Chapter 4: Savings

when interest rates are falling

- take short term loans to take advantage of refinancing at a lower rate. - take long term savings to "lock in" higher interest rate now.

categories of checking accounts

1. regular checking accounts 2. activity checking accounts 3. interest earning checking accounts

categories of savings plans

1. regular savings accounts 2. money market accounts and money market funds 3. certificates of deposit 4. U.S. savings bonds

basic questions to ask when selecting a financial services provider

1. where can I get the best return on my savings? 2. how can I minimize the cost of checking services? 3. will I be able to borrow money if I need it?

rate of return

also called the yield. the percentage of increase in the value of your savings from earned interest.

money market fund

an account offered by an investment company. it is a combination savings-investing plan. it uses the money to purchase a variety of short term investments. users of the fund can write checks from it. unlike deposit institutions, money market funds are not insured but the FDIC.

overdraft protection

an automatic loan made to checking account customers for checks written in excess of their balance.

U.S. savings bonds

low risk, guaranteed by the federal government. types of bonds include series EE and I bonds.

series EE bonds

may be purchased for any amount over $25. paper bonds are purchased at half face value. these bonds increase in value as interest accrues monthly and compounds semi-annually. they earn interest for 30 years. if you redeem the bonds before 5 years, you forfeit the last 3 months of interest. after 5 years, there is no penalty. this bond must be held for 1 year before it is cashed. the amount from bond redemption may be excluded from tax if it is used to pay for college tuition.

interest earning checking account

minimum balance required. if it is not met, you do not earn interest and incur a fee. called share draft accounts at credit unions.

signature card

the official record showing the signatures of who is allowed to write checks on the account.

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 the frequency of compounding for a 365 day period. the amount of interest a saver should expect to earn.

problematic financial businesses

these charge high fees and excessive interest rates. these include: pawnshops, check-cashing outlets, payday loan companies, rent-to-own centers, and car title loan companies.

special endorsement

this allows you to transfer the money to someone else. write "pay to the order of _____" followed by your signature.

I bonds

this bond has an interest rate based on two components: 1. a fixed rate for the life of the bond 2. an inflation rate that changes twice a year. these are sold at face value at any amount over $25. like series EE, they must be held for 1 year before they are cashed, and they have the same tax and education benefits.

stop-payment order

this may be used if a check is lost or stolen. it comes with a fee. if you lose your checkbook, it may be more cost efficient to just close your account.

categories of financial services

1. savings 2. payment methods 3. borrowing 4. other financial services (insurance, investments, tax assistance, financial planning).

2 ways debit cards can be used

1. with a signature like a credit card 2. using a PIN the first offers more security in case of a fraudulent transaction.

cashier's check

a check issued by a financial institution. you pay for one by paying the amount of the check plus a fee. similar to a money order.

trust

a legal agreement that provides for the management and control of assets by one party to the benefit of another party. prepared by a lawyer or commercial bank.

certified check

a personal check with a guaranteed payment.

money market account

a savings account that has a minimum balance requirement and has earnings based on the changing level of market interest rates. allows for check writing. these are insured by the FDIC.

certificate of deposit

a savings plan that requires that a certain amount be left on deposit for a stated time period in order to earn a stated return. most financial institutions impose a penalty for early withdrawal.

liquidity

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

automatic teller machine (ATM)

also called a cash machine. facilitates various types of transactions. to avoid surcharges, use your bank's _____ and/or withdrawal large amounts to avoid res on several smaller transactions.

regular savings accounts

called passbook or statement accounts. called share accounts at credit unions. usually involve a low or minimum account balance and allow you to withdrawal money as needed.

regular checking account

have a monthly service fee that can be waived if a minimum balance is kept.

selection of a savings plan is influenced by

inflation, rate of return, tax considerations, safety, liquidity, restrictions, and fees.

blank endorsement

only your signature

Truth in Savings Act

requires financial institutions to disclose: 1. fees on deposit accounts 2. the interest rate 3. annual percentage yield 4. other terms and conditions of the savings plan.

traveler's checks

these allow you to make payments when you are away from home. the payment form requires you to sign the check twice - once to identify you as authorized, the second time to cash them.

non-deposit institutions

these also offer various financial services. these include: life insurance companies, investment companies (like mutual fund companies), brokerage firms, credit card companies, finance companies, and mortgage companies.

deposit ticket

used for adding funds to a checking account.

a person may purchase up to ______ worth of electronic savings bonds for each series.

$10,000

parents may buy an additional _______ in bonds in each child's name.

$25,000

when interest rates are rising

- take short term savings to take advantage of higher rates when savings mature. - take long term loans to take advantage of current low rates.

APY formula

100*(interest/principal) when the maturity is 365 days.

asset management account

also called a cash management account. provides a complete financial services program for a single fee.

activity checking account

charges a fee for each check written and sometimes for each deposit in addition to a monthly service charge. no minimum balance required.

tax advantages of series EE bonds

interest is exempt from state and local taxes. federal tax on earnings isn't due until bonds are redeemed.

compounding

interest that is earned on previously earned interest.

restricted endorsement

your signature + the words "for deposit only"

deposit institutions

serve as intermediaries between suppliers (savers) and users (borrowers) of funds. these include: commercial banks, savings and loans associations, credit unions, and mutual savings banks.

Check Clearing for the 21st Century Act

shortens the processing time for a check. creates a substitute check, a digital representation of the paper check, and is considered its legal equivalent.

amount that FDIC insures

the FDIC insures $250,000 per person per financial institution.

debit card

also called a cash card. activates ATM for transactions. used for purchases. if you notify the financial institution of a lost ____ ____ within 2 days, your liability is limited to $50. if you wait up to 60 days, your liability could be up to $500. after 60 days, you are liable for all.