Personal Finance Chapter 4 - Financial Services: Savings Plans and Payment Accounts

Use a Credit Card To...

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

Non-Deposit Institutions - Mortgage Companies

-Organized primarily to provide loans for home purchases

Other Financial Services

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

Truth in Savings Act

-Requires financial institutions to disclose the following information on savings account plans: 1. Fees on deposit accounts 2. The interest rate 3. The annual percentage yield (APY) 4. Other terms and conditions of the savings plan

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 and payment services? 3. Will I be able to borrow money if I need it?

U.S. Savings Bonds

-A low-risk savings program guaranteed by the federal government

Types of Financial Services - Investment Services

-Individual retirement accounts (IRAs) -Brokerage service -Investment advice -Mutual funds

Non-Deposit Institutions - Life Insurance Companies

-Provide financial security for dependents with various life insurance policies, some containing savings and investment features -Expanded activities of life insurance companies include investment and retirement planning services

Managing CDs

-When first buying or rolling over a CD, investigate potential earnings and costs -Do not allow your financial institution to automatically roll over your money into another CD for the same term -If interest rates have dropped, you might consider a shorter maturity -If you believe rates are at a peak and you won't need the money for some time, obtain a CD with a longer term

Overdraft Protection

-An automatic loan made to checking account customers for checks written in excess of their balance -Convenient but costly -Most plans make loans based on $50 or $100 increments -Can be less costly than the fee charged for a check you write when you do not have enough money on deposit to cover it -- fee may be $30 or more -Many financial institutions will allow you to cover checking account overdrafts with an automatic transfer from a savings account for a nominal fee

Pros and Cons of Online Banking

-Benefits: convenience, saving time, instant information access -Cons: concerns of privacy, security of data, ease of overspending, costly fees, and online scams

Restrictions and Fees

-May be a delay between the time interest is earned and the time it is added to your account -Means that the interest will not be available for your immediate use -Some institutions charge a transaction fee for each deposit or withdrawal

NCUA

-National Credit Union Administration -Credit unions may obtain deposit insurance

HH Bonds

-No longer sold -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 it was exempt from state and local taxes

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

Certified Check

-A personal check with guaranteed payment -The amount of the check is deducted from your balance when the financial institutions certifies the check

Opening a Checking Account

-First, decide who the owner is -- only one person is allowed to write checks on an individual account. A joint account has 2+ owners -Both an individual and a joint account require a signature card --record of the official signatures of the person or persons authorized to write checks on the account

Trust

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

Money Market Account

-A savings account that requires a minimum balance and has earnings based on the changing market level of interest rates -May allow a limited number of checks to be written and generally impose a fee when the account balance goes below the required minimum, usually $1,000 -Money market accounts and funds offer earnings based on current interest rates, and both have minimum-balance restrictions and allow check writing

Money Market Fund

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

Smart Cards

-"Digital wallets" are similar to other ATM cards with an imbedded microchip -In addition to banking activities, the card may also store past purchases, insurance info, and your medical history -Recent developments include an option that allows you to pay with reward points

Types of Financial Services - Payment Services

-Checking account -Online payments -Cashier's checks -Money orders

Non-Deposit Institutions

-Life insurance companies -Investment companies -Brokerage firms -Credit card companies -Finance companies -Mortgage companies

Commercial Banks

-Offer a full range of services, including checking, savings, lending, and most other services -Organized as corporations with investors (stockholders) contributing the needed capital to operate, have several types: national banks, regional banks, community banks, and online-only banks

Regular Savings Account

-Previously called passbook or statement accounts, usually involve a low or no minimum balance and allow you to withdraw money as needed -Banks, savings and loan associations, and other financial institutions offer regular savings accounts -At a credit union, these savings plans are called share accounts

Non-Deposit Institutions - Credit Card Companies

-Specialize in funding short-term retail lending -These networks, including VISA, MasterCard, and Discover, have also expanded into various other banking and investing services

Mistakes Frequently Made When Managing Current Cash

1. Overspending as a result of impulse buying and overusing credit 2. Having insufficient liquid assets 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 plan

Access Methods for Online Banking

1. Text banking, providing account information and 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

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

Promotional CDs

-Attempt to attract savers with gifts or special rates

Interest-Earning Checking Account

-Checking accounts paying low interest -A higher interest right may be available if you use your debit card a certain number of times each month and agree to online statements

Liquid CDs

-Offer an opportunity to withdraw money without a penalty -You will likely be required to maintain a minimum balance in the account -This type of CD may have other restrictions such as a "waiting period" before any funds can be withdrawn or a limit on the number if withdrawals allowed

Stored-Value Cards

-Prepaid cards for telephone service, transit fares, highway tolls, laundry service, library fees, and school lunches are common -Some are disposable, but other can be reloaded -Also called prepaid debit cards, some may have activation charges, ATM fees, and other transaction costs -Recipients of government benefits may receive SS and other payments on a prepaid debit card, which is practical for people without a bank account

Savings and Loan Associations (S&Ls)

-Traditionally specialized in savings accounts and mortgage loans -Today, many of these organizations have expanded to offer financial services comparable to those of a bank

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

Debit Card

-A plastic access card used in computerized banking transactions -Activates ATM transactions -Also called a cash card

Compounding

-A process that calculates interest based on previously earned interest -The more frequent the compounding, the higher your rate of return will be

Money Market Funds

-Are a product of investment and insurance companies -Invest in mainly short-term government and corporate securities -Usually quite safe

Failure to Reconcile You Bank Account

-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

Common Payment Choices

-Cash -Check -Credit card -Debit card -Online/mobile transfer

Activity Accounts

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

Types of Financial Services - Cash Availability

-Check cashing -ATM/debit cards -Traveler's checks -Foreign currency exchange

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 and may even lose part of your savings -A CD based on the consumer price index can result in higher returns as inflation increases

Rising-Rate or Bump-Up CDs

-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

Check-Cashing Outlets

-More than 6,000 outlets -Charge anywhere from 1-20% of the face value of a check; the average cost is 2-3% -CCOs, sometimes called currency exchanges, also offer services, including electronic tax filing, money orders, private postal boxes, utility bill payment, and the sale of transit tokens

Interest on Checking Accounts

-The interest rate, the frequency of compounding, and the interest computation method will affect the earnings on your checking account

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.

Reconciling Your Checking Account

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 and ATM withdrawals from your checkbook balance 4. Add any interest earned to your checkbook balance -The revised balances for both the checkbook and the bank statement should be the same

Automatic Teller Machine (ATM)

-A computer terminal used to conduct banking transactions -Also called a cash machine -To minimize ATM fees, compare several financial institutions -Use your own bank's ATM to avoid surcharges, and withdraw larger amounts to avoid fees on smaller transactions

Mutual Savings Banks

-Are owned by depositors and specialize in savings accounts and mortgage loans, interests rates are usually lower than commercial banks -Profits go to the depositors through higher rates on savings

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

Zero-Coupon CD

-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 years, which is approximately a 6% annual return

Rent-To-Own Centers

-Stores that lease products to consumers who can own the item if they complete a certain numbers of monthly and weekly payments -Many RTO purchases can result in annual interest rates of over 300%

Selecting a Financial Instiitution

1. List your most important features for a financial institution related to: services; costs, fees, earnings; convenience; online, mobile banking 2. Rank the top three or four specific features based on their importance to you 3. Prepare a list of local, national, and online financial institutions 4. Conduct 3 types of research: talk with people who have used various financial institutions; conduct online research on the services, policies, and fees; and visit, as appropriate, the financial institution to observe the environment and to talk with staff members 5. Balance your needs with the information collected, and select where you will do business

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" and cross out the word dollars on the check 5. Sign the check 6. Note the reason for payment

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 -Investment companies and others offer this type of account, with checking, an ATM card, a credit card, online banking, and a line of credit as well as access for buying stocks, bonds, mutual funds, and other investments

Types of Financial Services - Credit Services

-Credit cards, cash advances -Auto loans, education loans -Mortgages -Home equity loans

Mobile Transfers

-Near-field communications (NFC) technology stores credit card and bank account info -Wireless devices replace debit and credit cards for processing financial and purchasing transactions -A tap or wave of your phone at the POS terminal sensor completes purchase -Usually occur through a bank account, in the future the payments may bypass banks with charges directly on your phone bill -Increasing the availability of "person-to-person" payments with the transfer of funds by email or to a mobile phone number

Financial Supermarkets

-One-stop financial service operations

Non-Deposit Institutions - Finance Companies

-Provide loans to consumers and small businesses -These loans have short and intermediate terms with higher rates than most other lenders charge -Most financial companies also offer other financial planning services

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 1 or 2 years -When the call option is exercised, the saver receives the original deposit amount and any interest that has been earned

Taxes

-Taxes reduce interest earned on savings -Ex: a 10% return for a saver in a 28% tax bracket means a real return of 7.2% -Several tax-exempt and tax-deferred savings plans and investments can increase your real rate of return

Restrictions on Checking Accounts

-The most common limitation is the required amount that must be kept on deposit to earn interest or avoid a service charge -In the past, financial institutions placed restrictions on the holding period for deposited checks -- a waiting period was usually required before you could access the funds -The Check Clearing for the 21st Century Act (Check 21) shortens the processing time -- establishes the substitute check, which is a digital reproduction of the original paper check, and is considered a legal equivalent of the original check

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 -Reflects the amount of interest a saver should expect to return -APY = 100 (Interest/Principal)

Types of Financial Services - Savings Services

-Regular savings account -Money market account -Certificates of deposit -U.S. savings bonds

Payday Loan Companies

-Also referred to as cash advances, check advance loans, postdated check loans, and delayed deposit loans -Desperate borrowers pay annual interest rates of as much as 780% and more to obtain needed cash from payday loan companies -Most frequent users of payday loans are workers who have become trapped by debts or poor financial decisions

Certificates of Deposit (CD)

-A savings plan requiring that a certain amount be left on deposit for a stated time period (ranging from 30 days to five or more years) to earn a specified interest rate -Can be attractive and safe savings alternative -Most financial institutions impose a penalty for early withdrawal of CD funds -For CDs of one year or less, the penalty is usually 3 months of interest -CDs of more than a year will likely have a fine of 6 months' interest, while a 5-year CD can result in a penalty as high as 20-25% of the total interest to maturity on the account

Peer-to-Peer Payments

-Allow you to transfer money to another person -Most require registering debit card, credit card, or bank account info, some P2P payments are conducted by email and with a secured website -Fees for the P2P service can range from less than a dollar to a percentage of the amount transferred

Traveler's Check

-Allows you to make payments when you are away from home -Requires you to sign each check twice -- first, when you purchase them and then when you cash them, to identify you as the authorized person -Electronic ones are available in the form of a prepaid travel card -- allows travelers visiting other nations to get local currency from an ATM

Liquidity

-Allows you to withdraw your money on short notice without a loss of value 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 a lower earnings rate -To achieve long-term financial goals, many people trade off liquidity for a higher return

Non-Deposit Institutions - Investment Companies

-Also called mutual funds -Offer a money market fund -The company uses the money from many investors to purchase a variety of short-term financial instruments -However, unlike accounts at most deposit institutions, investment company accounts are not covered by federal deposit insurance

Rate of Return

-Also called yield -The percentage of increases in the value of savings as a result of interest earned -Divide the interest earned by the amount in the savings account

Debit Card Transactions

-Amount of purchase deducted from your checking or other bank account -Most can be used: (1) with your signature, like a credit card, and (2) with a PIN, like an ATM card -When it is processed like a credit card, you have more security in case of a fraudulent transaction or a purchase dispute -When using a debit card to check into a hotel, buy gas, or rent a car, a merchant may freeze an amount in your bank account above what you actually spend -- could result in an overdrawn account

Online Payments

-Banks and online companies serve as 3rd parties to facilitate online bill payments -Organizations include PayPal, MyCheckFree, PayTrust, and Google Wallet -Some services give you a choice of using a credit card or a bank account, while others require one or the other -Linking a transaction to your checking account, rather than to a credit card, may not give you as much leverage when disputing a transaction -PayNearMe allows buyers to make a purchase and then pay cash at a local store -- may be used for online purchases, telephone orders, loan repayments, money transfers, and other transactions that might require a credit card -eBlime --> requires only email address, make payment through online banking or at a local walk-in site

Lost or Stolen Debit Card

-Can be expensive -If you notify the financial institution within 2 days of the lost card, your liability for unauthorized use is $50 -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, and even more if your card is linked to other bank accounts -Some card issuers use the same rules for lost or stolen debit cards as for credit cards: a $50 maximum -Not liable for unauthorized use, such as credit card fraud

Deposit Institutions

-Commercial banks -Savings and loan associations -Mutual savings banks -Credit unions

Restrictive Endorsement

-Consists of the words "for deposit only," followed by your signature, which is useful when you are depositing checks

Non-Deposit Institutions - Brokerage Firms

-Employ investment advisors and financial planners, serve as an agent between the buyer and seller for stocks, bonds, and other investment securities -These companies obtain their earnings from commissions and fees -Expanded financial services are available from brokerage organizations, including checking accounts and online banking

FDIC

-Federal Deposit Insurance Corporation -Coverage prevents a loss of money due to the failure of the insured institution -Insures amounts of up to $250,000 per depositor per insured financial institution -Coverage amounts that exceed the limit are possible by using different ownership categories, such as individual, joint, and trust ownership accounts -Ex: a joint account, held by 2 people, would be covered up to $500,000

Special Services for Checking Accounts

-Financial institutions attempt to reduce paper and postage costs, canceled checks are no longer returned -Bank customers are provided with more detailed monthly statements and will likely have online access to view and print checks that have been paid -Overdraft protection -Beware of checking accounts packaged with several services for a single month fee

Prepaid Debit Cards

-For many, these cards are being used instead of traditional banking services -Issued by many financial service providers including traditional financial institutions, retailers, and non-bank companies specifically created to provide this financial service -Loading funds may occur by cash, check, direct deposit, online transfer, smartphone check photo, or credit card cash advance -Common uses include in-store, online, and person-to-person payments -A savings feature may be connected to the card -Major concern has been the extensive number of fees -Resulted in lower consumer debt because you "pay before"

I Bonds

-Has an interest rate based on 2 things: a fixed rate for the life of the bond and an inflation rate that changes 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 year -I bonds are sold in any amount over $25 and are purchased at face value -Minimum holding period is 1 year -Interest earned on I bonds is added to the value of the bond and received when you redeem your bond -I bonds have the same tax and education benefits as EE bonds -Savings bonds are commonly registered one of three ways: (1) single owner, (2) two owners, either as co-owners or with one as primary owner, or (3) a beneficiary, who takes ownership of the bond when the original owner dies

Pawnshops

-Loans through pawnshops are based on the value of tangible possessions such as jewelry or other variable items -Many low- and moderate-income families use these organizations to obtain cash loans quickly -Charge higher fees than other financial institutions -Provide both lending and retail shopping services, selling items that owners do not redeem -States regulate them, but the interest rates charged can range from 3% a month to over 100% annually

Stop-Payment Order

-May be necessary if a check is lost or stolen -Most banks do not honor checks with "stale" dates, usually 6 months old or older -The fee commonly ranges from $20 to more than $30 -If several checks are missing or you lose your checkbook, closing the account and opening a new one is likely to be less costly than paying several stop-payment fees

EE Bonds

-May be purchased for any amount greater than $25 -Electronic EE bonds are purchased online at face value -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 -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 -Increase in value as interest accrues monthly and compounds semiannually -Must be held for 1 year before it can be cashed -Continue to earn interest for 30 years -Main tax advantages: the interest earned is exempt from state and local taxes and federal income tax on earnings is not due until the bonds are redeemed -Redeemed EE bonds may be exempt from federal income tax if the funds are used to pay tuition and fees at college, university, or qualified technical school for yourself or a dependent -Must be purchased by an individual who is at least 24 years old, and they must be issued in the names of one or both parents

Safety

-Most savings plans at banks, savings and loan associations, and credit unions are insured by agencies affiliated with the federal government -FDIC & NCUA -Some state-chartered credit unions have opted for a private insurance program -Some financial institutions have failed in recent years, but savers with deposits covered by federal insurance have not lost any money -Depositors have either been paid, or have had the accounts taken over by a financially stable institution -FDIC & NCUA also provide deposit insurance for certain retirement accounts, up to $250,000, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs, also Keogh accounts and plans for state government employees -This coverage only applies to retirement accounts in financial institutions insured by the FDIC & NCUA

Fees and Charges on Checking Accounts

-Nearly all financial institutions require a minimum balance or impose service charges for checking accounts -When using an interest-bearing check account, compare your earnings with any service charge or fee -Also, consider the cost of lost or reduced interest resulting from maintaining the minimum balance -Checking account fees have increased in recent years -Items such as check printing, overdraft fees, and stop-payment orders have doubles or tripled in price at some financial institutions

Mobile Banking Services

-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 -Deposits --Direct deposit of paycheck and government payment, online transfer from other account, take a photo of check to deposit (remote deposit) -Other Services --Direct deposit, transfers to savings accounts; text alerts for balances, payments, deposits; apply and receive approval for loans; compare current interest rates for loans; check rates, apply for insurance; buy, sell, monitor investments; locate ATM and bank branches using GPS; access or shoot photo of store, online coupons

Inflation

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

Car Title Loan Companies

-When in need of money, people with poor credit ratings might obtain a cash advance using their automobile title as a security for a high-interest loan -These loans, usually due in 30 days, typically have a cost similar to payday loans, often exceeding 200% -Process is simple, but the consequences can be devastating with the repossession of your car

Types of Financial Services

1. Savings - provides safe storage of funds for future use. Commonly referred to as time deposits, money in savings accounts and 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 and other payment methods are generally called demand deposits. 3. Borrowing - used by most people at some time during their lives. Credit alternatives range from short-term accounts, such as credit cards and cash loans, to long-term borrowing, such as home mortgage. 4. Other financial services - include insurance, investments, tax assistance, and financial planning. This type of arrangement is usually created through a commercial bank or lawyer. Parents who want to set aside certain funds for their children's education may use a trust.

Types of Financial Services - Other Services

-Insurance; trust service -Tax preparation -Safe deposit boxes -Budget counseling -Estate planning

Blank Endorsement

-Just your signature -Should be used only when you are actually depositing or cashing a check, since a check may be cashed by anyone once it has been signed

Cashier's Check

-A check issued by a financial institution -You may purchase one by paying the amount of the check plus a fee -May purchase a money order in a similar manner from financial institutions, post offices, and stores

Deposit Ticket

-Used for adding funds to your checking account -On this document, you list the amounts of cash and checks being deposited -Each check you deposit requires an endorsement to authorize the transfer of funds into your account

Credit Unions

-User-owned, nonprofit, cooperative organizations -Members traditionally had a common bond such as work location, church, or community affiliation, credit union membership today is more flexible, with more than 80 million people belonging to one -Annual banking studies consistently report lower fees and lower loan rates with higher satisfaction levels for credit unions

Regular Checking Accounts

-Usually have a monthly service charge that you may avoid by keeping a minimum balance in the account -Some financial institutions will waive monthly fee if you keep a certain amount in savings

Interest-Earning Checking Accounts

-Usually require a minimum balance -If the account balance goes below this amount, you may not earn interest and will likely incur a service charge -Called share draft accounts at credit unions