compounding

a process that calculates interest based on previously earned interest

truth in savings law

states that financial institutions have to inform you of fees on deposits, interest rates, annual percentage yield, and terms & conditions of savings plans

annual percentage yield (APY)

The percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365-day period.

annual percentage yield formula

100(interest/principal)

when would you prefer a savings plan with high liquidity over one with a high rate of return?

high liquidity - if you need to access the money in a short period of time

what is the relationship between compounding and the future value of an amount?

The number of times compounded determines the future value.

How do inflation and taxes affect earnings on savings?

As inflation increases, interest rates increase. Taxes reduce interest earned on savings.

electronic payments ex

debit (cash, check) cards, online payments/mobile transfers, stored-value cards, smart cards (electronic wallet)

checking accounts

regular checking, activity checking, interest earning checking

other payment methods

certified check, cashiers check, money order, traveler's check

electronic payments

Transactions not involving cash, checks, or credit cards have expanded with technology, improved security, and increased consumer acceptance.

use a credit card to

delay payment, build credit, buy online or for major purchases, earn rewards for spending

use a debit card to

limit spending to available funds, avoid future bills, avoid interest or annual fees, obtain better protection if processed as credit

regular checking account

a checking account for which the monthly fee is usually based on the average balance maintained and the number of transactions recorded

activity accounts

Fee charged for each check written, and sometimes for deposits - no minimum balance required

interest-earning checking account

any account on which you can write checks that pays interest (required min balance)

share draft account

an interest-bearing checking account at a credit union

endorsement types

black, restrictive, special, remote deposit capture

blank endorsement

just your signature

restrictive endorsement

"for deposit only" & signature & account number

special endorsement

transfer ownership "pay to the order of NAME OF NEW OWNER" and signature

remote deposit capture

uses scanners to capture check images and to use those images, instead of a paper check, to make a deposit to an account

proper check writing steps

record date, write name of person/org receiving pmt, record amount of check in figures, write amount of check in words, sign check, note reason for payment

what factors are commonly considered when selecting a checking account?

Restrictions, Fees & Charges, Interest, Special Services

Are checking accounts that earn interest preferable to regular checking accounts? Why or why not?

Yes, this allows money to continue to grow