Chapter 5
APY (Annual Percentage Yield)
100*(Interest/Principal) Only applicable when the number of days in the term is 365 or when the account does not have a state maturity.
Choosing a Financial Institutions
1: Prepare a list of important features. 2: rank the top 3 or 4 features, for you. 3: Prepare a list of financial institutions. 4: Conduct research for decision. 5: Make decision based upon above.
Safety
FDIC insures up to $250000 per person per financial institution.
Regular Savings Accounts
Usually involve a low or no minimum balance. Credit unions call them share accounts. Benefits: Low minimum balance, ease of withdrawal, insured. Drawbacks: low rate of return.
Credit unions
are user-owned, nonprofit cooperative financial institutions.
Interest earning checking accounts
also known as share draft accounts as credit unions
Investment companies
are also referred as mutual funds. Offer a money market fund on which you can write a limited number of checks.
Commercial Banks
offer a full range of services including checking, savings, lending and other services.
Special Endorsement
Allows you to transfer a check to someone else with the words "pay to the order of" followed by name of the other person with your signature.
Money Market Account/Funds
Benefits: Favorable rate of return, allows limited number 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).
U.S. Savings Bonds
Benefits: Rate varies with interest rates, low minimum deposit, government guaranteed, exempt from state, local income taxes. Drawbacks: Lower rate when redeemed within first five years.
Check Cashing Outlets
Charge 1-20% of the face value of a check: 2-3% is average
Opportunity Costs of financial services.
Higher rate of return may be obtained at the cost of lower liquidity. 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 of 6 percent compounded over 10 years.
Regular Checking Accounts
May have minimum balances
Live Insurance Companies
Offer insurance, plus savings and investment features; some offer financial planning and retirement services.
Managing your checking account
Opening a checking account: individual or joint accounts; and making deposits.
Types of Checking Accounts
Regular checking accounts, Activity account, Interest earning or Now Accounts, Interest Earning Checking Accounts
Truth In Savings
Requires: fees on deposit account, the interest rate, the annual percentage yield, other terms and conditions.
Activity accounts
fee on checks and deposits
Savings and Loan Associations
offer specialized savings plans, loans including mortgages, and other financial planning services
Finance companies
provide loans to customers so they can purchase homes
Mutual saving banks
specialize in savings accounts and mortgage loans, they are owned by their depositors
interest earning or now accounts
usually require a minimum balance
Liquidity
Allows you to withdraw money on short notice without penalty or fees.
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.
Making Deposits
Deposit ticket, endorsements.
Blank endorsement
Just your signature, can be deposited by anyone as long as it is signed.
Other Financial Institutions
Live insurance companies, investment companies, finance companies, mortgage companies, pawnshops, and check cashing outlets.
Pawnshops
Make loans on possessions but charge higher fees than other financial institutions, used for quick cash
Online Banking Concerns
Privacy and security. Costly ATM fees. Difficulty depositing checks and cash. Overspending potential. Online scams; phishing and emails scams.
Certificates of Deposit (CD's)
Require you to leave your money on deposit for a set time period, otherwise you incur penalties. Sever types to choose from. Consider all the earnings and all the costs. Benefits: Guaranteed rate of return for time of CD, insured (when purchased from bank or comparable financial institutions) Drawbacks: possible penalty for early withdrawal, minimum deposit.
Evaluating Checking Accounts
Restrictions, Fees and Charges, Interest rate and computation method, special services such as overdraft protection.
Restriction and fees
Several restrictions can affect the choice of a savings program. Delay in time between earned and posted transactions fees from deposits and withdrawals, time money has to be left in a deposit account in order to receive a gift.
Online Banking benefits
Time and money savings. Convenience for customer. No paper trail or identity thieves. Online transfer or funds from on account to another. Email notification regarding due date.
