Chapter 05-Financial Services: Savings Plans and Payment Accounts

•ONLINE AND MOBILE BANKING

-Benefits of convenience and saving time along with instant information access -Concerns of privacy, security of data, ease of overspending, costly fees, and online scams must also be considered -Traditional Electronic Banking oAutomatic teller machine (also called ATM or a cash machine) offer various transactions oDebit card (also called cash card) used to make purchases with your own funds

Fin Institutions

-Brokerage Firms oEmploy investment advisers and financial planners which serve as agents between the buyer and seller for stocks and bonds -Finance Companies oMake short and intermediate term loans to consumers but at higher rates -Credit Card Companies oFund short-term retail lending -Mortgage Companies oProvide loans to customers so they can purchase homes

•MANAGING DAILY MONEY NEEDS

-Cash, check, credit card, debit card, and online/mobile transfer are the most common payment choices

•FINANCIAL SERVICES AND ECONOMIC CONDITIONS

-Changing interest rates, rising consumer prices and other economic factors also influence financial services -Be aware of current trends and future prospects for interest rates (next slide) -Read The Wall Street Journal, business periodicals such as Businessweek, Forbes, Fortune, and other online sources.

•DEPOSIT INSTITUTIONS

-Commercial Banks ooffers a full range of services including checking, savings, lending and other services -Credit Unions oare user-owned, nonprofit, cooperative financial institutions oSurveys report lower fees for checking accounts, lower loan rates, and higher levels of user satisfaction compared to other financial institutions

•ELECTRONIC PAYMENTS

-Debit Cards -Online Payments -Mobile Transfers -Stored-Value Cards -Smart Cards

•PREPAID DEBIT CARDS

-Fasted growing payment method -Issued by traditional financial institutions, retailers (such as Walmart), and non-bank companies -Major concern is extensive number of fees a user can encounter due to few current regulations for these cards -Benefits include lowering consumer debt by helping to control spending and buying on credit

•EVALUATING CHECKING ACCOUNTS Need to be evaluated based on :

-Fees and charges -Interest rate, compounding frequency, and interest computation method -Special services such as overdraft protection and online access to view and print canceled checks

•OPPORTUNITY COSTS OF FINANCIAL SERVICES

-Higher rate of return may be obtained at the cost of lower liquidity (inability to obtain your money quickly) -Convenience of a 24-hour ATM should be considered against service fees The "no fee" checking account with a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years

•OTHER FINANCIAL INSTITUTIONS

-Life Insurance Companies oOffer insurance plus savings and investment features; recently expanded to offer investment and retirement planning -Investment Companies oAre also referred to as Mutual Funds oOffer a money market fund on which you can write a limited number of checks oAccounts are not covered by federal deposit insurance

•THE "UNBANKED" AND HIGH-COST FINANCIAL SERVICES

-Pawnshops o Make loans on possessions but charge higher fees than other financial institutions; used for quick cash; charge can be 3 to over 100% interest • -Check-cashing outlets oCharge 1-20% of the face value of a check; 2-3% is average cost -Payday Loans oReferred to as cash advances, check advance loans, postdated check loans, and delayed deposit loans; charge can be 780 percent or more • -Rent-To-Own Centers oLease products to consumers who can own the item if they complete a certain number of weekly or monthly payments; Charge can be over 300% o -Car Title Loans oProvide loans with automobile title as security for a high-interest charge usually over 200% •

•TYPES OF FINANCIAL SERVICES

-Savings oTime deposits, savings accounts and CD's - -Cash Availability and Payment Services oDemand deposits, checking accounts and other payment methods - -Borrowing for the short-term or long-term - -Investments and Other Financial Services oInsurance, investment, real estate purchases, tax assistance, and financial planning

•REGULAR SAVINGS ACCOUNTS

-Usually involve a low or no minimum balance -Credit unions call them share accounts

-Common mistakes in managing cash include...

1.Overspending from impulse buying and using credit 2.Not having enough liquid assets (cash and checking account) to pay current bills 3.Using savings or borrowing to pay for current expenses 4.Failing to put unneeded funds in an interest-earning savings account or investment program

•TRUTH IN SAVINGS***

Requires Disclosure of... -Fees on deposit accounts -The interest rate -The annual percentage yield (APY) -Other terms and conditions of the savings plan -

•CHOOSING A FINANCIAL INSTITUTION

Step 1: Prepare a list of important features Step 2: Rank the top 3 or 4 features for "you" Step 3: Prepare a list of financial institutions Step 4: Conduct research for decision Talk to others who have used their services Research online the services and fees Visit the financial institution to meet staff Step 5: Make decision where you will do business

-Changing interest rates and decisions related to financial services

When IR rising-use long term loans to take advantage of current low rates; select short term savings instruments to take advantage of higher rates when mature When IR falling-use short term loans to take advantage of low rates when refinance loans, select lt savings instruments to lock in earnings at current high rates

Payment methods

check -Certified check oPersonal check with guaranteed payment - -Cashier's check oCheck of a financial institution you get by paying the face amount plus a fee -Money order oPurchase at financial institution, post office, store

•CERTIFICATES OF DEPOSITS

•A savings plan that requires you to leave your money on deposit for a set time period, otherwise you incur penalties -Several types to chose from -Consider all the earnings and all the costs before saving with a CD or rolling over a CD (buying a new one at maturity) -Consider creating a CD portfolio with CDs maturing at different times (3-month, 6-month, 1-year, 2-year) -Review information at www.bankrate.com

APY

•ANNUAL PERCENTAGE YIELD (APY) Purpose is to provide consistency when comparing different savings options at different institutions Formula: ▪To calculate the APY = (100) x (Interest/Principal) NOTE: Formula is applicable when the number of days in the term is 365 or when the account does not have a stated maturity • • ▪Example: Interest of $60 on principal of $1,200 =(100) x ($60/$1,200) = 5% (APY)

Evaluating Savings Plans

•INFLATION -Compare your savings rate with inflation rate •TAX CONSIDERATIONS -Taxes reduce interest earned on savings -Taxes are not withheld from savings and investments; you may owe additional taxes at year-end as a result of earnings on saving

Evaluating Savings Plans

•LIQUIDITY -Allows you to withdraw money on short notice without a loss of principal or fees •SAFETY -FDIC and NCUA insures up to $250,000 per person per financial institution

Evaluating Savings Plans

•RATE OF RETURN -Percentage or yield is the increase in value of your savings due to interest -Example: a $100 savings account that earned $5 has a yield of 5 percent ($5/$100) - •COMPOUNDING -More frequent compounding means earning more interest on "interest previously earned"

oAsset management account

⃰Also called a cash management account or a wealth management account ⃰Offered by investment brokers and financial institutions ⃰Provides a complete financial service program for a single fee and the benefits include: -Tracking your money in one location -Fewer monthly and quarterly statements -Lower fees for maintaining a larger balance -Simplified tax reporting with one 1099 form -Ease of communicating your financial situation to family members