CCP Personal Finance Chapter 5 (Book)

Automatic Teller Machine (ATM)

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

Savings and loan associations (S&Ls)

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

endorsement

A signature or stamp on the back of a check transferring ownership

Deposit Ticket

A written record of money put into a checking account.

special endorsement

Allows you to transfer a check to someone else with the words "pay to order of" followed by the name of the other person and then your signature

What are payday loans also referred to as?

Cash advances, check advance loans, postdated check loans, and delayed deposit loans.

share account

a regular savings account at a credit union

stop payment order

a request that a bank or other financial institution not cash a particular check

money market account

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

Cerificate of Deposit (CD) (aka time deposits)

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

Money Market Funds (MMFs)

a savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments -Investors in money market funds are usually allowed to write checks, providing the convenience of liquidty

unbanked

a term used to describe a person who does not have a bank account

underbanked

a term used to describe a person who has a checking or savings account, but does a lot of business with check-cashing services and pawn shops

Near Field Communication (NFC)

a very short-range wireless connectivity technology designed for cell phones and credit cards

Money Market Accounts/ funds (benefits and drawbacks)

benefits -more favorable rate of return (based on current interest rates) -allows of checks to be written -insured (money market accounts) Drawbacks: -higher minimum balance than regular savings accounts -service charge and/or lower rate if below certain balance -not insured (money market funds)

Certificates of Deposit (CDs)(benefits and drawbacks)

benefits: -guaranteed rate of return for time of CS -Insured (when purchased from bank or comparable financial institution) drawbacks: -possible penalty (reduced interest) for early withdrawal -minimum deposit

Regular savings accounts (benefits and drawbacks)

benefits: -low or no minimum balance -ease of withdrawal -insured Drawback -low rate of return

U.S. Savings Bonds (benefits and drawbacks)

benefits: -rate varies with interest rates (I-bonds) -low minimum deposit -government guaranteed -exempt from state, local income taxes drawback: -Lower rate when redeemed within first five years

What services do check-cashing outlets have?

electronic tax filling, money orders, private postal boxes, utility bill payments, and prepaid debit cards - these services usually cost less at other financial service providers

bank reconciliation

A report that accounts for the differences between the bank statement and a checkbook balance

callable CDs

Start with higher rates and usually have long maturities as high as 10 to 15 years. With this savings option, if interest rates drop, the bank may "call" (close) the account after a set period, such as one or two year. When the call option is exercised, the saver receives the original deposit amount and any interest that as been earned

Cashier's Check

a check drawn by a bank on its own funds and signed by an officer of the bank

trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another commonly created through a commercial bank or a lawyer

certified check

a personal check that the bank guarantees or certifies to be good

debit card

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

compounding

a process that calculates interest based on previously earned interest

traveler's checks

allow you to make payments when you are away from home

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

blank endorsement

an endorsement consisting only of the endorser's signature. should only be used when you cash a check in person

Prime rate of interest

an indication of the rate banks charge large corporations

share draft account

an interest-bearing checking account at a credit union

common payment choices

cash, check, credit card, debit card, and online/mobile transfer

restrictive endorsement

consists of the words for deposit only, followed by your signature, which is especially useful when you are depositing checks

Check-cashing outlets are also called

currency exchanges

liquidity

ease with which savings can be withdrawn

I bonds

has an interest rate based on two components: (1) a fixed rate for the life of the bond, and (2) an inflation rate that changes twice a year

Inflation

higher consumer prices result in lower buying power of interest earned on savings

rising-rate or bump-up CDs

may have higher rates at various intervals, such as every 6 months.

time deposit

money in a savings account and certificates of deposit

How many people belong to credit unions now?

more than 80 million people

types of commercial banks

national banks, regional banks, community banks, and online-only banks.

liquid cd

offer an opportunity to withdraw money without a penalty. However, you will likely be required to maintain a minimum balance in this account. There is a waiting period before any funds can be withdrawn or a limit on the number of withdrawals is allowed

Higher returns for long-term savings will usually be achieved at the cost of low liquidity

opportunity cost: the inability to obtain your money quickly

How much could an unbanked or underbanked person pay in interest and service fees?

over $2,400

Step 3 of choosing a financial institution

prepare a list of local, national, and online financial institution (include the address, phone, and website).

FDIC (Federal Deposit Insurance Corporation)

prevents a loss of money due to the failure of the insured insitution

Zero-coupon CD

purchased at a deep discount (small portion of the face value) with no interest payments

Step 2 of choosing a financial institution

rank the top three or four specific feature based on their importance to you

Truth in Savings Law

requires financial institutions to disclose the following information on savings account plans: -feeds on deposit accounts -the interest rate -the annual percentage yield (APY) -other terms and conditions of the savings plan

taxes

taxable interest reduces amount of earning

Mortgage rate

the amount individuals pay to borrow for the purchase of a new home

Corporate bond rate

the cost of borrowing for large U.S. corporations

demand deposit

the money in checking accounts and other payment methods

rate of return

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

Discount rate

the rate financial institutions are charged to borrow funds from Federal Reserve banks

Certificate of Deposit rate

the rate for six-month time deposits at savings institutions

Treasury bond rate

the yield on long-term (20-year) U.S. government debt obligations.

True or False: When the debit card is processed like a credit card, you have more security in case of a fraudulent transaction or purchase dispute

true

share drafts

what credit union members write checks called these against their account balances

If you notify the financial institution within two days of the lost card...

your liability for unauthorized use is $50. However, you can be liable for up to $500 of unauthorized use if you wait up to 60 days to notify your bank. After 60 days, your liability can be the total amount in your account

both using savings and increasing borrowing reduce:

your net with and your potential to achieve long-term financial security

APY formula

APY=100[(1+Interest/Principal)^365/days in term -1]

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 or a wealth management account

Restrictions and Fees

- Minimum balance limitations. - Fee for additional transactions.

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

activity accounts

Fee charged for each check written, and sometimes for deposits

How many people in the U.S. are unbaked?

17 million

Mistakes made frequently when managing current cash needs include:

(1) Overspending as a result of impulse buying and using credit (2) having insufficient liquid assets to pay current bills (3) using savings or borrowing to pay for current living expenses (4) failing to put unneeded funds in an interest-earning savings account or investment program

Most debit cards can be used two ways

(1) with your signature, like a credit card (2) with your personal identification number (PIN)

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.

Types of financial services: payment services

- checking account -online payments -cashier's checks -money orders

High-Cost Financial Service Providers

-Pawnshop -Check-cashing outlet -Payday loan company -Rent-to-own center -Car title loan company

mutual savings bank

-a financial institution that is owned by depositors and specializes in savings accounts and mortgage loans -located mainly in the northeastern United States -the profits of a mutual savings bank go to the depositors through huger rates on savings

Commercial bank

-a financial institution that offers a full range of financial services to individuals, businesses, and government agencies -Includes checking, savings, and lending -are organized as corporation with investors (stockholders) contributing the needed capital to operate

Credit Union

-a user-owned, nonprofit, cooperative financial institution that is organized for the benefit of its members -annual banking studies often report lower fees and lower loan rates with higher satisfaction levels for credit unions compared to other financial institutions -most offer credit cards, mortgages, home equity loans, online banking, and investment fees

safety

-availability of deposit insurance -risk of loss of savings or interest

Types of financial services: Cash availability

-check cashing -ATM/debit cards -Traveler's checks -foreign currency exchange

Risks of online and mobile banking

-concerns of privacy -security of data -online scams

EE bonds

-continue to earn interest up to 30 years -interest eared is exempt from state an local taxes and that federal income tax on earnings is not due until the bonds are redeemed

Types of financial services: credit services

-credit cards, cash advances -auto loans, education loans -mortgages -home equity loans

Use a credit card to:

-delay the payment for a purchase -build a credit history with wise buying -buying online or for major purchase -Earn more generous rewards points for spending

Types of financial services: other services

-insurance; trust services -tax preparation -safe deposit boxes -budget counseling -estate planning

a consolidated financial services account has the potential benefits of:

-keeping track of you 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 form -ease of communicating you financial situation to family members

nondeposit institutions

-life insurance company -investment company -brokerage firm -credit card company -finance company -mortgage company

Use a debit card to:

-limit your spending to available money -avoid bills that will be paid in the future -avoid interest payment or an annual fee -obtain better protection if you process a transaction as a credit card

life insurance

-main purpose is to provide financial security for dependents -many life insurance policies contain savings and investment features -in recent years life insurance companies have expanded their financial services to include investment and retirement planning.

Finance companies

-making loans to consumers and small businesses is the main function of finance companies. -these loans have short and intermediate terms with higher rates than most other lenders charge. -Some finance companies have expanded their activities to offer other financial planning services

investment companies (aka mutual funds)

-offer banking-type services -offer MMFs -are not covered by federal deposit insurance

rate of return

-percentage increase in the value of savings -increases with frequency of compounding

Types of financial services: savings account

-regular savings account -money market account -certificates of deposit -U.S. savings bonds

Nonbank 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

brokerage firms

-the organizations employ investment advisers and financial planners, and serve as agents between the buyer and the seller for stocks, bonds, and other investment securities. -Their earnings come from commissions and fees. -Expanded financial services are available from brokerage firms, including checking accounts and online banking

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

interest-earning checking accounts (NOW(negotiable order of withdrawal) accounts)

-usually require a minimum balance -if below minimum you will not earn interested and probably be charged a fee

failure to reconcile your bank account each month can result in not knowing

-your exact spending habits for wise money management -if the correct deposit amounts have been credited to your account -any unauthorized ATM withdrawals or other transactions -If you have been overcharged for fees -Errors that your bank may have made in your account

suggestions to minimize banking fees

1. avoid overdraft charges of nearly $30 each by linking your checking account to your savings 2. use ATMs that are in your bank's system 3. search for true "free" checking accounts with a no- or low-minimum balance requirement; 4. consider doing your banking at a credit union, where lower fees, lower borrowing rates, and higher rates for savings are usually offered

After-tax savings rate of return formula

1. determine your top tax bracket for federal income taxes 2. subtract the rate, expressed as a decimal, from 1.0 3. multiply the result by the yield on your savings account 4.this number, expressed as a percentage, is your after-tax rate of return interest rate*(1-Tax rate)

procedure of 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 is in figures 4. write the amount of the checks in words 5. sign the check 6. note the reason for payment

financial service activities through your smartphone or tablet have three access methods:

1. text banking (providing account information and conducting transactions through text messages) 2. mobile web banking (with internet access of the financial institutions's website) 3. banking apps (for performing various types of transactions)

Examples of Deposit Financial Institutions

-Commercial bank -Credit Union -Savings and loan association -mutual savings bank

Types of financial services: investment services

-Individual retirement accounts (IRAs) -brokerage service -investment advice -mutual funds

Credit card companies

-Specializing in funding short-term retail lending is the focus -

HH bonds

No longer sold, were current-income bonds with interest deposited electronically to your bank account every six months

step 5 of choosing a financial institution

Balance your needs with the information collected, and decide 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 and authorization letters facilitate a smooth transition of direct deposits and automatic payment from one financial institution to another

Step 4 of choosing a financial institution

Conduct three types or research: (1) talk with people who have used various financial institutions; (2) conduct online research on the services, policies, and fees: and (3) visit, as appropriate, the financial institution to observe the environment and to talk with staff members ADDITIONAL RESEARCH ACTIONS MAY INCLUDE: -determining the minimum balance to avoid monthly service charges -obtaining a fee disclosure statement, savings rate sheet, and sample loan application -assessing whether the deposit insurance and online banking services meet your needs

Debit Card vs. Credit Card

DEBIT CARD- from bank account. An advantage of a debit card is there is no interest on a debit card. CREDIT CARD- borrowed money from third party. An advantage of a credit card is you can spend more than you have. (also disadvantage)

Step 1 of choosing a financial institution

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; reward program -Online, Mobile banking: ease of operation; services; privacy, security; other fees

Prepaid debit cards

Load money onto this card to spend anywhere, but it won't help increase your credit score. As a result of the lack of regulations, they can have an extensive amount of fees

annual percentage yield

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.

What is the interest rates on pawnshops?

While states regulate pawnshops, the interest rates charged can range from 3 percent a month to over 100 percent a year

T-bill rate

the yield on short-term (13-week) U.S. government debt obligations