Unit 3 Banking Services FINANCIAL INSTITUTIONS SAVINGS ACCOUNTS

Unit 3 – Banking Services FINANCIAL INSTITUTIONS SAVINGS ACCOUNTS CHECKING ACCOUNTS

Financial Institutions Learning Objectives Describe the different types of financial institutions. Identify the benefits of different financial institutions.

Commercial Banks Full service bank, offers wide variety of services and products including checking, savings loans, credit cards, investments Insured by FDIC - $250, 000 per depositor

Savings and Loan Associations Focus mortgages and loans to customers that hold a savings account. Generally pay higher interest rate than commercial banks

Credit Unions Non-profit institution owned by the members (usually have a common bond) Insured by NCUA ($250, 000) Usually charge lower fees and loan rates

How to Choose Are you looking for low costs, low fees, and high returns on deposits (interest rates)? What services are important to you? Do you need loans, mortgages, or working capital for a small business? How important is convenience for you?

Savings Accounts LEARNING TOPIC #2

Learning Objectives Describe three different ways to save Understand how to determine which method of savings is right for you Understand calculate the two ways in which banks calculate interest on savings accounts Understand be able to describe the concept of “time value” of money. Apply the “Rule of 72” to a financial decision.

Savings Accounts The purpose of a savings account is to accumulate money in a safe place for some future use. Most savings accounts pay interest at a low rate. There are three basic types of savings accounts.

Savings Accounts Basic or Regular Savings Account Most . 01% - 1% common type of savings account, and the simplest to use. Savings account will typically have no minimum balance requirement, or a low one. Easy access to your money. Often offers a low interest rate.

Savings Accounts Money Market Account 1% - 2% Often receive a higher interest rate than you would with a basic savings account. May also have to keep a higher minimum balance (the amount differs from bank to bank). Easy access to the funds in your account, though the number of withdrawals you can make will probably be limited. In addition, you may have the ability to write checks, but the number you are allowed to write will also probably be limited.

Savings Accounts CD (Certificate of Deposit) 2% - 4% Must leave your money in the account for a specific amount of time, which varies by bank and type of CD, before you can have access to it. Usually have to pay penalty for withdrawing from a CD before its maturity date. Typically offer a higher interest rate than other types of savings accounts and will often be fixed.

Activity: Bank Scavenger Hunt (minimum opening deposits, monthly fees, current interest rates)

Computing Interest Most savings accounts earn a set amount of interest. The interest earned on savings accounts is taxable The amount of money you have in your account that the bank uses to calculate how much interest they need to pay you is called the principal. The higher the rate of interest (%), the more money the account earns.

Simple Interest Simple interest – When interest is computed on the principal alone for a certain time period. This method assumes that one interest payment will be made at the end of the period. Interest rates are usually given in yearly rates. The interest may be paid after a certain amount of months, in which case the months must be converted into a fraction of a year (shown as a decimal). Interest is only calculated on the amount the account holder has deposited, not on any of the earned interest that has been added to the account balance.

Simple Interest Simple interest formula I=PRT I = interest P = principal R = interest rate (in decimal form) T = time in years

I=PRT Interest = Principal (Rate)(Time) Time – time in years that we are calculating interest for. If interest is calculated for a certain amount of months, this number will be shown as a decimal to represent a fraction of the year. Ø Number of months we are calculating for divided by number of months in a year: 6 months (calculated twice a year) 6/12 =. 5 3 months (calculated 4 times a year - quarterly) 3/12=. 25

Simple Interest Example An account holder has a principal amount of $1000 in their savings account. Their annual interest rate is 6%, and it gets paid into their account every 6 months. Using the simple interest method, calculate the amount of earned interest after 6 months. Simple Interest (I) = Principal (P) x Rate (R) x Time (T) Interest = $1000 x 6% annual rate x 6 months Interest = $1000 x. 06 x. 5 Interest = $30

Compound Interest Compound interest - Interest earned is added to the principal, then interest will be calculated on the principal plus the interest that was earned earlier. Earning The interest on interest, aka - free money on free money!!! longer you save, the more you will amass in your account(s).

Compound Interest Table Example An account holder has $100 (principal) in their savings account, and the annual rate it 6%. The interest is compounded quarterly (4 times a year) for 3 years. An interest rate of 6% per year is 1. 5% each quarter (6 divided by 4). You must start a compound interest table by calculating the rate used for each period…annual interest rate/number of time periods in a year!!!

Compound Interest Table Example • An account holder has $100 (principal) in their savings account, and the annual rate it 6%. The interest is compounded quarterly (4 times a year) for 3 years. An interest rate of 6% per year is 1. 5% each quarter (6 divided by 4). • You must start a compound interest table by calculating the rate used for each period…annual interest rate/number of time periods in a year!!!

What is the FUTURE VALUE of your $ Compounding will make your money grow over time. That is why you need to think of your money not only in terms of what it can buy today, but also in terms of its potential future value. Future Value = the value that a sum of money today will be worth at some point in the future if invested for a return

What is the FUTURE VALUE of your $ Example--you Calculate want to spend $20, 000 on a car. the cost of that car not only in today’s dollars but by taking into account the potential future earnings of those dollars

The future value. . . If you invest $20, 000 in an account with an annual rate of return of 10% and never add another penny, how much do you think it could grow to in 20 years? Approx. $135, 000 of future savings! FV= PV x (1+i)n FV= PV x (1+i)N FV= $20, 000 x (1. 10)20 FV = future value PV= present value (principal/amount of money today) i = interest rate (in decimal form) N= number of in years that money is invested FV= $20, 000 x 6. 727 FV= $134, 540

Calculating Future Value Using Tables Question: How much will $1, 000 deposited in a savings account earning an annual interest rate of 6 percent be worth at the end of 5 years? (take the $ amount and multiply by the # found in the table) FV = $1, 000 x 1. 338 FV = $1, 338

Time Value of Money The time value of money is the relationship between…… Time Money Interest Rate And their effect on…… Earnings Growth

Time Value of Money The more time you have to save, the more money you will have at the end of the time period. The more money you have to save, the more money you will have at the end of that time period. The higher the interest rate you can earn, the more money you will have at the end of the time period. These are three most important factors in determining how much money will be available to meet your specific financial goals.

So what is Present Value? ? Present $100 2 value is the amount of money you have today > $100 future main factors: Investment opportunities and inflation What about future amounts that have a greater face value? So how do you compare the future values from values of today?

Present Value Example You won the lottery. Woohoo!! $1, 000 “If today or $1, 050, 000 in one year I accept the $1 M today is there an investment opportunity that could offer me returns of $50, 000 or more? ? ”

Present Value example FV = PV x PV = FV= $1, 050, 000 i= 10% N= 1 (1+i)N FV (1+i)N PV = 1, 050, 000 (1. 10)1 PV tables = $954, 545 < $1, 000

Why is PV and FV important? Powerful Aids If tools in financial decision making in calculating return on investment and annuities a company wants to expand operations in five years and need $50, 000, how much do they need to invest now?

Rule of 72 The Rule of 72 - helps you to figure out how to double your money! If you know how much interest you will be earning you can calculate how many years it will take to double your money. Example 1: 72 / 6% interest = 12 years If you’d like to double your money within a specific time frame, you can calculate what interest rate you will need. Example 2: 72 / 9 years = 8% interest 72 Interest Rate 72 Years Needed to Double Investment = Interest Rate Required

Rule of 72 Practice #1: If someone earns 3. 5% interest on their savings account, how long will it take them to double their money? 72 / 3. 5% interest = 20. 6 years #2: If someone has 12 years to save their money, what interest rate will they need in order to double their money? 72 / 12 years = 6%

Activity: Calculation Practice

Checking Accounts LEARNING TOPIC #3

Learning Objectives I can explain the purpose and uses of a checking account I can explain the purpose of and prepare a checkbook register I can write a check and prepare a deposit and withdrawal slip I can explain the purpose of and prepare a bank reconciliation

Checking Accounts Provide a safe place to keep money and allow users easy access to the money in the account. Checking accounts at banks are generally insured by the Federal Deposit Insurance Corporation (FDIC) up to the legal limit of $250, 000 per depositor per bank.

Checking Accounts Ways to get money out of a checking account Bank withdrawal – need withdrawal slip ATM withdrawal Automatic withdrawal – money is deducted from your account and transferred to another party. Check – a written order to a bank to pay the stated amount to the person or business named on the check.

Opening a checking account varies from bank to bank, two standard requirements are: Money Photo ID Some banks may also require: Social Security Card Savings account Once open, they will have you fill out a signature card: Signature card: Provides an official signature that the bank can compare to the signature written on checks.

Keeping a checkbook register Checkbook register – A tool that can be used to track checking account transactions. It can also provide a record of payments made for bills or purchases. This is the account holder’s record of all of their transactions. What to record in a checkbook register: Deposits Checks Withdrawals Fees Electronic transfers

Keeping a checkbook register

Writing Checks A check is a legal document used to transfer money. Payer – the person who writes the check Payee – the person or business the check is written to.

Steps for Check Writing 1. Enter date *Never Post Date – writing a date that will occur in the future 2. Enter the name of the Payee 3. Enter the amount of the check in numbers, immediately after the dollar sign 4. Write the dollar amount in words *Draw a line to the end if entire space is not used up *Use the word “and” to separate dollars and cents 5. Sign your name 6. Enter a note on the memo line state the purpose of the check (optional)

Rent ($850) is due to your landlord, Steve Adams, tomorrow 10/21 17 Steve Adams Eight hundred fifty and 00/100 ------------ November Rent 850. 00 Jillian Thomas

Tips for writing checks Always If use pen! you make a mistake, start over with a new check you have a check with a mistake on it, write “VOID” across the check in large letters.

Writing Checks Endorsement – Signature by payee or instructions by payer on the back of a check. 3 kinds of endorsements: 1. Blank – signature by payee 2. Restrictive – the purpose of the transfer is written before the signature of the payee Example – For Deposit Only 3. Special – The words “Pay to the order of” and the name of the person or company to which the check is being made out to are written before the signature of the payee.

Writing Checks Deposit Can – money added to an account be done in person at a bank or at an ATM. Must complete a deposit slip. List cash as one number List check amounts separately Subtract out any money that you would like to receive back from the teller. Include signature if you are requesting cash back.

Writing checks Automatic deposit – Money is electronically placed in an account (ex. Direct deposit) Bank statement – The bank’s record of all of the transactions on your account(s) for a period of one month. The bank will send it to you once a month, either by snail mail or email, to be reviewed by you for accuracy. Reconciliation – Comparing your checkbook register with the bank statement and making necessary adjustments, so that the two balances are the same.

Practice Checking Account Transactions… check, deposit slip, and check book register

Activity: Checking Account Transactions