Personal Finance Chapter 4
Promotional CDs
-Beware of these -They attempt to attract savers with gifts or special rates -Be sure to balance the value of item against the lost interest
Cash Availability
-Check cashing -ATM/debit cards -Traveler's checks -Foreign currency exchange
Taxes
1. Taxable interest reduces amount of earnings
Time deposits
savings accounts/certificates of deposit
Smishing
scam over text message
Endorsement
your signature on the back of the check -Each check you deposit requires one
Deposit Institutions:
-Commercial bank -Credit union -Savings & loan association -Mutual savings bank
Use a debit card to:
-Limit your spending to available money -Avoid bills that will be paid in the future -Avoid interest payment or annual fee -Obtain better protection if you process a transaction as a credit card
Cashier's check
a check issued by a financial institution -You may purchase one by paying the amount of the check plus a fee
Automatic teller machine (ATM) (cash machine)
a computer terminal used to conduct banking transactions
Substitute check
a digital reproduction of the original paper check, & is considered a legal equivalent of the original check
Savings & loan associations (S&Ls)
a financial institution that traditionally specialized in savings accounts & mortgage loans -Most today have expanded to offer financial services comparable to those of banks
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
Money market fund
a savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments
Credit unions
a user-owned, nonprofit, cooperative financial institution that is organized for the benefit of its members
Demand deposits
checking accounts & other payment methods are called this
Restrictive endorsement
consists of the words "for deposit only", followed by your signature, which is especially useful when you are depositing checks
Joint account
has 2 or more owners
Stop-payment order
may be necessary if a check is lost or stolen -The fee for this commonly ranges from $20 to more than $30
Financial supermarkets
one-stop financial service operations
Individual account
only one person is allowed to write checks
Deposit institutions
serve as intermediaries between suppliers (savers) & users (borrowers) of funds *Common of these organizations are: -Commercial banks -Savings & loan associations (S&Ls) -Mutual savings banks -Credit unions
Bank reconciliation
to determine the correct balance in your account prepare this to account for differences between the bank statement & your checkbook balance
US Savings Bonds
-A low risk savings program guaranteed by the federal government that have been used to achieve various financial goals *Benefits: 1. Rate varies with interest rates (I-bonds) 2. Low minimum deposit 3. Government guaranteed 4. Exempt from state, local income taxes *Drawback 1. Lower rate when redeemed within first 5 years
Types of US Savings Bonds:
-EE Bonds -HH Bonds -I Bonds
Payday Loan Companies
-Also called cash advances, check advance loans, postdated check loans, & delayed deposit loans -Borrowers can pay 780% annual interest rates -To prevent exploitation, some employers are offering pay advances through payroll provider services
Liquidity
1. Ease with which savings can be withdrawn -Allows you to withdraw your money on short notice without a loss of value or fees -To achieve long-term financial goals, many people trade off liquidity for a higher return
If you are a victim of identity theft, take the following actions:
1. File a police report immediately in the area where the item was stolen; this proves you were diligent & is a first step toward an investigation (if there ever is one) 2. Call the 3 national credit reporting organization immediately to place a fraud alert on your name & SS #; the numbers are Equifax, 1-800-525-6285; Experian, 1-888-397-3742; & TransUnion, 1-800-680-7289 3. Contact the SS Administration fraud line at 1-800-269-0271
Debit card v. Credit card
Debit: you are spending your own funds Credit: you are borrowing money
Prepaid debit cards
cards that you put money on -Ex: walmart gift card -Become the fastest-growing payment method -You pay "before" you use -Beware of fees with prepaid cards -Have resulted in lower consumer debt, since they help you control your spending -Also called stored-value cards
Blank endorsement
is just your signature, which should be used when you are actually depositing or cashing a check, since a check may be cashed by anyone once it has been signed
Common payment choices:
-Cash -Check -Credit card -Debit card -Online/mobile banking transfer
Economic conditions & how they affect financial services:
-Changing interest rates, rising consumer prices, & other economic factors influence financial services -Be aware of current trends & future prospects for interest rates -Can learn about these trends & prospects by reading The Wall Street Journal, The Financial Times, the business section of daily newspapers, & business periodicals like Bloomberg Businessweek, Forbes, & Fortune
Car Title Loan Companies
-When in need of money, people with poor credit ratings might obtain a cash advance using their automobile title as security for a high-interest loan -These loans, usually due in 30 days, typically have a cost similar to payday loans, often exceeding 200% -Consequences can be devastating with the repossession of your car
Money order
-You can purchase this the same way you can a cashier's check from financial institutions, post offices, & stores -Allow you to make a payment that the recipient knows is valid
Mobile Banking Services for Payments/Transfers:
-Access cash at ATM -Balance inquiry -Online payments -Move funds among various accounts -Person-to-person payments (transfer funds to another person's account) -Instant payments for bills you forgot to pay -Tap or wave your phone to make a purchase -Access online images of canceled checks
Asset management account (cash management account)
an all-in-one account that includes savings, checking, borrowing, investing, & other financial services for a single fee
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 & then your signature
Deposit ticket
is used for adding funds to your checking account -On this, you list the amounts of cash & checks being deposited
Rising-rate/bump-up CD
-May have higher rates at various intervals, such as every 6 months -Beware of ads that highlight a higher rate in the future -This rate may be in effect only for the last few months of an 18- or 24-month CD
HH bonds
-No longer sold -Were current-income bonds with interest deposited electronically to your bank account every 6 months -This interest was taxed as current income on a person's federal tax return, but it was exempt from state & local taxes
Obtaining & using a checking account involves several activities:
-Opening a checking account -Making deposits -Writing checks -Reconciling your checking account
Indexed CDs
-Have earnings based on the stock market -In times of strong stock performance, your earnings can be higher than those on other CDs -At other times, however, you may earn no interest & may even lose part of your savings -A CD based on the consumer price index can result in higher returns as inflation increases
Traveler's checks
allow you to make payments when you are away from home -This payment form requires you to sign each check twice -First, you sign the traveler's checks when you purchase them -Then, to identify you as the authorized person, you sign them again as you cash them -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
Other Financial Service Providers:
-Pawnshop -Check-cashing outlet -Payday loan company -Rent-to-own center -Car title loan company
Vishing
scam over the phone; fraud by live or automated calls
Bank statement
summarizes deposits, checks paid, ATM withdrawals, interest earned, & fees such as service charges & printing of checks
Near-field communications (NFC)
technology stores credit card & bank account info -These wireless devices replace debit & credit cards for processing financial & purchasing transactions -A tap or wave of your phone at the point-of-sale terminal sensor completes the purchase -While these mobile transactions usually occur through a bank account, in the future these payment may bypass banks with charges directly on your phone bill
Rate of return (yield)
the percentage of increase in the value of savings as a result of interest earned -Is determined by dividing the interest earned by the amount in the savings account -The yield on your savings usually will be greater than the stated interest rate
Types of Financial Services:
-Cash availability -Payment services -Savings services -Credit services -Investment services -Other services
Other payment methods:
-Certified check -Cashier's check -Money order -Traveler's check
Activity accounts
-Charge a fee for each check written & sometimes a fee for each deposit in addition to a monthly service charge -You don't have to maintain a minimum balance -Is most appropriate for people who write only a few checks each month & are unable to maintain the required minimum balance
Check-Cashing Outlets
-Charge anywhere from 1-20% of the face value of the check to cash it -Average cost is 2-3% -Offer services, including electronic tax filing, money orders, private postal boxes, utility bill payment, & the sale of transit tokens -CCO's; currency exchanges
Payment Services
-Checking account -Online payments -Cashier's checks -Money orders
Credit Services
-Credit cards, cash advances -Auto loans, education loans -Mortgages -Home equity loans
Electronic payments:
-Debit (cash) & credit cards -Online, mobile payments -Stored-value (prepaid) cards -Smart cards ("digital wallet") -Peer-to-peer payments (P2P)
Use a credit card to:
-Delay the payment for a purchase -Build a credit history with wise buying -Buy online or for major purchases -Earn more generous rewards points for spending
Mobile Banking Services for Deposits:
-Direct deposit of paycheck & government payment -Online transfer from other account -Take photo of check to deposit (remote deposit)
Certificates of Deposit
-Higher earnings are available to savers when they leave money on deposit for a set time period -CD requires that a certain amount be left on deposit for a certain time period (ranging from 30 days to 5 or more years) -Can be an attractive & safe savings alternative -Most institutions impose a penalty for early withdrawal of CD funds -CDs of 1 year or less, the penalty is usually 3 months of interest -CDs or more than a year will likely have a fine of 6 months interest -CDs of 5 years can result in a penalty as high as 20-25% of the total interest to maturity on the account *Benefits: 1. Guaranteed rate of return for time of CD 2. Insured (when purchased from bank or comparable financial institutions) *Drawbacks: 1. Possible penalty (reduced interest) for early withdrawal 2. Minimum deposit
Investment Services
-Individual retirement accounts (IRAs) -Brokerage service -Investment advice -Mutual funds
Other Services
-Insurance; trust service -Tax preparation -Safe deposit boxes -Budget counseling -Estate planning
Zero-coupon CD
-Is purchased at a deep discount (a small portion of the face value) with no interest payments -Your initial small deposit ($5,000, for example) grows to the maturity value of the CD ($10,000) in 10 years, which is approximately a 6% annual return
Non-deposit institutions:
-Life insurance companies -Investment companies (mutual funds) -Brokerage firms -Credit card companies -Finance companies -Mortgage companies
Two basic choices when you need quick cash:
-Liquidate savings (reduces net worth) -Borrow (reduces net worth)
Pawnshops
-Loans are based on the value of tangible possessions such as jewelry or other valuable items -Use these to obtain cash quickly -Charge higher fees than other financial institutions -Have become the "neighborhood bankers" & the "local shopping malls" -Regulated by states, but interest rates charged range from 3% to over 100% annually
Liquid CDs
-Offer an opportunity to withdraw money without a penalty -You will likely be required to maintain a minimum balance in the account -May have other restrictions such as a "waiting period" before any funds can be withdrawn or a limit on the number of withdrawals allowed
3 Main Categories of Alternative Payment:
-Payments (Electronic Payments) -Checking accounts -Other payment methods
Selection of a Savings Plan is Usually Influenced by:
-Rate of return -Inflation -Tax considerations -Liquidity -Safety -Restrictions -Fees
Checking accounts:
-Regular checking account -Activity checking account -Interest-earning account
3 categories of checking accounts:
-Regular checking accounts -Activity accounts -Interest-earning accounts
Savings Services
-Regular savings account -Money market account -Certificates of deposit -US savings bonds
Types of Savings Plans:
-Regular savings accounts -Certificates of deposit -Interest-earning checking accounts -Money market accounts & funds -US savings bonds
Smart Cards
-These "digital wallets" are similar to other ATM cards with an embedded microchip -The card may also store past purchases, insurance info, & your medical history -Has banking activities -Recent developments include an option that allows you to pay with reward points
When interest rates are rising...
-Using long-term loans to take advantage of current low rates -Select short-term savings instruments to take advantage of high rates when they mature
Regular checking accounts
-Usually have a monthly service charge that you may avoid by keeping a minimum balance in the account -Some financial institutions with waive the monthly fee if you keep a certain amount in savings -Avoiding this monthly charge can be beneficial
Process of Bank Reconciliation:
1. Compare the checks written with those reported as paid on the statement; use the canceled checks, or compare your check register with the check numbers reported on the bank statement; subtract from the bank statement balance the total of the checks written but not yet cleared 2. Determine whether any deposits made are not on the statement; add the amount of the outstanding deposits to the bank statement balance 3. Subtract fees or charges on the bank statement & ATM withdrawals from your checkbook balance 4. Add any interest earned to your checkbook balance
Mistakes made frequently when managing current cash needs include:
1. Overspending as a result of impulse buying & overusing credit 2. Having insufficient liquid assets to pay current bills 3. Using savings or borrowing money to pay for current expenses 4. Failing to put unneeded funds in an interest-earning savings account or investment plan
Procedure for Proper Check Writing:
1. Record the date 2. Write the name of the person or organization receiving the payment 3. Record the amount of the check in numerals 4. Write the amount of the check in words ; checks for less than a dollar should be written as "only 79 cents," for example, then cross out the world dollars on the check 5. Sign the check 6. Note the reason for payment
Financial service activities through your smartphone or tablet have 3 access methods:
1. Text banking, providing account info & conducting transactions through text messages 2. Mobile web banking with online access to the financial institution's website 3. Banking apps to conduct transactions using the mobile application of a bank or credit union -Mobile & online banking provide the benefits of convenience & saving time along with instant info access -Concerns of privacy, security of data, ease of overspending, costly fees, & online scams must also be considered
A failure to reconcile your bank account each month can result in not knowing:
1. Your exact spending habits for wise money management 2. If the correct deposit amounts have been credited to your account 3. Any unauthorized ATM withdrawals 4. If your bank is overcharging you for fees 5. Errors that your bank may have made in your account
Mutual savings banks
a financial institution that is owned by depositors & specializes in savings accounts & mortgage loans -The profits of a mutual savings bank go to the depositors through higher rates on savings
Commercial bank
a financial institution that offers a full range of financial services to individuals, businesses, & government agencies -Services include: checking, savings, lending, & most others *Several types: national banks, regional banks, community banks, & online-only banks
Trust
a legal agreement that provides for the management & control of assets by one party for the benefit of another -Usually created through a commercial bank or lawyer
Certified check
a personal check with guaranteed payment -The amount of the check is deducted from your balance when the financial institution certifies the check
Debit card (cash card)
a plastic access card used in computerized banking transactions
Money market account
a savings account offered by banks, savings & loan associations, & credit unions that requires a minimum balance & has earnings based on market interest rates
Phishing
a scam that uses e-mail spam or pop-up messages to deceive you into revealing your credit card number, bank account info, SS #, passwords, or other private info
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
Callable CDs
-Start with higher rates & usually have long maturities, as high as 10-15 years -With this savings option, if interest rates drop, the bank may "call" (close) the account after a set period, such as 1 or 2 years -When the call option is exercised, the saver receives the original deposit amount & any interest that has been earned
Interest-Earning Checking Accounts
-Usually pay a low interest rate -Frequently have a savings feature -Many financial institutions have offered high-rate checking accounts to customers who meet certain requirements -A higher interest rate might be available if you use your debit card a certain number of times each month & agree to online statements
Types of CDs
-Rising-rate/bump-up CDs -Liquid CDs -Zero-coupon CD -Indexed CDs -Callable CDs -Promotional CDs
I bonds
-Series I bonds *Interest Rate Based on 2 Components: 1. A fixed rate for the life of the bond 2. An inflation rate that changed twice a year -Every 6 months a new, fixed base rate is set for new bonds -The additional interest payment is recalculated twice a year, based on the current annual inflation rate -Sold in any amount over $25 & are purchased at face value -The minimum holding period is 1 year -Interest earned on I bonds is added to the value of the bond & received when you redeem your bond -Have the same tax & education benefits as EE bonds
Money Market Accounts & Funds
-Requires a minimum balances & has earning based on market interest rates -Offered by banks, savings & loan associations, & credit unions -May allow a limited number of checks to be written & generally impose a fee when the account balance goes below the required minimum, usually $1,000 -Both accounts & funds offer earnings based on current interest rates, & both have minimum-balance restrictions & allow check writing -The major difference is safety -MMAs at banks & savings & loan associations are covered by federal deposit insurance -This isn't true of MMFs, which are a product of investment & insurance companies -Since MMFs invest mainly in short-term (less than a year) government & corporate securities, however, they are usually quite safe *Benefits: 1. Favorable rate of return (based on current interest rates) 2. Allows limited number of checks to be written 3. Insured (money market accounts) *Drawbacks: 1. Higher minimum balance than regular savings accounts 2. Service charge &/or lower rate if below certain balance 3. Not insured (money market funds)
Checking Account Selection Factors:
-Restrictions: *Minimum balance *Federal deposit insurance *Hours & location of branch offices *Holding period for deposited checks -Fees & charges: *Monthly fee *Fees for each check or deposit *Printing of checks *Fee to obtain canceled check copy *Overdraft, stop-payment order, certified check fee *Fees for online banking -Special services: *Direct deposit *Availability of ATMs *Overdraft protection *Discounts or free checking for certain groups (students, senior citizens) *Free or discounted services -Interest: *Interest rate *Minimum deposit to earn interest *Method of compounding *Portion of balance for computing interest *Fee charged for falling below necessary balance to earn interest
EE bonds
-Series EE bonds may be purchased for any amount greater than $25 -Patriot bonds -Electronic EE bonds are purchased online at face value; for example, you pay $50 for a $50 bond -Electronic EE bonds may be obtained or purchased for any amount you desire -Paper savings bonds, while no longer issued at financial institutions, are still available through payroll savings plans or by using part or all of your federal tax refund -Paper EE bonds are sold at half the face value, & may be purchased for set values ranging from $25-$5,000, with maturity values of $50-$10,000 -Paper savings bonds continue to be redeemed at financial institutions -If a savings bond has been lost or stolen, it can be reissued in either a paper or an electronic format -To locate savings bond issued since 1974, you can go to www.treasuryhunt.gov -EE bonds increase in value as interest accrues monthly & compounds semiannually -If you redeem bonds before 5 years, you forfeit the latest 3 months of interest -After 5 years, you aren't penalized -A bond must be held for 1 year before it can be cashed -Series EE bonds continue to earn interest for 30 years *Main tax advantages of series EE bonds are: 1. The interest earned is exempt from state & local taxes 2. Federal income tax on earnings isn't due until the bonds are redeemed -Redeemed series EE bonds may be exempt from federal income tax if the funds are used to pay tuition & fees at a college, university, or qualified technical school for yourself or a dependent -The bonds must be purchased by an individual who is at least 24 years old, & they must be issued in the names of one or both parents -This provision is designed to assist low- & middle-income households; people whose incomes exceed a certain amount don't qualify for this tax exemption
Inflation
1. Higher consumer prices result in lower buying power of interest earned on savings
Steps in Selecting a Financial Institution:
1. List your most important features for a financial institution related to: services (checking, savings accounts; deposit insurance; loans; investments; mobile app), costs-fees-earnings (checking minimum balance, ATM fees; credit rates; savings rates), convenience (branch locations, hours; ATM locations; customer service; rewards program), & online-mobile banking (ease of operation; services; privacy, security; other fees) 2. Rank the top 3 or 4 specific features based on their importance to you 3. Prepare a list of local, national, & online financial institutions (include the address, phone & website) 4. Conduct 3 types of research: (1) talk with people who have used various financial institutions; (2) conduct online research on the services, policies, & fees; & (3) visit, as appropriate, the financial institution to observe the environment & to talk with staff members -Additional research may include: determining the minimum balance to avoid monthly service charges; obtaining a fee disclosure statement, savings rate sheet, & sample loan application; & assessing whether the deposit insurance & online banking services meet your needs 5. Balance your needs with the info collected, & select where you will do business; you may use more than one financial institution to take advantage of the best services offered by each; this action gives you flexibility to move your money if the fees at one place increase; talk with a manager if you believe a fee was charged unfairly, the bank may reverse the charge to keep you as a customer; "switch kits" are available to make changing banks easier; these forms & authorization letters facilitate a smooth transition of direct deposits & automatic payments from one financial institution to another
Non-Bank Financial Service Providers:
-Retailer stores (prepaid debit cards, other services) -Online banking service provider (E*Trade Bank) -Online payment services (PayPal) -P2P (peer-to-peer) lending intermediaries
Interest-earning accounts
-Usually require a minimum balance -If the account balance goes below this amount, you may not earn interest & will likely incur a service charge -Are called share draft accounts at credit unions
Regular Savings Accounts
-Called passbook or statement accounts -Usually involve a low or no minimum balance & allow you to withdraw money as needed -Banks, savings & loan associations, & other financial institutions offer these -At credit unions, these savings plans are called share accounts *Benefits: 1. Low minimum balance 2. Ease of withdrawal 3. Insured *Drawback: 1. Low rate of return
Non-Deposit Institutions:
-Life insurance company -Investment company -Brokerage firm -Credit card company -Finance company -Mortgage company
Compounding
a process that calculates interest based on the previously earned interest -Each time interest is added to your savings, the next interest amount is computed on the new balance in the account -The more frequent the compounding, the higher your rate of return will be -Large amounts held in savings for long periods of time will result in far higher differences
Other Mobile Banking Services:
-Direct deposit, transfers to savings accounts -Text alerts for balances, payments, deposits -Apply & receive approval for loans -Compare current interest rates for loans -Check rates, apply for insurance -Buy, sell, monitor investments -Locate ATM & bank branches using GPS -Access or shoot photo of store, online coupons
A TreasuryDirect account at www.treasurydirect.gov provides the benefits of:
1. 24-hour access to buy, manage, & redeem series EE & I electronic savings bonds 2. Converting series EE & I paper savings bonds to electronic bonds through the SmartExchange feature 3. Purchasing electronic savings bonds as a gift 4. Enrolling in a payroll savings plan for purchasing electronic bonds 5. Investing in other Treasury securities such as bills, notes, bonds, & TIPS (Treasury Inflation-Protected Securities) 6. Eliminating the risk that your savings bonds will be lost, stolen, or damaged
Truth in Savings Act
requires financial institutions to disclose the following info on savings account plans: 1. Fees on deposit accounts 2. The interest rate 3. The annual percentage yield 4. Other terms & conditions of the savings plan
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 & frequency of compounding for a 365-day period -Reflects the amount of interest a saver should expect to earn
Main Categories of Financial Services:
1. Savings provides safe storage of funds for future use; commonly referred to as time deposits, money in savings accounts & certificates of deposit are examples of savings plans 2. Payment services offer an ability to transfer money to others for daily business activities; checking accounts & other payment methods are generally called demand deposits 3. Borrowing is used by most people at some time during their lives; credit alternatives range from short-term accounts, such as credit cards & cash loans, to long-term borrowing, such as a home mortgage 4. Other financial services include insurance, investments, tax assistance, & financial planning; ex: trust, this type of agreement is usually created through a commercial bank or a lawyer; parents who want to set aside certain funds for their children's education may use a trust
3 main endorsement forms:
-Blank endorsement -Restrictive endorsement -Special endorsement
Restrictions, Fees
1. Minimum-balance limitations 2. Fee for additional transactions
Rent-To-Own Centers
-Stores that lease products to consumers who can own the item if they complete a certain number of monthly or weekly payments
Rate of Return
1. Percentage increase in value of savings 2. Increases with frequency of compounding
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
Debit cards used in 2 ways:
1. With your signature, like a credit card 2. With your personal identification # (PIN), like an ATM card
Basic questions to ask when selecting a financial service provider:
1. Where can I get the best return on my savings? 2. How can I minimize the cost of checking & payments services? 3. Will I be able to borrow money if I need it?
Savings Bonds Info:
-A person may purchase up to $10,000 worth of electronic savings bond of each series a year, for a total of $20,000 -This amount applies to any person, so parents may buy an additional $25,000 in each child's name *Savings Bond Are Commonly Registered 1 of 3 Ways: 1. Single owner 2. Two owners, either as co-owners or with one as primary owner 3. A beneficiary, who takes ownership of the bond when the original owner dies
Safety
1. Availability of deposit insurance 2. Risk -FDIC (Federal Deposit Insurance Corporation): insures up to $250,000 per depositor per insured financial institution -NCUA (National Credit Union Association) *Both of these provide deposit insurance for certain retirement accounts, up to $250,000, including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, & Savings Incentive Match Plans for Employees (SIMPLE) IRAs as well as self-direct Keogh accounts & various plans for state government employees
