Chapter 5 Banking Chapter 5 Banking Your daily

Chapter 5 Banking

Chapter 5 - Banking Your daily cash needs will be determined by how you use your money Are you going to pay cash for all your purchases? Are you going to use a debit card/write checks? Are you going to use a credit card and pay off at the end of the month to consolidate your spending If you need quick money, for an emergency, how are you going to get it? Financial Services & Institutions Financial Services Almost every single financial institution offers the following services Savings Accounts (Share Accounts) Safe storage of money for future use (also called a time deposit, as it’s in for a period of time) Payment Services Allows for the transfer of money to businesses or individuals for payments This is a checking account, or an e-cash account, since it’s tied to checks or a debit card

Chapter 5 - Banking Borrowing Both short term and long term loans to buy large items or in case of emergencies Home Mortgages, Holiday Loans, etc… Other Services Potentially offered Insurance Securities (stocks/bonds/mutual funds) Tax Assistance Financial Planning Electronic Banking Services Much of the world has gone to digital banking, and these allow you to “bank” anytime you need Direct Deposit The automatic deposit of your paycheck into specified accounts Can split into multiple accounts to meet your savings/spending needs

Chapter 5 - Banking Automatic payments Have your bills paid automatically each month (for fixed expenses) You can also set these up through most of your accounts which you owe debts on Utilities, Credit Cards, Student Loans Automated Teller Machines (ATMs) Allows you to do most banking activities without going into the bank Deposit Checks, Withdraw Cash, Check balances (be aware of fees though!) Mobile Banking Most financial institutions have robust mobile/online banking things now where you can do almost everything

Chapter 5 - Banking Debit Cards A digital connection to your account that can be used to make purchases both offline and online Be careful if you lose your debit card Most banks will not hold you liable for purchases made fraudulently as long as you notify them in time The law states that in less than 60 days, the most you can be liable for is $500 After 60 days, your liability is unlimited.

Chapter 5 - Banking Purchases made with a debit card can be one of two types Online purchase You enter your PIN (Personal Identification Number) and make the transaction Money is taken IMMEDIATELY from your account (they check if you have it) Called a Point of Sale Transaction (POS) Offline purchase You use your debit card like a credit card (most have a VISA or Master. Card logo on them) Money is NOT taken immediately, instead it is run through VISA or Master. Card’s system If you don’t have the money in your account when it “clears” (anywhere from 1 minute to 3 days) you will be charged an overdraft fee ($30 or more)

Chapter 5 - Banking Gift Cards (or Stored Value Cards) Pre-paid cards, may be reloadable, that have a certain amount of money on them that you can spend May be VISA or Master. Card branded, so you can use them almost everywhere Sometimes have high fees associated with them $5 to load $50 onto a card is 10% interest!

Chapter 5 - Banking Types of Financial Institutions Protection of your money Most financial institutions have insurance on your money (don’t bank at one that doesn’t) FDIC – Federal Deposit Insurance Corporation Up to $250, 000 person/per account (so $500, 000 for a joint account) is guaranteed to be replaced in the event of bank failure NCUA – National Credit Union Association Same coverage as FDIC, but for Credit Unions

Chapter 5 - Banking Deposit Institutions – Types Commercial Bank – For profit company Some are nationwide (5/3, Chase, etc…) Some are local (1 st Source, Centier) Credit Union – Non-profit company Tend Savings to be smaller (United, Honor, TCU) & Loan Associations Tend to just focus on Savings accounts and Loans (no checking accounts) Mutual Savings Banks More focused on small borrowers & savers (rather than commercial loans/accounts)

Chapter 5 - Banking Savings Plans & Payment Methods Most banks allow you to save money in many different ways Regular Savings Accounts (Share accounts) Very Can little money needed to open ($5 is the norm) access your money at any time (very liquid) Usually pays a very low interest rate

Chapter 5 - Banking Certificates of Deposit (CD’s) Generally pay a higher interest rate than a savings account, but you must accept 3 key limitations to get the higher rate 1. Must leave your money in for a longer period of time (1 month – 6 years) 2. If you withdraw early, will pay a penalty (lost interest) 3. Have a higher minimum deposit (usually about $500) Rates For are different at different institutions, so shop around your emergency fund, you may consider a CD “ladder”, where you buy staggered 5 year CD’s (as you get a higher interest rate), but stagger them, so they mature at different times

Chapter 5 - Banking Money Market Accounts Your money will be “invested” by the bank in bonds and other investments Generally pays about the same interest as a CD Requires a higher minimum balance ($1, 000 - $2, 500 is typical) Gives you some check writing abilities out of the account These are also great for your emergency fund! U. S. Savings Bonds Can buy with your tax refund Very low risk, pays a little bit of interest You do not have to pay State and Local income taxes on them (still have to pay federal)

Chapter 5 - Banking Evaluating Savings Plans Rate of Return or Yield This is the percentage increase in value of your deposit, per year Over time, your interest will start earning interest. This is called compounding and it is why it is essential that you start saving EARLY Truth in Savings Act Banks are required to disclose all of the provisions of your savings accounts Any Fees they might have The Interest Rate The APY (Annual Percentage Yield)

Chapter 5 - Banking Inflation You could lock your money into a 5 -year CD at 2% interest, and if inflation is 3%, you are actually losing money! Be careful Tax Considerations Interest earned is taxed as income… can be a cause for concern if you have lots of savings or very high income Liquidity How accessible is your money if you need it?

Chapter 5 - Banking Types of Checking Accounts Regular Checking Accounts No Minimum balance May charge you a monthly fee to have account (most don’t anymore) Activity Accounts Very rare now Charge you for each check you write Interest Earning Checking You earn interest on the money in the checking account (about the same as savings) May have some requirements to get the interest This is the norm at most institutions. If you’re not getting interest on your checking account, find a new bank/credit union Overdraft protection Most banks will “loan” you money if you overdraft your account (write a check/use debit card without the money), VERY Expensive!!!!

Chapter 5 - Banking Using a Checking Accounts can be single or joint Writing a check Checks will include date, payee, amount (both in words and numbers), signature, and optionally the reason Stop-payment If you write a check and later don’t want it to be cashed, you can put a stop-payment on it, which will prevent it from being cashed ($20 -$30 charge to do this) Depositing a check You need to endorse the check by signing the back If you just sign, this is called a blank endorsement If you specify what can be done, it’s a restrictive endorsement (“For Deposit Only”) You can also do a special endorsement where you transfer the check to an organization or person To do this, you sign, then the other person signs to deposit the check

Chapter 5 - Banking Check Clearing The Bank or Credit Union can place a hold on the check (not allowing you to take the cash out of the account or spend it) until it clears (they check if the check writer has the funds). This can take between 2 and 5 days Tracking your checking account Bank Reconciliation – “Balancing your checkbook” Making sure all your transactions are recorded, and show up in the official bank statement that they will send you monthly

Chapter 5 - Banking Other Payments Certified Check Guaranteed Payment You pay the bank and the bank writes the check for you (so the person KNOWS you have the money) Used for large purchases (Down payment on a house, buying a car with cash) Cashiers Checks/Money Orders Backed by the bank or company (Western Union) Travelers Checks Used in other countries/traveling – Can be canceled and re-issued more easily than a debit/credit card