Bài giảng Personal Financial - Chapter 4: Savings and Payment Services

4 Savings and Payment ServicesMeeting Daily Money NeedsRoutine spending activities require a cash management planPayment options: cash, check, credit cards, and debit cards Common Mistakes:OverspendingInsufficient liquid assetsUsing savings or borrowing to pay for current expensesFailing to put unneeded funds in an interest bearing or investment account4-*1Objective 1Identify Commonly Used Financial ServicesMeeting Daily Money Needs Sources of Quick Cash:Liquidate savingsSavings accountCDMutual fund Borrow Credit card advancePersonal loan Both options reduce net worth4-*2Types of Financial ServicesSavingsTime depositsSavings accounts and certificates of depositPayment servicesChecking accounts = demand depositsAutomatic paymentsBorrowing for the short- or long-termOther financial servicesInsurance, investments, real estate purchases, tax assistance, financial planning, and asset management (cash management) accounts4-*3Electronic and Online Banking ServicesDirect deposit Paychecks and other regular incomeAutomatic Payments and Fund TransfersRecurring payments such as for utilitiesRemember to deduct them from your check registerATM Access Obtain cash, check account balances, and transfer funds Check out the fees! (use own bank ATM; larger sums)Debit Card Deducts money directly and immediately out of your checking account (no “float” time)Lost card liability $50 (2 days) to $500 (up to 60 days); unlimited liability after 60 daysTraditional banks  most offer online servicesWeb-only banks (e.g., E*Trade Bank, ING Direct) Services Provided:4-*4Pros and Cons of Online BankingBenefitsConcernsTime and money savingsPotential privacy and security violationsConvenience for transactions, comparing ratesATM fees can become costlyNo paper trail for identity thievesDifficulty depositing cash, checksTransfer access for loans, investmentsOverspending due to easy accessE-mail notices of due datesOnline scams, “phishing,” and email scams4-*5Interest Rates & Financial Decisions4-*Be aware of current trends and future prospects for interest rates6Four Tools of Monetary (Cash) Asset ManagementA low-cost, interest-earning checking account from which to pay monthly living expenses.A small savings account in a local financial institution for irregular expenses and emergency cash (3-6 months of expenses- or more- is recommended)When income begins to exceed expenses regularly, open a money market account.Your monetary asset management plan is complete when you transfer some funds into longer-term savings instruments. Examples: CDs, U.S. Savings Bonds7Objective 2Compare the Types of Financial Institutions Basic questions to ask before choosing a financial institution:Where can I get the best return on my savings?How can I minimize costs for financial services?Will I be able to borrow money if I need it?Determine the financial services you need before choosing a financial institutionCompare fees and convenienceConsider the safety (FDIC insurance) and rates for deposits and loans at different institutionsOther factors?4-*How did YOU choose your bank or credit union?8Comparing Financial InstitutionsDeposit InstitutionsCommercial Banks Organized as corporations (answer to stockholders)Offer a full range of services including checking, savings, lending and other services (e.g., trust management)Savings and Loan Associations Checking accounts, specialized savings plans, loans, and financial planning and investment services4-*9Deposit Institutions Mutual Savings Banks Specialize in savings accounts and mortgage loans (mostly in northeastern U.S.)Owned by their depositors, with profits going back to depositors by paying a higher rate on savingsCredit Unions User-owned, nonprofit and provide comprehensive financial servicesLower fees and lower loan ratesComparing Financial Institutions4-*10Life Insurance Companies Investment Companies Money Market Mutual FundCombination savings & investment; short-term securitiesNot (normally) covered by FDIC (like bank MMDAs)Brokerage Firms Act as agent for buyers and sellers of financial productsCredit Card Companies Specialize in short term loansFinance Companies Make short and medium term loans to consumersHigher rates than most other lenders (use as a last resort)Mortgage Companies Provide home mortgage loansNon-Deposit Financial Institutions4-*11Problematic Financial BusinessesPawnshops Loans on tangible possessions (e.g., jewelry) High fees; 3% per month common Short-term loans (e.g., 30 -45 days)Used for quick cash (small dollar amounts)Check-Cashing Outlets (Currency Exchanges)Charge 1-20 % of check’s face value 1-3% fee is averageMany provide other services (e.g., money orders, bill paying, international remittances)Comparing Financial Institutions4-*12More Problematic Financial BusinessesPayday Loan Companies A.k.a., “Cash advances,” “check advance loans,” “postdated check loans,” “delayed deposit loans”Very high interest rates (write $115 check to borrow $100 for 2 weeks; translates into 390% APR!)Car Title LoansHigh-cost short term loan secured with car title Rent-to-Own Centers Lease merchandise at high interest rates to low-income customers; small weekly payments add upOften pay 3 to 4 times the cost of an itemComparing Financial Institutions4-*13Objective 3Assess Various Types of Savings PlansRegular Savings AccountsA.k.a., Passbook savings and Statement accountsLow minimum balance; easy withdrawalFDIC Insured; fees and balance requirements varyLow rate of returnCalled “share accounts” at credit unionsCertificates of Deposit (CDs)Required minimum deposit; required time on depositPenalties for early withdrawal Take care when rolling over (check current interest rates)Consider creating a “CD portfolio” (laddering)4-*14Objective 3Assess Various Types of Savings PlansInterest-Earning Checking AccountsChecking accounts paying low interestMoney Market Accounts and FundsFloating interest rate (based on current interest rates)Allows limited check writingHigher minimum balance than regular savingsMoney market accounts are covered by the FDIC, but money market funds are not (generally)4-*15Types of Savings PlansU.S. Savings BondsSeries EE (Patriot Bonds)Sold at half of face valueFace values $50 - $5,000Fixed-rate interest compounded semiannually Penalty if redeemed within 5 yearsContinues earning interest for 30 yearsPotential tax advantages if used to pay tuitionSeries I Bonds (Inflation-Adjusted Bonds)Earns a fixed rate plus an inflation rate Twice-a-year inflation adjustment Series HH Current income bonds; no longer availableSee www.savingsbonds.gov for rates4-*16Evaluating Savings Plans Rate of Return or YieldPercentage increase in value due to interestCompounding frequency increases return (notice over time)4-*Compounding- Earning interest on previously-earned interest17“Truth in Savings Act” Requires disclosure of:Fees on deposit accounts; other terms and conditionsInterest rate paid on savingsAnnual percentage yield (APY)APY defined as the “total percent” based on annual interest and frequency of compoundingAPY = Rate per period X # periods per year“Total interest that would be received on a $100 deposit for a 365-day period, given an institution’s annual rate of simple interest and frequency of compounding”APY must be in advertising and disclosures.WHY?Evaluating Savings Plans4-*18Objective 4Evaluate Different Types of Payment MethodsDebit Card TransactionsImmediate account debit; DC usage > credit cardsCan use 2 ways: with a signature and PINOnline PaymentsPayPal, MyCheckFree (examples of third parties) Stored-Value CardsPrepaid cards for telephone, transit, tolls, etc.Smart Cards “Electronic wallets;” embedded data microchips (e.g., medical info)4-*19Payment MethodsChecking AccountsRegular Checking Accounts (service charge; minimums)Activity Accounts (charge a fee for each check written)Interest-Earning Checking Accounts (called share draft accounts at credit unions)Require a minimum balanceEvaluating checking accounts:Restrictions, such as a minimum balanceFees, which are increasing, and chargesInterest rate and computation methodSpecial services (e.g., overdraft protection)Beware of “package” deals that include unneeded services; look for “relationship account” deals4-*20Other Payment MethodsCertified CheckPersonal check with guaranteed paymentShows that account has enough $; fee chargedCashier’s CheckCheck of a financial institution (backed by institution’s assets) you get by paying the face amount plus a feeMoney OrderPurchase at financial institution, post office, storesTraveler’s CheckSign check twice; becoming less common (fraud issues)Electronic traveler’s checks - prepaid travel card with ability to get local currency at an ATM4-*21Managing a Checking AccountWriting ChecksRecord the dateWrite the name of the person/organization receiving the checkRecord the amount of the check in figuresWrite the amount of check in wordsSign the checkNote the reason for the payment (memo)4-*22Managing a Checking Account Bank ReconciliationCompare written checks with those reported paidSubtract the total of all checks written but not yet clearedDetermine deposits not on the statement; Add the amount to the statement balanceSubtract fees or charges and ATM withdrawals from the checkbook balanceAdd any interest to your checkbook balance4-*What should you do if the balances don’t match?23Wrap UpChapter QuizConcept Check 4-1- Electronic BankingConcept Check 4-2- Descriptions of Financial InstitutionsConcept Check 4-3- Money Market Accounts and Funds; Benefits of U.S. Savings Bonds; Major InfluencesConcept Check 4-4- Suggested Payment Methods24