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CHAPTER 5Banking Services:

Savings Plans and Payment Accounts

7ePersonal FinanceKapoor Dlabay Hughes

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Types of Financial Services Savings.

Time deposits in savings and in certificates of deposit.

Payment services. Checking accounts monies are

commonly called demand deposits. Automatic payments.

Borrowing for the short- or long-term. Other financial services.

Insurance, investment, real estate purchases, tax assistance, and financial planning are additional services you may use.

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Types of Financial Services (continued)

Asset management account. Also called a cash management account. Offered by brokers and financial institutions. Provides a complete financial services program

for a single fee and includes... A minimum balance. A checking account and an ATM card. A credit card Online banking. A line of credit for quick cash loans. Access to a variety of investments. www.schwab.com or www.americanexpress.com. 5-4


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Electronic Banking Services

Direct deposit of paychecks and other regular income.

Automatic payments transfer funds such as for utilities. Remember to deduct them from your register.

ATM access to obtain cash, check account balances, and transfer funds - check out the fees.

A debit card - takes money out of your account. Lost card liability $50-$500. 5-5


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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 that requires a $500 non-interest-bearing minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years.

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Changing Interest Rates and Decisions Related to Financial Services

The prime rate is what banks charge large corporations. See www.federalreserve.gov.

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. 5-7


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Types of Financial Institutions

Deposit type institutions Commercial banks are corporations that offer a full

range of services including checking, savings, lending and other services.

Savings and loan associations have checking accounts, specialized savings plans, loans and financial planning and investment services.

Mutual savings banks specialize in savings accounts and mortgage loans. They are owned by their depositors, with profits going back to depositors by paying a higher rate on savings.

Credit unions are user-owned, nonprofit and provide comprehensive financial services. 5-8


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Types of Financial Institutions

Non-deposit type institutions. Life insurance companies offer insurance plus

savings and investment features, with some offering financial planning and investing services.

Investment companies offer a money market fund on which you can write a limited number of checks.

Finance companies make short and medium term loans to consumers, but at higher rates.

(continued)

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Types of Financial Institutions Non-deposit type institutions (continued).

Mortgage companies provide loans to customers so they can purchase homes.

Pawnshops make loans on possessions but charge higher fees than other financial institutions. Used for quick cash.

Check-cashing outlets charge 1-20% of the face value of a check. 2-3% is average.

Title and payday loan companies - high interest.

(continued)

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Comparing Financial Institutions Basic concerns of a financial services customer.

Where can I get the best return on my savings?

How can I minimize the cost of checking and payment services?

Will I be able to borrow money when I need it?

See Appendix 5A on information on Using a Checking Account.

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Choosing a Financial Institution Consider

Services offered. Interest rates. Fees and charges. Financial advice. Safety (deposit insurance). Convenience. Locations. Online services. Special programs. 5-12


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Types of Savings Plans Regular savings accounts. Certificates of deposit. Require you to leave your money on deposit for a

set time period, otherwise you incur penalties. Several types to chose from. Consider all the earnings and all the costs.

Interest earning checking accounts. Money market accounts and funds.

Money market accounts are covered by the FDIC, but money market funds are not. 5-13


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Types of Savings Plans U.S. savings bonds.

Series EE sold at half of face value, with potential tax advantages if used to pay tuition and fees.

Series HH pays interest every six months. See www.savingsbonds.gov for rates.

Advantages Exempt from state and local income taxes. You don’t have to pay federal income tax on

earnings until you redeem the bonds.

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Evaluating Savings Plans Rate of return or yield.

Percentage increase in value due to interest. Compounding.

Interest on previous interest earned. Inflation - compare the rate of return on your savings

with the inflation rate. Restrictions and fees. Liquidity. Safety via FDIC and NCUA.

FDIC insures up to $100,000 per person per financial institution (see www.fdic.gov).

Tax considerations for interest earned.5-15


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After Tax Rate of Return

(1 - tax rate) x yield on savings (1 - .28) x .06 .72 x .06 4.32% This means that a person who is earning 6%

on their savings, but has a 28% marginal tax rate, is actually earning 4.32% rate of return after they pay income taxes on the interest.

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