Personal Finance Chapter 5

I Bonds

Has an interest rate based on a fixed rate for the life of the bond and an inflation rate that changes yearly; every 6 months a fixed base rat his set for new bonds and additional interest payment is recalculated twice a year, based on current inflation rate. Bonds sold over $25 are purchased at face value and the minimum holding period is one year; interest is received at redemption and have same tax/education benefits as EE bonds.

Indexed CDs

Have earnings based on the stock market, earnings can be higher than those on other CDs if the stock market is strong. At other times, one may lose part of savings or get no interest; a CD based on the CPI can result in higher returns as inflation increases

Prime Rate

Indication of the rate banks charge large corporations

Check-Cashing Outlets

Institutions that will cash checks without an account, but charge 1-20% of face value of the check; sometimes provide electronic tax filing, money orders, private postal boxes, utility bill payment, and prepaid debit card service, but are usually less costly at other financial service providers.

Child's Education Trust

Investments and money are managed by a bank, and the necessary amounts go to children for education expenses.

Rising-Rate or Bump-Up CDs

May have higher rates at various intervals, such as every 6 months; be aware of ads that highlight a higher rate in the future, because it may only be in effect for the last few months

Borrowing

Most people use credit; alternatives range from short term accounts like credit cards and cash loans to long term borrowing, like home mortgages

Money Market Fund

A combination savings-investment plan in which the investment company uses one's money to purchase a variety of short-term financial instruments; investors are usually allowed to write checks, providing liquidity convenience.

Making Deposits

A deposit ticket is used for adding funds to checking accounts; list amount of cash/checks and endorse with a signature.

Trust

A legal agreement that provides for the management and control of assets by one party for the benefit of the another; this arrangement is most commonly created through a commercial bank or lawyer.

Compounding

A process that calculates interest based on previously earned interest; each time interest is added to savings, the next interest amount is computed on the new balance. The more frequently compounding occurs, the higher the rate of return will be.

Reconciling Checking Accounts

Account difference between bank statement and checkbook balance

Rolling Over CDs

Automatically buying a new CD at maturity; carefully assess all earnings and costs. Do not allow a financial institution to automatically roll over money into another for the same term; consider interest rates for term length.

Selection of a Savings Plan

Based on interest rate earned, liquidity, safety, and convenience.

Promotional CDs

Be aware of these; attempt to attract savers with gifts or special interest rates. Balance the value of the item against loss of interest.

Credit Union

Benefits- Strong personal service, high savings rates and lower fees Drawbacks- Few branches, limited fee-free ATMs, may have membership eligibility

Online Bank

Benefits- high customer satisfaction, higher yields on savings Drawbacks- Limited personal contact, no local branches

Financial Services and Economic Conditions

Changing interest rates, rising consumer prices, etc.

Deposit Institutions

Commonly serve as intermediates between supplies and users of funds; commercial banks, savings and loan associations, mutual savings banks, credit unions

Writing Check

Date, name/organization achieving, dollar amount in figures, write amount in words, sign, note reason

Opening a Checking Account

Decide owner of account; joint or individual

Mutual Savings Banks

Owned by depositors, and also specializes in savings and mortgages; located in mainly NE US. Profits go to depositors through higher rates on savings

Concerns of Mobile/Online Banking

Privacy concerns, security of data, ease of overspending, costly fees, and online scams

Inflation

Rate of return earned on savings should be compared with inflation rate; as inflation rate increases, the interest rates offered to savers also increases

Rent-to-Own Centers

Rental businesses offer products to be leased until a person completes a certain number of payments; purchases can result in annual interest rates over 300%

Interest-Earning Checking Accounts

Usually require a minimum balance; share draft account

Car Title Loans

When in need of money, people with poor credit ratings might obtain cash in advance using their automobile title as security for high-interest loans; loans are usually do in 30 days and can exceed 200%. Consequences can be devastating in instances of repossession.

Payday Loans

Cash advances, check advance loans, postdated check loans, and delayed deposit loans where desperate borrowers pay annual interest rates as much as 780% to obtain needed cash; mostly workers who have become trapped by debts or poor financial decisions.

Benefits of Mobile/Online Banking

Convenience, saving time, and instant information access

CD Portfolio

Created with CDs maturing at different times; gives flexibility and degree of liquidity when reinvesting.

Debit Card Payments

-With signature -With PIN -Merchant may freeze an amount in your bank account

Share Account

A regular savings account for a credit union

Credit Unions

A user-owned, nonprofit, cooperative financial institution with members traditionally bonded by work location, church, or community affiliation; more flexible membership today. Benefits: lower fees and loan rates, higher satisfaction levels, offer credit cards, mortgages, home equity loans, online banking, and investment services

Choosing a Financial Institution

1. List most important features for a financial institution relating to services, costs, fees, earnings, convenience, online, and mobile banking 2. Rank top three or four specific features based on importance to you 3. Prepare a list of local, national, and online financial institutions 4. Research via talking with users, online, and talk to staff members 5. Balance needs and decide where to do your business.

Large-Scale Bank

Benefits- Many branches, fee-free ATMs, latest digital banking services Drawbacks- limited personal service, higher fees, potential online security concerns

Regional, Community Bank

Benefits- high, customer satisfaction, strong personal service Drawbacks- Limited number of branches, may not be in national ATM network

Common Endorsements

Blank- your signature Restrictive- words "for deposit only" followed by your signature Special- allows you to transfer a check to someone else with words "pay to the order of" followed by their name and your signature.

Commercial Banks

Offers a full range of financial services, including checking, savings, and lending, along with other services; organized by corporations with investors contributing the needed capital to operate. Types: National, Regional, Community, and Online-only Banks

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; may allow one to write limited numbers of checks, and may impose a fee if one goes below the minimum balance. Covered by federal deposit insurance.

Liquidity

Allows one to withdraw money on short notice without loss of principal or fees; some plans impose penalties for early withdrawal and other restrictions. One should consider degree of liquidity in relation to savings goals

Asset Management Account

An all-in-one account that includes checking, savings, borrowing, investing, and other financial services for a single fee; also called cash management or wealth management account.

Overdraft Protection

An automatic loan made to checking account customers for checks written in excess of available balance; service is convenient but costly. Many allow an automatic transfer from savings account for a nominal fee.

Share Draft Account

An interest-bearing checking account at a credit union

Debit Card

Cash card that activates ATM transactions that can also be used to make purchases; one is spending their own money rather than borrowing and lost ones can be expensive. One is liable for at least 50 dollars of unauthorized use. Report fraud within 60 days.

Automatic Teller Machine (ATM)

Cash machine that facilitates various financial transactions; to minimize fees, compare institutions and use your own bank to avoid surcharges.

Activity Accounts

Charge a fee for each check written and sometimes for each deposit, in addition to a monthly service charge; no minimum balance

Smart Cards

Electronic wallets are similar to ATM cards with an embedded microchip; may store past purchases, insurance info, and medical history.

Brokerage Firms

Employ investment advisers and financial planners, serving as agents between the buyer and seller for stocks, bonds, and other investment securities; earnings come from commissions and fees and expanded services can include checking accounts and online banking.

Prepaid Debit Cards

Have become popular alternatives to checking accounts and are issued by many financial service providers (banks, credit card companies, retailers, and nonbank companies) Concerns- extensive fees, little regulation Benefits- Lower consumer debt and helps control buying on credit

Pawnshops

Loans based on the value of tangible items such as jewelry and other valuables; used by low income families to quickly obtain cash loans. They charge higher fees than other financial institutions and interest rates can range from 3% per month to 100% per year.

Savings Bonds

Low-risk savings program guaranteed by the federal government and can be used to achieve financial goals.

Finance Companies

Make loans to consumers and small business that have short/intermediate terms with higher rates than most other lenders; some have financial planning services

EE Bonds

May be purchased for any amount greater than $25 and purchased online at face value; may be purchased for any amount you desire and give more flexibility. They are no longer issued on paper series, and must be held one year before it can be cashed. They continue to earn interest for 30 years, and it is exempt from taxes exempt from state and local taxes, and federal taxes aren't due until it is cashed (can be exempt in this way if redemption is used for tuitions/fees for education) -The purchasing individual must be at least 24 years old

Safety

Most saving plans at banks, savings, and loan associations, and credit unions are insured by agencies affiliated with the federal government. -FDIC coverage prevents loss of money due to failure of the insured institution (up to $250,000 per deposited per institution) -NCUA insures credit unions

Investment Companies

Mutual funds that offer banking-type services not covered by federal deposit insurance; a common service is the money market fund

Liquid CDs

Offer an opportunity to withdrawal money without penalty, but one will likely have to maintain a minimum balance in the account; may have other restrictions, such as a waiting period before any funds can be withdrawn or a limit on the number of withdrawals allowed.

Buying CDs Online

One will likely earn a higher rater than with a local bank; when interest rates stay low, consider savings alternatives like bonds, mutual funds, and government securities.

Mortgage Companies

Organized primary to provide loans to purchase loans

Life Insurance Companies

Provide financial security for dependents and contain savings/investment features; have recently expanded to include investments and retirement planning

Zero-Coupon CDs

Purchased at deep discount with no interest payments; an initial small deposit grows to maturity in 10 years, which is approximately 6% of annual return

Mobile Transfers

Replace debit and credit cards for processing financial and purchasing transactions; sensors in phones

Truth in Savings

Requires financial institutions to disclose fees on deposit accounts, interest rate, annual percentage yield, other terms/conditions of the savings plan

Regular Checking Accounts

Usually have a monthly service charge avoided by keeping a minimum balance; sometimes interest is lost

Certificates of Deposit (CD)

A savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate; can be attractive as a savings alternative, but penalties incur for early withdrawals

Investment and Other Financial Services

Insurance protection, investing for the future, real estate purchases, tax assistance, and financial planning

Regular Savings Account

Involve low or no minimum balance; savers receive a monthly/quarterly statement with a summary of transactions and usually allows one to withdraw money as needed. Offered by banks, savings, loan associations, and other financial institutions.

Evaluating Checking Accounts

Restrictions, fees and charges, interest, special services

Savings

Safe storage of funds for future use; services are commonly referred to as time deposits and include money in savings accounts and certificates of deposit.

Other Payment Methods

Certified checks-personal check with guaranteed payment Cashier's Check- check of a financial institution Money order- allows payments that recipient knows is valid Traveler's check- allows payments away from home

Mistakes Made When Managing Current Cash Needs

1. Overspending via impulse buying/using credit 2. Having insufficient liquid assets to pay current bills 3. Using savings or borrowing to pay for current living expenses 4. Failing to put unneeded funs in interest-earning savings accounts or investment programs

HH Bonds

Series are no longer sold; were current income bonds with interest deposited electronically to ones bank account every six months. This interest was taxed as current income on a federal tax return, but exempt from state/local.

Online Payments

Serve as third parties to facilitate online bill payments that sometimes give a choice of credit card or bank account; may give more leverage when disputing a transaction

Store-Valued Cards

Some are disposable, others can be reloaded; recipients of government benefits may receive payments via a prepaid debit card, which is good for people without accounts

Credit Card Companies

Specialize in funding short-term retail lending; include visa, master card ,discover, and have expanded into other banking/investing services

Savings and Loan Associations

Specialized in savings accounts and home mortgages; most offer services comparable to a bank

Callable CDs

Start with higher rates and usually have long maturities; if interest rates drop, the bank may close the account after a set period and the saver receives the original deposit amount and any interest that has been earned.

Tax Considerations

Taxes reduce interest earned on savings; not usually withheld from taxable savings and investment income, resulting in owing additional taxes at year-end.

Cash Availability and Payment Services

The ability to transfer money to others is a necessary part of daily business activities

Mortgage Rate

The amount individuals are paying to borrow for the purchase of a new home

Corporate Bond Rate

The cost of borrowing for large US corporations

Rate of Return

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

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.

Discount Rate

The rate financial institutions are charged to borrow funds from the federal reserve banks

Certificate of Deposit Rate

The rate for 6 month time deposits at savings institutions

Treasury Bond Rate

The yield on long-term US Government debt obligations

T-Bill Rate

The yield on short-term US Government debt obligations

Opportunity Costs of Financial Services

-Higher returns for longterm savings achieved at cost of low liquidity -Convenience of nearby ATMS should be considered in relation to service fees -No-fee checking account requires a non-interest earring of $500 minimum means a loss of interest earnings

Consolidated Financial Services Account Benefits

-Keeping track of money in a single location -Fewer monthly/quarterly statements -Lower fees for maintaining a large balance with one financial institution -Simplified tax reporting with all dividends and interest on one form -Ease of communicating your financial situation to family members

Access Methods Through Tablet/Smartphone

1. Text banking 2. Mobile web banking 3. Banking apps for various transactions