Your Money and Credit-Test Two-Morris
Sources of Quick Cash
-Liquidate savings a. Savings account b. CD c. Mutual Fund -Borrow a. Credit card advance b. Personal loan *Both options reduce net worth
Pawnshops
-Loans on possessions -Higher fees; 3% per month common -Used for quick cash
Finance Companies
-Make short and medium term loans to consumers -Higher rates
Restrictions and Fees (Savings Plans)
-Minium balance -Fee for additional transactions
Regular Checking Accounts
-Monthly service charge usual -Minimum balance
Investment Companies
-Mutual Funds -Money Market Fund a. combination savings and investment plan b. not covered by FDIC
Series HH Bonds
-No longer sold -Current income bonds -Pays interest every six months -Interest direct deposited and taxed as current income
ATM access
-Obtain cash, check account balances, and transfer funds -Check out the fees *involved with online banking
Common mistakes made when managing current cash needs
-Overspending (impulse buying, using credit) -Insufficient liquid assets -Using savings or borrowing to pay for current expenses -Failing to put unneeded funds in an interest bearing or investment account
Regular Savings Accounts
-Passbook savings (most liquid) -Statement accounts -Low minimum balance -Easy withdrawal -Insured -Low rate of return -Credit Union=share accounts
Problematic Financial Businesses
-Pawnshops -Check-cashing outlets -Payday loan companies -Rent-to-Own Centers -Car Title Loans
Rate of Return or Yield
-Percentage increase in value due to interest -Frequency of compounding (calculates interest based on previously earned interest) increases return
Concerns of Online Banking
-Potential privacy, security violations -ATM fees can become costly -Difficulty depositing cash, checks -Overspending due to easy access -Online scams, "phishing," and e-mail scams
Liquidity (Savings Plans)
-Quick availability of cash -Without significant loss in value
Automatic Payments Transfer Funds
-Recurring payments such as for utilities -Remember to deduct them from your register *involved with online banking
Managing Electronic Savings Bonds
-Registration: a. Single owner b. Co-owners with a primary owner c. With a beneficiary -Treasury Direct a. Establish an account at the Treasury website b. 24/7 access to buy manage and redeem electronic bonds
Certificates of Deposit (CD)
-Required minimum deposit -Required time on deposit -Penalties for early withdrawal -Take care when rolling over -Various CD types a. Rising-rate or bump b. Stock-indexed c. Callable d. Promotional *becoming less liquid
Evaluating Checking and Payment Accounts
-Restrictions, such as a minimum balance -Fees, which increase, and charges -Interest rate and computation method -Special services=overdraft protection -Beware of "package" deals that include unneeded services
Types of U.S. Savings Bonds
-Series EE -Series HH -I Bonds
Financial Services Research
-Services offered -Fees disclosure -Minimum balance -Savings rate sheet -Sample loan application -Sufficient deposit insurance
Traveler's Check
-Sign each check twice -Electronic traveler's checks-prepaid travel card with ability to get local currency at an ATM
Trust
A legal agreement that provides for the management and control of assets by one party for the benefit of another.
Interest-Earning or Share Draft (@ Credit Unions) Checking Accounts
Require a minimum balance
"Truth in Savings Act"
Requires a disclosure of: -Fees on deposit accounts -Interest Rate -Annual Percentage Yield (APY)
FCVA
Sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments.
Consumer Credit
The use of credit for personal needs (except a home mortgage). -A major force in our economy
Types of Financial Services
a. Savings b. Payment Services c. Borrowing d. Other Financial Services
Taxes (Savings Plans)
Reduces interest earned on savings
Series EE Bonds
-"Patriot Bonds" -Sold at half of face value -Face values $50-$5,000 -Fixed-rate interest compounded semiannually -Penalty if redeemed within 5 years -Continues earning interest for 30 years -Potential tax advantages if used to pay tuition
Cash Management Account
-Also called asset management account -Offered by investment companies and others to provide a complete line of financial serves program, which include: a. Checking account and ATM card b. Credit card c. Online banking d. Line of credit for quick cash loans e. Access to a variety of investments
Cashier's Check
-Bank check -Check from a financial institution; you pay the face amount, plus a fee
Non-Deposit Institutions
-Life insurance companies -Investment companies -Brokerage firms -Credit card companies -Finance companies -Mortgage companies
Use a Debit Card to...
-Limit spending to available funds -Avoid future bills -Avoid interest or annual fee -Obtain better protection
Payday Loan Companies
-Cash advances -Check advance loans -Postdated check loans -Delayed deposit loans -High interest rates
Other Payment Methods
-Certified Check -Cashier's Check -Money Order -Traveler's Check
Check-Cashing Outlets
-Charge 1-20% of check's face value -1-3% is average -AKA: Currency Exchanges
Types of Financial Institutions
-Commercial Banks -Savings and Loan Associations -Mutual Savings Banks -Credit Unions
Electronic Payments
-Debit Card Transactions=immediate account debit -Online Payments=PayPal, MyCheckFree -Stored-Value Cards=prepaid cards for telephone, transit, tolls, etc. -Smart Cards="electronic wallets"
Annual Percentage Yield
-Defined as the "total percent" -Total percent is based on annual interest and frequency of compounding -APY=Rate per period X # periods per year -Will be higher if compounded more than once -More compounded=higher yield
Use a Credit Card to...
-Delay payment -Build a credit history -Buy online -Major purchases -Earn rewards
Before choosing a financial institution
-Determine the financial services you need before choosing a financial institution -Compare fees and convenience -Consider the safety and rates for deposits and loans at different institutions
I Bonds
-Earns a fixed rate plus an inflation rate -Twice-a-year inflation adjustment
Safety via FDIC and NCUA (Savings Plans)
-FDIC insured up to $250,000 per person per financial institution -Up to $250,000 for certain retirement accounts
Money Market Accounts and Funds
-Floating interest rate -Allows limited check writing -Higher minimum balance -Money market accounts are covered by the FDIC, but money market funds are not -Money market accounts=bank -Money market funds=investment company; higher interest rate; risk premium-no FDIC
Life Insurance Companies
-Insurance plus savings and investments -Some offer financial planning and investing services
Mobile Banking
-Text banking -Mobile web banking -Banking apps
Benefits of Online Banking
-Time and money savings -Convenience for transactions, comparing rates -No paper trail for identity thieves -Transfer access for loans, investments -E-mail notices of due dates
Online Banking
-Traditional banks have online serves -Web-only banks (E*Trade Bank) -Services provided: a. Direct deposit b. Automatic payments transfer funds c. ATM access d. Debit card
Bank Reconciliation
1. Compare written checks with those reported paid (subtract the total of all checks written but not yet closed) 2. Determine deposits not on the statement (add the amount to the statement balance) 3. Subtract fees or charges and ATM withdrawals from the checkbook balance 4. Add any interest to your checkbook balance
Five Steps to Selecting a Financial Institution
1. List features most important to you 2. Rank the top 3-4 most important features 3. List local, national, and online institutions 4. Conduct research: -talk with friends -online research -personal visit 5. Balance your needs with information collected
Writing Checks
1. Record the date 2. Write the name of the person/organization receiving the check 3. Record the amount of the check in figures 4. Write the amount of check in words 5. Sign the check 6. Note the reason for the payment
Basic questions to ask before choosing a financial institution
1. Where can I get the best return on my savings? 2. How can I minimize my costs for financial services? 3. Will I be able to borrow money if I need it?
Making Deposits
3 types of endorsements -Blank endorsement=signature only -Restrictive endorsement="for deposit only" -Special endorsement="pay to the order of"
ATM
A computer terminal used to conduct banking transactions.
Mutual Savings Bank
A financial institution that is owned by depositors and specializes in savings accounts and mortgage loans.
Mutual Savings Banks
A financial institution that is owned by depositors and specializes in savings accounts and mortgage loans. -Profits go back to depositors by paying a higher rate on savings
Commercial Bank
A financial institution that offers a full range of financial services to individuals, businesses, and government agencies. -Organized as corporations -Offer a full range of services including checking, savings, lending, and other services
Savings and Loan Association
A financial institution that traditionally specialized in savings accounts and mortgage loans. -Checking accounts, specialized savings plans, loans and financial planning and investment services
Open End Credit
A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment. -Use as needed until line of credit max reached -Credit cards -Department store cards -You pay interest and finance charges if you do not pay the bill in full when due -Revolving Check Credit -Bank Line of Credit
Interest
A periodic charge for the use of credit
Debit Card
A plastic access card used in computerized banking transactions; also called a "cash card" or "ATM card."
Debit Card
A plastic access card used in computerized banking transactions; also called a cash card. -Deducts money directly and immediately out of your account -Lost card liability $50-$500
Revolving Check Credit
A prearranged loan from a bank for a specified amount; also called a bank line of credit.
Compounding
A process that calculates interest based on previously earned interest.
Money Market Account
A savings account offered by banks, savings and loan associations, and credit unions that requires a minimum balance and has earnings based on market interest rates.
Certificate of Deposit
A savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate.
Money Market Fund
A savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments.
Credit Union
A user-owned, nonprofit, cooperative financial institution that is organized for the benefit of its members. -Lower fees and lower loan rates
Collateral
A valuable asset that is pledged to ensure loan payments.
Brokerage Firms
Act as agent for buyers and sellers of financial products. Obtain their earnings through the commissions and fees charged for various services
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."
Credit
An arrangement to receive cash, goods, or services now and pay for them in the future. -Based on trust in people's ability and willingness to pay bills when due
Overdraft Protection
An automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account.
Interest Earning Checking Accounts
Checking accounts paying low interest
Inflation (Savings Plans)
Compare the rate of return vs. the inflation rate
Activity Checking Accounts
Fee charged for each check written, and sometimes for deposits
Financial Services and Economic Conditions
For successful financial planning, be aware of: -Prime rate=rate banks charge large corporations -Consumer interest rates -Rising consumer prices
Opening a Checking Account
Individual vs. joint account
Other Financial Services
Insurance, investment, real estate purchases, tax assistance, trusts, and financial planning
Simple Interest
Interest computed on principal only and without compounding. -The dollar cost of borrowing -Interest=principal x rate x time
Rent-to-Own Centers
Lease merchandise at high interest rates to low-income customers
Payment Services
Offer an ability to transfer money to others for daily business activities -Checking accounts=demand deposits -Automatic payments
Closed End Credit
One-time loans that the borrower pays back in a specified period of tie and in payments of equal amounts. -Mortgage, automobile, and installment loans for furniture, appliances, and electronics -3 most common types of closed-end credit 1. Installment sales credit 2. Installment cash credit 3. Single lump-sum credit
Direct Deposit
Paychecks and other regular income. *involved with online banking
Certified Check
Personal check with guaranteed payment
Mortgage Companies
Provide home mortgage loans
Savings
Provides safe storage of funds for future use. -Time deposits -Savings and certificates of deposit
Money Order
Purchase at financial institution, post office, store
Credit Card Companies
Specialize in short term loans
Capital
The borrower's assets, or net worth.
Character
The borrower's attitude toward his or her credit obligations.
Capacity
The borrower's financial ability to meet credit obligations.
Line of Credit
The dollar amount, which may or may not be borrowed, that a lender makes available to a borrower.
Conditions
The general economic conditions that can affect a borrower's ability to repay a loan.
Rate of Return
The percentage of increase in the value of savings as a result of interest earned; also called "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.
Minimum Monthly Payment
The smallest amount you can pay and remain a borrower in good standing.
Finance Charge
The total dollar amount paid to use credit. -Includes interest costs and fees, such as service charges, credit-related insurance premiums, or appraisal fees
Borrowing
Used by most people at some time during their lives. you can borrow for the short-term (credit cards) or the long-term (home mortgage).
Interest Rates and Financial Decisions
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 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