Personal Finance Chapter 5

Automatic Teller Machine (ATM)

A computer terminal used to conduct banking transactions; also called a cash machine

What is a CD portfolio?

Having CDs mature at different times, like a three-month CD, six month CD, and one year CD all valued at $2000 which gives you a degree of liquidity and flexibility when reinvesting those funds.

Indexed CDs

Have earnings based on stock market - so your CD earnings depends on strong or weak stock performance

Restrictions and Fees

Other limitations can affect your choice of a savings program - like a possible delay between time interest is earned and time it is added to your account, which means it wouldn't be available for your immediate use. Also, some institutions charge a transaction fee for each deposit or withdrawal

What does online banking services provide?

Savings plans, payment services and cash access, borrowing, and other services

Demand Deposits

checking accounts and other payment methods that give you the ability to transfer money to other parties

Activity Accounts (Types of Checking Accounts)

Charge a fee for each check written and sometimes a fee for each deposit in addition to a monthly service charge. However you don't have to maintain a minimum balance. Most appropriate for people who only write a few checks each month and are unable to maintain the required minimum balance.

Opportunity Costs of FInancial Services?

Common Trade-Offs include: - Higher returns for long-term savings will usually be achieved at the cost of low liquidity, the inability to obtain your money quickly. - The convenience of a 24-hour automatic teller machine or a bank branch office near your home or a place of work should be considered against service fees. - The "no-fee" checking account that requires a non-interest-bearing $500 minimum balance means lost interest of nearly $500 at 6 percent compounded over 10 years.

Opening a Checking Account (Managing your Checking Account)

Decide the owner of the account. Only one person is allowed to write checks on an individual account. A join account has 2 or more owners. Both require a signature card. This document is a record of the official signatures of the person or persons authorized to write checks on the account.

FDIC Coverage

Federal Deposit Insurance Corporation (FDIC) insures deposits of up to $250,000 per person per financial institution. It would be safe to deposit your funds in a savings account that is FDIC-insured.

What are I Bonds? (US Savings Bonds)

I Bonds earn a combined rate consisting of: - A fixed rate for the life of the bond - An inflation rate that changes twice a year. Sold in the same denominations as EE bonds but are purchased at face value, not at a discount. Minimum holding period is one year.

Other things about APY?

If the number of days is 365 in a term, it can just be: APY = 100 (Interest/Principal)

Other Financial Services (Type of Financial Service)

Insurance protection, investment for the future, real estate purchases, tax assistance, and financial planning are additional services you may need for successful financial management. With some financial plans, someone else can manage your funds. A trust is a legal agreement that provides for the management and control of assets by one party for the benefit of another.

What is the different between a money market account and a money market fund?

It's in the safety. Accounts at banks and credit unions are covered by federal deposit insurance. Funds are a product of investment companies, though since money market funds invest mainly in the short-term, they're usually pretty safe.

Rising Rate or bump-up CD

May have higher rates at various intervals, such as every six months. However, beware of ads that highlight a higher rate in the future. This rate may be in effect only for the last couple of months for an 18 or 24 month CD

Borrowing (Type of Financial Service)

Most people use credit at some time during their lives (you know, COLLEGE LOANS). Credit alternatives range from short-term accounts, such as credit cards and cash loans, to long-term borrowing, such as a home mortgage.

Debit Card Transactions (Electronic Payments)

Nearly every store and online retailer processes debit card transactions, with the amount of the purchase deducted from your checking or other bank account. Most debit cards can be used 2 ways: 1. With your signature, like a credit card 2. With your personal identification number (PIN), like an ATM card. When the debit card is processed like a credit card, you have more security in case of a fraudulent transaction or a purchase dispute. When you check into a hotel, buy gase, or rent a car, a merchant may freeze an amount in your bank account above what your actually spend, which could potentially result in an overdrawn account.

Special Services (Evaluating Checking Accounts)

Overdraft protection is an automatic loan made to checking account customers for checks written in excess of the available balance. This service is convenient but costly.

Stored-Value Cards (Electronic Payments)

Prepaid cards for telephone service, transit fares, highway tolls, laundry service, school lunches, and the like are common. While some are disposable, some can be reloaded.

What are HH bonds? (US Savings Bonds)

Series HH Bonds are no longer sold, but were current-income bonds with interest deposited electronically to your bank account every six months. Interest was taxed as current income on a person's federal tax return, but exempt from state and local taxes.

Callable CDs

Started with higher rates and usually have long-term maturities as high as 10 to 15 years. These savings plans have the benefit of federal deposit insurance, though the bank may "call" the account after a stipulated period (like 1 or 2 years) if interest rates drop. When the call option is exercised, the saver receives the original investment principal and any interest that has been earned.

Payment Services (Type of Financial Service)

The ability to transfer money to other parties is a necessary part of daily business activities. Checking accounts and other payment methods are involved in this, and are also commonly called demand deposits.

What about compounding?

The more frequent the compounding, the higher your rate of return will be.

Rate of Return

The percentage of increase in the value of savings as a result of interest earned; also called yield

Regular Checking Accounts (Types of Checking Accounts)

Usually have a monthly service charge that you may avoid by keeping a minimum balance in the account, though some financial institutions can waive it if you have a certain amount in your savings account. Avoiding the monthly service charge can be beneficial. Fore example, a monthly fee of $7.50 results in $90 a year. However, you lose interest on the minimum balance account in a non-interest earning account.

Smart Cards (Electronic Payments)

"Electronic Wallets" similar to other ATM cards. However, their imbedded microchip stores prepaid amounts as well as info with account balances, transaction records, insurance information, and medical history.

What is the Truth in Savings Law?

(Also known as Federal Reserve Regulation DD) defines APY as 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. Requires financial institutions to disclose the following information on savings account plans: 1. Fees on deposit accounts 2. The interest rate 3. The APY (annual percentage yield) 4. Other terms and conditions of the savings plans

Pros of Asset Management Assets

- Keeping track of your money in a single location - Fewer monthly and quarterly statements - Lower fees for maintaining a large balance with one financial institution - Simplified tax reporting with all dividends and interest on one 1099 form. - Case of communicating your financial situation to family members - Asset management accounts are offered by companies such as American Express and Charles Schwab

Restrictions (Evaluating Checking Accounts)

- Minimum balance, federal deposit insurance, hours and location of branch offices, holding period for deposited checks

Inflation

- Rate of return you earn on your savings should be compared with the inflation rate. When the inflation rate was over 10 percent, people with money in savings accounts earning 5 or 6 percent were experiencing a loss in buying power of that money. In general, as inflation rate increases, interest rates offered to savers also increase.

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

Mutual Savings Bank

A financial institution that is owned by depositors and specializes in savings accounts and mortgage loans

Commercial Bank

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

Trust

A legal agreement that provides for the management and control of assets by one party for the benefit of another

Certified check

A personal check with guaranteed payment

Debit Card

A plastic access card used in computerized banking transactions; also called a cash card

Share Account

A regular savings account at a credit union

Money Market Account

A 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

What is a money market account?

A savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments. Made to meet consumer demand for higher savings rates. May impose a fee when you go below the required minimum balance. Offer earnings based on current interest rates.

Money order

Allow you to make a payment that a recipient knows is valid

Asset Management Account

An all-in-one account that includes savings, checking, borrowing, investing, and other financial services for a single fee; also called a cash management account

Online Payments (Electronic Payments)

Banks and internet companies are serving as third parties to facilitate online bill payments, like Paypal or billmelater.com and Google checkout. When using such services, make sure to consider the fees and ONLINE SECURITY and CUSTOMER SERVICE AVAILABILITY! Being linked to your checking account may not give you as much leverage when disputing a transaction.

Writing Checks (Managing your Checking Account)

Before writing a check record the info in your check register and deduct the amount of check from your balance. The procedure for proper check writing has the following steps: 1. record the date 2. write the name of the person or organization receiving the payment 3. record the amount of the check in figures 4. write the amount of the check in words (checks for less than a dollar should be written as "only 69 cents" and cross out the word "dollar" on the check) 5. Sign the check 6. Note reason for payment A stop-payment order may be necessarily if the check is lost or stolen.

What is rolling over a CD?

Buying a new CD at maturity

Traveler's checks

allow you to make payments when you are away from home. Electronic traveler's checks, in the form of a prepaid travel card are also available. This card allows travelers visiting other nations to get local currency from an ATM.

Promotional CDs

attempt to attract savers with gifts or special rates, like offering Rolex watches or archery equipment in lieu of interest.

Reconciling your checking account (Managing your Checking Account)

each month you will receive a statement. To return your correct balance, prepare a reconciliation to account for differences between the bank statement and your checking balance.

Savings (Type of Financial Service)

safe storage of funds for future use is a basic need for everyone. These services, commonly referred to as time deposits, include money in savings accounts and certificates of deposit. Selection of a savings plan is based on interest rate earned, liquidity, safety, and convenience.

Interest Earning Checking Accounts (Types of Checking Accounts)

sometimes called NOW (negotiable order of withdrawal) accounts, usually require a minimum balance, which will incur a service charge if you are under. A share draft account is an interest-earning checking account at a credit union.

Low Liquidity

the inability to obtain your money quickly

Types of Financial Services

• Banks and other financial institutions offer services to meet a variety of needs.

Financial Services and Economic Conditions

• Changing interest rates, rising consumer prices, and other economic factors also influence financial services. For successful financial planning be aware of the current trends and future prospects for interest rates. You can stay in touch be reading Wall Street Journal or Business Work and Forbes.

Financial Institutions (Deposit Institutions)

• Commercial Banks - offers a full range of financial services to individuals, businesses, and government agencies • Savings and Loan Associations - the savings and loan association specializes in savings accounts and loans for mortgages. Savings and loan associations also offer checking accounts, expanded savings plans, loans to businesses, and other investment and financial planning services. • Mutual savings banks - owned by depositors and specializes in savings accounts and mortgage loans. • Credit Union - user-owned nonprofit, cooperative financial institution organized for the benefit of its members.

Meeting Daily Money Needs (Pt. 2 - Mistakes)

• Common mistakes made when managing current cash needs include: - Overspending as a result of impulse buying and using credit cards. Having insufficient liquid assets (cash, 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 to achieve long-term goals.

Other Financial Institutions

• Life Insurance Companies - main purpose of life insurance is to provide financial security for dependents, though many life insurance policies contain savings and investment features. • Investment Companies - also called mutual funds, offer banking-type services. A common service of these organizations is the money market fund, a combination savings-investment plan in which the investment company uses your money to purchase a variety of short-term financial instruments. • Finance Companies - Making loans to consumers and small businesses • Mortgage Companies - organized primarily to provide loans to purchase homes

What are certificates of deposit (CDs)?

• Savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specific rate of return. Can be a savings alternative.

What are the types of CDs?

• Types of CDs include: 1. Rising Rate or Bump-up CDs 2. Indexed CDs 3. Callable CDs 4. Promotional CDs

Comparing Financial Institutions

• Decide what you want from the organization that will serve your needs.

Meeting Daily Money Needs (Pt. 3 - Need more than you have)

• There may be times when you need more cash than you currently have available. To cope, you have 2 basic choices: liquidate savings or borrow. A savings account, CoD (certificate of deposit), mutual fund, or other investment may be accessed when you need funds. A credit card cash advance or a personal loan can also be appropriate. But always remember that both using savings and increasing borrowing reduce your net worth and your potential to achieve long-term financial security.

Consolidated Financial Services Accounts (Types of Financial Services)

• To simplify the many financial services that exist and to attract customers, many financial institutions offer all-in one accounts, called asset management accounts. It includes savings, checking, borrowing, investing and other financial services for one single fee.

Regular Savings Accounts (Savings Plans)

• Usually involve a low or no minimum balance. Savers receive a monthly or quarterly statement with a summary of transactions. A regular savings account usually allows you to withdraw money as needed. At a credit union, savings accounts are called share accounts.

Cashir's check

A check of a financial institution

Compounding

A process that calculates interest based on previously earned interest

Credit Union

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

Other Payment Methods

While personal checks are the most common payment forms, other methods are certified checks, cashier's check, money order, traveler's checks.

Debit Card Use

You are spending your own funds rather than borrowing additional money

Share draft account

an interest-bearing checking account at a credit union

Time Deposits

safe storage of funds for future use, including money in savings accounts and certificates of deposit

Liquidity

allows you to withdraw your money on short notice without a loss of principal or fees. Some savings plans impose penalties for early withdrawal or have other restrictions. With certain types of savings certificates and accounts, early withdrawal may be penalized by a loss of interest or lower earnings rate. Consider the degree of liquidity you desire in relation to your savings goals.

Meeting Daily Money Needs (Pt. 1 - Basic Know-how)

• Buying stuff costs money so you need to know how to manage dat cash. • Cash, check, credit card, or debit card are common payment choices. You must consider fees and the potential for impulse buying and overspending.

Money Market Account

A savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments

Losing Your Debit Card

A lost debit card that is reported stolen/lost within 2 days gives you a liability for unauthorized use for $50. After that, it is up to $500 if unreported for up to 60 days. Past that, your liability is unlimited. Remember to report the fraud within 60 days of receiving your statement to protect your right not to be charged for the transaction.

Overdraft Protection

An automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account

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

Fees and Charges (Evaluating Checking Accounts)

Nearly all financial institutions require a minimum balance or impose service charges for checking accounts. - Monthly fee 0 Fees for each check or deposit - Printing of checks - Fee to obtain canceled check copy - Overdraft, stop-payment order, certified check fee - Fees for preauthorized bill payment, fund transfer or home banking activity

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.

Annual Percentage Yield Equation

APY = 100 [(1 +Interest/Principal)^365/days in term - 1)] Principal is amount of funds on deposit. Interest is total dollar amount earned during the term on the principal. Days in term is the actual number of days over which interest is earned.

Tax Considerations

Like inflation, taxes reduce interest earned on savings, like a 10 percent return for a saver in a 28 percent tax bracket meaning a real return of 7.2 percent. Remember that taxes usually are not withheld from savings and investment income.

Savings and Loan Associations (S&L)

A financial institution that traditionally specialized in savings accounts and mortgage loans

Making Deposits (Managing your Checking Account)

Deposit ticket is used for adding funds to your checking account. Each check you deposit requires an endorsement - your signature on the back of the check - to authorize the transfer of the funds into your accounts. 3 types of endorsement: 1. A blank endorsement is just your signature, which should only be used when you are actually depositing or cashing a check, since a check could be cashed by anyone once it as been signed. 2. A restrictive endorsement consists of the words for deposit only followed by your signature which is especially useful when you are depositing checks. 3. A special endorsement allows you to transfer a check to someone else with the words "pay to the order of" followed by the name of the other person and then your signature.

What are EE Bonds? (US Savings Bonds)

Series EE Bonds (called Patriot Bonds after the 9/11 terrorist attacks) may be purchased for amounts ranging from $25 to $5000 (face values of $50 to $10000, respectively). EE bonds increase in value every month as interest accrues monthly and compounds semi-annually. If you redeem EE bonds before 5 years you forfeit the latest 3 months of interest. After 5 years, you are not penalized. These bonds must be held for one year before it can be cashed. Redeemed EE Bonds may be exempt from federal income tax if the funds are used to pay tuition and fees at a college, university, or qualified technical school for yourself or a dependent. Must be purchased by an individual who is at least 24 and must be issued in names of one or both parents.

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