Personal Finance Chapter 4

credit card

A plastic card used to make purchases now and pay for them later. 1. delays the payments for a purchase 2. build a credit history with wise buying 3. buy online or for major purchases 4. earn more generous rewards points for spending

Cash mistakes

1. Overspending due to 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 place funds not needed for current expenses in a savings account

smart phone access

1. text banking-providing account information and conducting transactions through text message 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

comparing financial institutions

1. where can I get the best return on my savings? 2. How can I minimize the cost of checking, payments services, and other fees? 3. Will I be able to borrow money if I need to?

savings and loan associations

S&Ls Specialize in savings accounts and mortgages *Nowadays they offer services comparable to a regular bank

selecting a savings account

When selecting this type of account, think about the: 1. rate of return 2. inflation 3. taxes 4. liquidity 5. safety 6. restrictions, fees

cashiers check

a check issued by a financial institution *May purchase one by paying the amount of the check plus a fee

substitute check

a digital reproduction of the original paper check and is considered a legal equivalent of the original check

trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another *Created through a commercial bank or a lawyer *Used by parents who want to set aside certain fund for their children's education

certified check

a personal check with guaranteed payment *amount of the check is deducted from your balance when the bank certifies the check

compounding

a process that calculates interest based on previously earned interest

signature card

a record of the official signatures of the person or persons authorized to write checks on the account

stop payment order

a request that a bank or other financial institution not cash a particular check *May be necessary if a check is lost or stolen 6 months or older = stale date checks Fee ranges from $20 to 30+

money market account

a savings account that requires a minimum balance with earnings based on the changing market level of interest rates *may allow a limited # of checks to be written *may impose a fee when the account balance goes below required minimum (usually $1000) *Benefits- favorable rate of return (based on current interest rates), allows limited # of checks to be written, insured (only accounts, not funds) *drawbacks- higher minimum balance than regular savings accounts, service charge or lower rate if below a certain balance, not insured

certificate of deposit

a savings plan requiring that a certain amount be left on a deposit for a stated time period to earn a specific rate of return *has penalties for early withdrawals (reduced interest) *benefits: guaranteed rate of return for time of CD, insured (from bank) *drawbacks- possible penalty (reduced interest) for early withdrawal, minimum deposit

money market fund

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

deep discount

a small portion of the face value

travelers checks

allow you to make payments when you are away from home *requires you to sign each check twice First sign: when you purchase them second sign: to identify you as authorized person before they are cashed

peer to peer payments

allow you to transfer money to another person

payment services

allow you to transfer money to pay expenses and for other daily business activities 1. checking account 2. online payments 3. cashier's checks 4. money orders 5. demand deposits

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 person and then your signature

liquidity

allows you to withdraw money on short notice without a loss of value or fees

asset management account

also called cash management account *An all in one account that includes savings, checking, borrowing, investing and other financial services for a single fee *Investment companies and others offer this 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

overdrafting protection

an automatic loan made to a checking account customer for checks written in excess of their balance *convenient but costly *Banks have to obtain permission from a customer before being part of an overdraft protection program

apy

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 *reflects the amount of interest a saver should expect to earn APY = 100 (interest/principal)

promotional cds

attempt to attract savers with gifts or special rates *balance the value of the item against the lost interest

ATM

automatic teller machine (cash machine) A computer terminal used to conduct banking transactions which can facilitate various types of transactions

alternative service providers

banks, savings, loan associations, credit unions term-80 *Other financial institutions that process most payment, savings and credit transactions

rising rate CDs

bump up CDS have higher rates at various intervals (EX. 6 months) Higher future rates mean they may only be in effect for the last few months of a 2 year CD

money order

can be paid from banks, post offices and stores *allow you to make a payment that the recipient knows is valid

liquid cds

can withdraw money without penalty , but you will be required to maintain a minimum balance in the account May also have restrictions such as a waiting period before any funds can be withdrawn, or a limit on the # of withdrawals allowed

payday loan companies

cash advances, check advance loans, post dated check loans, delayed deposit loans Borrowers can pay annual interest rates of up to 780% to obtain needed cash from these companies Usually used by workers who have become trapped by debt or poor financial decisions

debit card

cash card *activates ATM transactions and used for purchases *spending own funds rather than borrowing money *when lost or stolen, can be expensive

influence of financial services

changing interest rates + rising consumer prices + other economic factors = influence of financial services

activity accounts

charge a fee for each check written, sometimes a fee for each deposit + monthly service charge *no minimum balance required *For people who only write a few checks a month and are unable to maintain the required minimum balance

demand deposits

checking accounts and other payment methods

restrictive endorsement

consists of the words for deposit only, follow by signature, useful for depositing checks

car title loan companies

consumers can use their car title in exchange for a high interest loan *loans are usually due within 30 days and cost similar to payday loans *if you do not pay it back, vehicle can be repossessed

rule of thumb

credit cards = pay later debit cards = pay now prepaid cards = pay before

check cashing outlets

currency exchanges *allow people without banks to cash checks for 1-20% of the face value of a check (avg- 2-3%) Offer services such as electronic tax filing, money orders, private postal boxes, utility bill payment, and sale of transit tokens

rate of return

earnings on savings can be measured by this, which is the percentage of increase in the value of your savings from earned interest EX: $100 in a savings account that earned $5 after a year yields 5% rate of return

brokerage firms

employ investment advisors and financial planners *serve as an agent between the buyer and seller for stocks, bonds, and other investment securities *companies obtain their earnings from commissions and fees

FDIC

federal deposit insurance corporation *Coverage prevents a loss of money due to the failure of the insured institution *Insures up to 250,000 per depositor per insured financial institution *coverage amounts that exceed the limit are possible through individual, joint, and trust ownership accounts EX: joint accounts can have up to 500k insured

joint account

has two or more owners Requires a signature card

regular checking accounts

have a monthly service charge that can be avoided by keeping a minimum balance in the account *some banks waive monthly fee if there is a certain amount in savings *lose interest on the minimum balance account in a non-interest earning account

indexed Cds

having earnings based on the stock market strong stock performance= earnings higher than those on other CDs Low stock performance= may not earn any interest or lose part of savings Based on CPI, can result in higher returns as inflation increases

borrowing

is used by most people at some time during their lives *Range from short-term accounts: credit cards and cash loans *Long term - home mortgage

blank endorsement

just your signature, only use when depositing or cashing a check since it can be cashed by anyone once it has been signed

pawn shops

loans through pawn shops are based on the value of tangible possessions such as jewelry or other valuable items *low and moderate income families use these organizations to obtain cash loans quickly, charge higher fees *provide lending and retail shopping services

savings bond

low risk savings program guaranteed by the federal government, used to achieve financial goals *Benefits- rate varies with interest rates (I bonds), low minimum deposit, government guaranteed, exempt from state, local income taxes *Drawback - lower rate redeemed within first 5 years *A person may purchased up to $10k worth of savings bonds of each series (total of 20k), but this applies to any person, so an additional 20k can be purchased in each childs name

time deposits

money in savings accounts and certificates of deposit

investment companies

mutual funds Offer a money market fund Not covered by federal deposit insurance use money from investors

ncua

national credit union credit unions obtain deposit insurance Both FDIC and N___ provide deposit insurance for retirement accounts such as traditional IRAs, roth IRAS, SEP iras, SIMPLE IRAS, and self directed keogh accounts

commercial banks

offer a full range of financial services *Includes checking, savings, lending *Organized as corporations with investors contributing the needed capital to operate *Types: national, regional, community, online-only banks

rent-to-own centers

offer big screen tv's, pc's bedroom sets and kitchen appliances *stores that lease products to consumers who can own the item if they complete a certain number of monthly or weekly payments EX: a $600 computer can result in $1900 of payments

individual account

only one person is allowed to write checks Requires a signature card

mortgage companies

organized primarily to provide loans for home purchases

Mutual savings bank

owned by depositors, specialize in savings accounts and mortgages *located in northeastern US *profits of a mutual savings bank are shared by depositors through higher rates on savings

regular savings account

passbook, statement accounts involve a low or no minimum balance and allow you to withdraw money as needed *at a credit union, the savings plans are called share accounts *Benefits- Low minimum balance, ease of withdrawal, insured *drawbacks- Low rate of return

life insurance companies

provide financial security for dependents with various life insurance policies *some companies offer investment and retirement planning services

finance companies

provide loans to consumers and small businesses *loans have short and intermediate terms with higher rates than most other lenders charge

savings services

provides safe storage of funds for future use 1. regular savings account 2. money market account 3. certificates of deposit 4. U.S. savings bonds 5. time deposits

zero coupon cd

purchased at a deep discount with no interest payments *initial small deposit can grow to the maturity values of the CD EX: deposit = 5000, maturity value after 10 years = 10000, 5% annual return

interest earning checking

require a minumum balance *if account balance < minimum will not earn interest and will have a service charge also called share draft accounts at credit unions

truth in savings act

requires financial institutions to disclose this info 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 plans

IRAs

retirement account in the form of a long-term time deposit, with annual contributions not taxed until withdrawn during retirement

endorsement

signature on the back of the check to authorize the transfer of funds into your account

credit card companies

specialize in short term loans and retail lending *EX: visa, mastercard, discover

callable CDs

start with higher rates and have long maturities (10-15 years) If interest rates drop, bank may close the account after a set period (can be 1-2 years). when this happens, saver receives original deposit + any earned interest

bank statement

summarizing deposits, checks paid, ATM withdrawals, interest earned and fees such as service charges and printing of checks *balance reported on statement usually differs from balance in checkbook due to checks that have not yet cleared, deposits not received by the bank and interest earned

series EE bonds

the most common bond, involve amounts over $25. Most are bought and managed online and may be purchased for any amount in value from interest earned *if redeemed before 5 years, you forfeit the latest three months of interest. after 5 years, you are not penalized Is tax exempt (state, local taxes), FDI isnt due until bonds are redeemed. Bonds are exempt from FDI if they are used to pay tuition/fees, must be bought by someone over 24 y/o

deposit ticket

used for adding funds to your checking account *list amount of cash and checks being deposited *add endorsement (signature on bank of check)

prepaid cards

used for telephone services, transit fares, highway tolls, laundry service and school lunches *Some are disposable and some are reloadable

bank reconciliation

used to determine the correct balance and to account for differences between the bank statement and your check book balance

credit unions

user owned, non profit, cooperative organizations *Lower fees and lower loan rates with higher satisfaction levels for credit unions compared to other places *More than 80 million people belong to one *organized for the benefit of its members

interest rates

when rising: 1. use long-term loans to take advantage of current low rates 2. select short-term savings instruments to take advantage of high rates when they mature when falling: 1. use short-term loans to take advantage of lower rates when you refinance the loans 2. select long-term savings instruments to lock in earnings at current high rates

I bond

you earn interest based on a fixed rate and inflation rate 1. every 6 months a new rate is set 2. purchased at face value for an amount starting at $25 3. minimum holding period is one year 4. interest earned is added to the value of the bond and received when you redeem your bond

selecting a savings plan

1. restrictions and fees 2. safety 3. liquidity 4. rate of return

Non deposit institutions

1. life insurance company 2. investment company 3. brokerage firm 4. credit card company 5. finance company 6. mortgage company

debit card uses

1. limit your spending to available money 2. avoid bills that will be paid in the future 3. avoid interest payment or an annual fee 4. obtain better protection if you process a transaction as credit card

other financial service providers

1. pawnshop 2. check cashing outlet 3. payday loan company 4. rent to own center 5. car title loan company

non bank financial service providers

1. retailer stores (prepaid debit cards, other services) 2. online banking service provider (E*Trade Bank) 3. online payment services (paypal) 4. P2P (peer-to-peer) lending intermediaries

writing a check

1. record the date 2. write the name of the person/organization receiving the payment 3. record the amount of the check in numerals 4. Write the amount of the check in words; check for less than a dollar should be written as "only 79 cents" and cross out dollars on the check 5. sign the check 6. note the reason for payment

checking accounts

1. regular checking account 2. activity checking account 3. interest-earning account

selecting a checking account

1. restrictions 2. fees and charges 3. special services 4. interest

Payments/transfers

1. access cash at ATM 2. Balance inquiry 3. online payments 4. move funds among various accounts 5. person to person payments (transfer funds to another person's account) 6. instant payments for bills you forgot to pay 7. tap or wave your phone to make a purchase 8. access online images of canceled checks

rule of thumb notes

1. as inflation rate increased, interest rates to savers also increase 2. taxes reduce interest earned on savings 3. liquidity- allows you to withdraw your money on short notice without a loss of value or fees

other payment methods

1. certified check 2. cashier's check 3. money order 4. traveler's checks

cash availability

1. check cashing 2. ATM/debit cards 3. Traveler's checks 4. Foreign currency exchange

deposit institutions

1. commercial bank 2. credit union 3. savings and loan association 4. mutual savings bank

credit services

1. credit cards, cash advances 2. auto loans, education loans 3. mortgages 4. home equity loans

digital payments

1. debit and credit cards 2. online/mobile payments 3. stored value (prepaid) cards 4. smart cards (digital wallet) 5. P2P payments

deposits

1. direct deposit of paycheck and government payment 2. online transfer from other account 3. take photo of check to deposit (remote deposit)

mobile banking services

1. direct deposit, transfers to savings accounts 2. text alerts for balance, payments, deposits 3. apply and receive approval for loans 4. compare current interest rates for loans 5. check rates, apply for insurance 6. buy, sell, and monitor investments 7. locate ATM and bank branches using GPS 8. Access or shoot photo of store, online coupons

managing cds

1. do not allow financial institution to auto roll over your money into another CD for the same term 2. low interest rates = consider lower maturity 3. high interest rates = consider longer maturity 4. to give flexibility + liquidity - make CD portfolio with set amount at different periods of time *rolling over a CD- buying a new CD at maturity

losing a debit card

1. if you notify the financial institution within two days of the lost card, your liability for unauthorized use is $50 2. you can be liable for up to $500 of unauthorized use if you wait up to 60 days to notify your bank 3. 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

investment services

1. individual retirement accounts (IRAs) 2. brokerage service 3. investment advice 4. mutual funds

Misc services

1. insurance; trust service 2. tax preparation 3. safe deposit boxes 4. budget counseling 5. estate planning

prepaid debit cards

Issued by traditional financial institutions, retailers (walmart,etc) and nonbank companies *to add funds to these cards, can use cash, a check, direct deposit, online transfer, smartphone check photo or credit card cash advance *used for in store and online purchases, P2P payments may encounter many fees: activation fees, monthly fees, transaction fees, cash withdrawal fee, balance inquiry fee, a fee to add funds, a dormancy fee

losing a credit card

Liability is up to $50

Online Financial service providers

These are online only banks 1. bank of the internet 2. ally bank

quick cash

To get this, liquidate savings or borrowing Any accounts such as savings accounts, certificate of deposit, mutual fund, or investment may be accessed when you need funds, or credit card cash advance or a personal loan