Chapter 21

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Banking & Credit

Saving Money

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Ways to saveCredit union

non-profit financial institution similar to a bankPassbook account

you receive a booklet in which transactions are recorded

Statement accountyou receive a computerized statement of monthly

transactionsInterest

money that banks pay depositors for the use of their money

Compound interestInterest is figured on the amount of money deposited

plus interest accrued on initial deposit

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Savings bondsWhen you buy a U.S. savings bond, you are lending money to

the governmentEach year the bond grows in value until it has maturedYou can then redeem, or cash it in for the full face value

Money market deposit accountsSavings accounts offered by banks and require a high minimum

balanceMoney is pooled with money from other savers and then

investedYou are paid a dividend or share of profits of a fund or

organization

CD’sType of investment where you deposit an amount of money for

a fixed amount of time at a stated interest rateChoosing a longer investment period often ensures a higher

interest rate

Retirement plans

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Pension plans Retirement plan funded, at least in part, by an employer or union Pension builds up throughout a worker’s career

Common types of pension plans

Defined-benefit plan Your company pays you a fixed amount at retirement. You know before you

retire what amount you will receive

Defined-contribution plan (profit-sharing plan) Your employer contributes a set amount to the plan each year. The amount

you receive at retirement depends on how much money has built up in the fund

401K plan You put a specific portion of your salary into the plan Employers often match this contribution, up to a specific percentage of

salary Funds in 401K plans are invested in stocks, bonds, & mutual funds Money that accumulates in your 401K plan is tax-deferred (don’t pay taxes

until you withdraw it)

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Individual retirement accounts (IRA)

Personal retirement account into which you can put a limited amount of money yearly

Earnings are not taxed until you retire

You can invest up to $2,000/yr in an IRA

Disadvantage – penalty is charged if you withdraw money before the age of 59 ½

Checking accounts

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Types of checking accountsRegular checking account

Often requires no minimum balanceRarely earn interestUsually charged a monthly fee

Managing your checking accountFill checks out completely & accuratelyEndorse (or sign) the back of checks that you are

depositing into your accountDirect deposit – electronic transfer of payment

from a company to an employee’s bank account If your employer uses direct deposit, your employer will

provide you with a voided check

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Keeping track of your accountOverdraw- when you withdraw more than depositBanks charge a high fee for overdrawn checksThey may also send a check to the business that

submitted it for payment, causing you embarassment

Check registerSmall booklet for tracking your accountChecks, deposits, fees, interest charges are recorded

in the register

ReconcileComparing statement with register (balancing

checkbook)

Other banking services

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Electronic funds transfer (EFT)

Transfer of money from one bank account to another by electronic means rather than cash

Examples include:ATM’sDebit cards

Online Banking

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Managing your money from your own computer or anywhere you can find online access

Saves time & paperwork

Safety precautions are in place to prevent computer hackers from accessing your personal account information (assigned a special ID & password)

Using Credit Wisely

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Credit card Issued by bank and allows the cardholder to charge amounts

in many different placesCredit limit

Maximum amount you can charge against your accountCharge accounts (Businesses)

Only used at that store…ex. Lowe’sLoans

Receive money from banks to make larger purchases (cars, mortgages)

Installment loansLoan is paid back in regular monthly installments

Loans are guaranteed by collateral (car, house)

Disadvantages of credit

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Finance chargesFee based on amount of money you owe Based on a particular interest rate

Overusing your credit card

Costs of creditAnnual feesFinance charges (APR)Grace period – interest not charged during this

period