Ch. 5 Financial Services: Savings Plan and Payment Accounts
smart cards
"electronic wallets" are similar to ATM cards stores prepaid amounts as well as information w/ account balances, transaction records, insurance information, and medical history
No federal deposit insurance coverage
- Life insurance company - investment company, brokerage firm - credit card, finance company - mortgage company
Federal deposit insurance coverage
- commercial bank - savings and loan. mutual savings - credit union
Online Banking Concerns
- potential privacy, security violations - ATM fees can become costly - difficulty depositing cash, checks - overspending due to ease of access - online scams, "phishing", and e-mail spam
services offered
- savings services - payment services - borrowing - other: insurance, investments
Online Banking Benefits
- time and money savings - convenience for transactions, comparing for transactions, comparing rates - no paper trail for identity thieves - transfer access for loans, investments - e-mail notices of due dates
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 rater 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
writing checks
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 5) sign the check 6) note the reason for payment
CD portofolio
CDs maturing at different times to give you some degree of liquidity and flexibility when you reinvest your funds
asset management accounts
Cash management account: provides a complete financial services program for a single fee includes: checking account, ATM card, credit card, online banking, and line of credit for obtaining quick cash loans provide access to: stock, bond, mutual fund, and other types of investments
interest-earning checking accounts
NOW accounts: negotiable order of withdrawal, usually a require a minimum balance - if account goes below this amount, you may not earn interest and will likely incur a service charges
EE bonds
Patriot Bonds - may be purchased for amounts ranging from $25 to 5,000 - purchased at face value - interest accrues monthly and compounds semiannually - must be held for one year before it can be cashed * the interest earned is exempt from state and local taxes * you do not have to pay federal income tax on earnings until the bonds are redeemed but may be exempt is used to pay for tuition
cashier's check
a check of a financial institution and may be purchased by paying the amount of the check plus a fee
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 - not covered by federal deposit insurance - allowed to write a limited number of checks, providing the convenience of liquidity
mutual savings bank
a financial institution that is owned by depositors and specialized in savings accounts and mortgage loans - located mainly in the northeastern US - the profits go to the depositors, usually paying higher rates on savings
commercial bank
a financial institution that offers a full range of financial services to individuals, businesses, and government agencies - organized as corporations with individual investors contributing the capital the banks need to operate - national banks are chartered by the federal govt. and the state banks by the states and have fewer restrictions
savings and loan association (S&L)
a financial institution that traditionally specialized in savings accounts and mortgage loans
trust
a legal agreement that provides for the management and control of assets by one party for the benefit of another - most commonly created through a commercial bank or a lawyer
compounding
a process that calculates interest based on previously earned interest
market funds
a product of investment companies that are not protected by the federal deposit insurance usually just as safe
share account
a regular savings account at a credit union
credit union
a user-owned, nonprofit cooperative financial institution that is organized for the benefit of its members
traveler's checks
allow you to make payments when you are away from home requires you to sign each check twice 1) sign when you purchase them 2) sign them again as you cash them
special endorsement
allows you to transfer a check to someone else with the words 'to pay to the order of' followed by the name of the other person and then your signature
liquidity
allows you to withdraw your money on short notice w/out a loss of principal or fees
overdraft protection
an automatic loan made to checking account customers for checks written in excess of the available balance - convenient but costly
inflation
as the inflation rate increases, the interest rates offered to savers also increase
Promotional CDs
attempt to attract savers with gifts or special rates - balance the value of the item against the lost interest
online payments
banks and internet companies are serving as 3rd parties to facilitate online bill payments - consider all fees as well as online security and customer service availability
debit card
cash card: activates ATM transactions may also be used for purchases; spending your own money rather than borrowing additional money
automatic teller machine (ATM)
cash machine: provides various banking activities and other types of transactions
activity accounts
charge a fee for each check written and sometimes a fee for each deposit, in addition to a monthly service charge -do not hace to maintain a minimum balance - useful for those who write only a few checks a month and are unable to maintain the required minimum balance
restrictive endorsement
consists of the words 'for deposit only', followed by your signature
Borrowing
credit alternatives range from short-term accounts, such as credit cards and cash loans, to long-term borrowing, such as home mortgage
I Bonds
earns a combined rate consisting of 1) a fixed rate for the life of the bond and 2) an inflation rate that changes twice a year - additional interest payment is recalculated twice a year - purchased at face value - minimum holding period is 1 yr
joint account
has 2 or more owners require a signature card
indexed CDs
have earnings based on the stock market - strong stock performance, can be higher than those on other CDs - low performance, may earn no interest and may even lose part of your savings - CDs based on consumer price index can result in higher returns as inflation increases
Other Financial Services
insurance protection, investment for the future, real estate purchases, tax assistance, and financial planning are additional services
FDIC
insures deposits of up to $250,000 per person per financial institution joint account is considered to belong proportionally to each name on the account - max coverage of FDIC is based on each depositor, not each account
selection of savings plan based on
interest rate earned liquidity safety convenience
blank endorsement
just your signature which should only be used when you are actually depositing or cashing a check
regular savings accounts
low or no minimum balances receive a monthly or quarterly statement w/ summary of transactions - withdraw money as needed
finance companies
making loans to consumers and small businesses -loans have short and intermediate terms with higher rates than most other lenders charge
store- valued cards
may be disposable or may be reloaded w/ additional amount
stop-payment order
may be necessary if a check is lost or stolen
Rising-rate or bump-up CDs
may have higher rates at various intervals, such as every 6 months
mortgage companies
mortgage companies are organized primarily to provide loans to purchase homes
investment companies
mutual funds: offer banking-type services
fees and charges
nearly all institutions require a minimum balance or impose service charges for checking accounts - consider the cost of lost or reduced interest due to the need to maintain the minimum balance
HH bonds
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
individual account
only one person is allowed to write checks
certified check
personal check w/ guaranteed payment; the amount of the check is deducted from your balance when the financial institution certifies the check
safety
protection by federal govt. prevents a loss of money due to the failure of the insured institution
life insurance companies
provide financial security for dependents, many life insurance policies contain savings and investment features
money order
purchased from financial institutions, post offices and stores allows to make a payment that the recipient knows is valid
Savings
safe storage of funds for future use -time deposits: money in savings accounts & certificates of deposits
money market account
savings account that requires a minimum balance and has earnings based on market interest rates - allow you to write a number of checks to make large payments or to transfer money to other accounts - may impose a fee when you go below the required minimum balance - are covered by federal deposit insurance
certificate of deposit (CD)
savings plan requiring that a certain amount be left on deposit for a stated time period - penalty for early withdrawal
Callable CDs
start with higher rates and usually have long-term maturities, as high as 10 to 15 yrs - have the benefit of federal deposit insurance - bank may make calls
bank statement
summarizing deposits, checks paid, interest earned, and fees such as service charges and printing of checks
tax considerations
taxes reduce interest earned on savings
Payment Services
the ability to transfer money to other parties is a necessary part of daily business activities -demand deposits: checking accounts and other payment methods
APY
the percentage 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
bank reconciliation
to account for difference between the bank statement and your checkbook balance
deposit ticket
used for adding funds to your checking account
endorsement
your signature on the back of the check to authorize the transfer of funds into your account
share draft account
an interest-bearing checking account at a credit union write checks against their account balances
rate of return
the percentage of increase in the value of savings as a result of interest earned; also called yield
debit card transactions
used in 2 ways: 1) with your signature, like a credit card 2) with your personal identification number PIN, like ATM - more security incase of fraudulent transaction
regular checking accounts
usually have a monthly service charge that you may avoid by keeping a minimum balance in the account and will be beneficial