Ch. 5 Financial Services: Savings Plan and Payment Accounts

smart cards

"electronic wallets" are similar to ATM cards stores prepaid amounts as well as information w/ account balances, transaction records, insurance information, and medical history

No federal deposit insurance coverage

- Life insurance company - investment company, brokerage firm - credit card, finance company - mortgage company

Federal deposit insurance coverage

- commercial bank - savings and loan. mutual savings - credit union

Online Banking Concerns

- potential privacy, security violations - ATM fees can become costly - difficulty depositing cash, checks - overspending due to ease of access - online scams, "phishing", and e-mail spam

services offered

- savings services - payment services - borrowing - other: insurance, investments

Online Banking Benefits

- time and money savings - convenience for transactions, comparing for transactions, comparing rates - no paper trail for identity thieves - transfer access for loans, investments - e-mail notices of due dates

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 rater when they mature

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

writing checks

1) record the date 2) write the name of the person or organization receiving the payment 3) record the amount of the check in figures 4) write the amount of the check in words 5) sign the check 6) note the reason for payment

CD portofolio

CDs maturing at different times to give you some degree of liquidity and flexibility when you reinvest your funds

asset management accounts

Cash management account: provides a complete financial services program for a single fee includes: checking account, ATM card, credit card, online banking, and line of credit for obtaining quick cash loans provide access to: stock, bond, mutual fund, and other types of investments

interest-earning checking accounts

NOW accounts: negotiable order of withdrawal, usually a require a minimum balance - if account goes below this amount, you may not earn interest and will likely incur a service charges

EE bonds

Patriot Bonds - may be purchased for amounts ranging from $25 to 5,000 - purchased at face value - interest accrues monthly and compounds semiannually - must be held for one year before it can be cashed * the interest earned is exempt from state and local taxes * you do not have to pay federal income tax on earnings until the bonds are redeemed but may be exempt is used to pay for tuition

cashier's check

a check of a financial institution and may be purchased by paying the amount of the check plus a fee

money market fund

a combination savings-investment plan in which the investment company uses your money to purchase a variety of short-term financial instruments - not covered by federal deposit insurance - allowed to write a limited number of checks, providing the convenience of liquidity

mutual savings bank

a financial institution that is owned by depositors and specialized in savings accounts and mortgage loans - located mainly in the northeastern US - the profits go to the depositors, usually paying higher rates on savings

commercial bank

a financial institution that offers a full range of financial services to individuals, businesses, and government agencies - organized as corporations with individual investors contributing the capital the banks need to operate - national banks are chartered by the federal govt. and the state banks by the states and have fewer restrictions

savings and loan association (S&L)

a financial institution that traditionally specialized in savings accounts and mortgage loans

trust

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

compounding

a process that calculates interest based on previously earned interest

market funds

a product of investment companies that are not protected by the federal deposit insurance usually just as safe

share account

a regular savings account at a credit union

credit union

a user-owned, nonprofit cooperative financial institution that is organized for the benefit of its members

traveler's checks

allow you to make payments when you are away from home requires you to sign each check twice 1) sign when you purchase them 2) sign them again as you cash them

special endorsement

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

liquidity

allows you to withdraw your money on short notice w/out a loss of principal or fees

overdraft protection

an automatic loan made to checking account customers for checks written in excess of the available balance - convenient but costly

inflation

as the inflation rate increases, the interest rates offered to savers also increase

Promotional CDs

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

online payments

banks and internet companies are serving as 3rd parties to facilitate online bill payments - consider all fees as well as online security and customer service availability

debit card

cash card: activates ATM transactions may also be used for purchases; spending your own money rather than borrowing additional money

automatic teller machine (ATM)

cash machine: provides various banking activities and other types of transactions

activity accounts

charge a fee for each check written and sometimes a fee for each deposit, in addition to a monthly service charge -do not hace to maintain a minimum balance - useful for those who write only a few checks a month and are unable to maintain the required minimum balance

restrictive endorsement

consists of the words 'for deposit only', followed by your signature

Borrowing

credit alternatives range from short-term accounts, such as credit cards and cash loans, to long-term borrowing, such as home mortgage

I Bonds

earns a combined rate consisting of 1) a fixed rate for the life of the bond and 2) an inflation rate that changes twice a year - additional interest payment is recalculated twice a year - purchased at face value - minimum holding period is 1 yr

joint account

has 2 or more owners require a signature card

indexed CDs

have earnings based on the stock market - strong stock performance, can be higher than those on other CDs - low performance, may earn no interest and may even lose part of your savings - CDs based on consumer price index can result in higher returns as inflation increases

Other Financial Services

insurance protection, investment for the future, real estate purchases, tax assistance, and financial planning are additional services

FDIC

insures deposits of up to $250,000 per person per financial institution joint account is considered to belong proportionally to each name on the account - max coverage of FDIC is based on each depositor, not each account

selection of savings plan based on

interest rate earned liquidity safety convenience

blank endorsement

just your signature which should only be used when you are actually depositing or cashing a check

regular savings accounts

low or no minimum balances receive a monthly or quarterly statement w/ summary of transactions - withdraw money as needed

finance companies

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

store- valued cards

may be disposable or may be reloaded w/ additional amount

stop-payment order

may be necessary if a check is lost or stolen

Rising-rate or bump-up CDs

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

mortgage companies

mortgage companies are organized primarily to provide loans to purchase homes

investment companies

mutual funds: offer banking-type services

fees and charges

nearly all institutions require a minimum balance or impose service charges for checking accounts - consider the cost of lost or reduced interest due to the need to maintain the minimum balance

HH bonds

no longer sold but 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 exempt from state and local taxes

individual account

only one person is allowed to write checks

certified check

personal check w/ guaranteed payment; the amount of the check is deducted from your balance when the financial institution certifies the check

safety

protection by federal govt. prevents a loss of money due to the failure of the insured institution

life insurance companies

provide financial security for dependents, many life insurance policies contain savings and investment features

money order

purchased from financial institutions, post offices and stores allows to make a payment that the recipient knows is valid

Savings

safe storage of funds for future use -time deposits: money in savings accounts & certificates of deposits

money market account

savings account that requires a minimum balance and has earnings based on market interest rates - allow you to write a number of checks to make large payments or to transfer money to other accounts - may impose a fee when you go below the required minimum balance - are covered by federal deposit insurance

certificate of deposit (CD)

savings plan requiring that a certain amount be left on deposit for a stated time period - penalty for early withdrawal

Callable CDs

start with higher rates and usually have long-term maturities, as high as 10 to 15 yrs - have the benefit of federal deposit insurance - bank may make calls

bank statement

summarizing deposits, checks paid, interest earned, and fees such as service charges and printing of checks

tax considerations

taxes reduce interest earned on savings

Payment Services

the ability to transfer money to other parties is a necessary part of daily business activities -demand deposits: checking accounts and other payment methods

APY

the percentage 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

bank reconciliation

to account for difference between the bank statement and your checkbook balance

deposit ticket

used for adding funds to your checking account

endorsement

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

share draft account

an interest-bearing checking account at a credit union write checks against their account balances

rate of return

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

debit card transactions

used in 2 ways: 1) with your signature, like a credit card 2) with your personal identification number PIN, like ATM - more security incase of fraudulent transaction

regular checking accounts

usually have a monthly service charge that you may avoid by keeping a minimum balance in the account and will be beneficial