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  1. 9 Managing Liquidity(Checking Accounts and Bank Savings)

  2. The Roles of Money Management and Savings • If you can’t manage your checking and savings accounts properly, you’ll have trouble managing more complicated investments, such as retirement accounts • Why maintain cash balances? • It’s expensive (because you’re forgoing interest income) • But we like the convenience Chapter 9

  3. The Roles of Money Management and Savings • Why savings are so important • Very liquid • Serves as an emergency fund • Allows us to achieve a certain goal (vacation, car down payment, etc.) • Americans save less than 2.5% of their income • Europeans save about 10%+ Chapter 9

  4. The Roles of Money Management and Savings • How much savings do you need? • Emergency fund • Should have amount equal to about 3 to 6 months of after-tax income • Additional amount depends on your goals (short- and long-term) • Do you want to buy a house soon? Need to save for the down payment • Have money automatically transferred to your savings account from each paycheck • Treat it as a fixed expense Chapter 9

  5. The Roles of Money Management and Savings • How fast your savings will grow depends upon: • What interest rate your savings earn (stated or nominal rate) • Frequency of compounding • How much money you deposit periodically • How your account balance is determined Chapter 9

  6. What Determines How Fast Your Savings Will Grow? • The impact of time on interest earned • If interest is being compounded (earning interest on interest), time can have a significant impact • The frequency of compounding • The more frequently money is compounded, the more often interest is paid—so money grows faster • Your effective interest rate is greater the more often interest is compounded • The treatment of deposits and withdrawals • Most financial institutions use the day-of-deposit-to-day-of-withdrawal method of computing interest • Interest is based on the exact number of days the money is in your account • Other methods include minimum balance (will earn less interest this way) Chapter 9

  7. Choosing a Financial Institution • Financial institutions include banks and credit unions • Factors influencing your decision • How important is convenience to you? • Do you choose a bank just because it’s right around the corner from your house? • Convenience is important, but nowadays with electronic banking it’s not nearly as important • Direct deposit, online-banking, epay, etc. Chapter 9

  8. Choosing a Financial Institution • What services do you expect? • Electronic banking • Safe deposit box • Do you want good, personal service where the tellers know you by name? • What insurance safeguards are present? • Most financial institutions (banks, credit unions) are federally insured up to $250,000 Chapter 9

  9. Choosing a Financial Institution • How much does it cost? • Before deregulation financial institutions offered many services for ‘free’ • Charged a basic fee for having an account • Provided free checks, help with reconciliation, etc. • Banks competed on the basis of service because basically all banks paid customers same interest rate on deposits • The spread between interest paid to customers and interest charged on loans was large • Since deregulation banks compete for deposits based on interest rates • Spread on interest paid vs. charged has narrowed • Banks have eliminated ‘free’ services and now charge fees (sometimes very HIGH fees) • Banks collect about $20 billion in fees (up 200% from 10 years ago) • Fees vary widely from bank to bank • Shop around Chapter 9

  10. What are the Major Financial Institutions? • Commercial banks (AKA full-service banks) • Offer: • Checking and savings accounts • Personal and business loans • Trust services • Safe-deposit boxes • Mortgage loans • Discount brokerage serves (maybe) • Convenient (Over 65,000 branch offices across U.S.) Chapter 9

  11. What are the Major Financial Institutions? • Savings Banks (S&Ls) • Traditionally serve consumers • Mortgage loans (make about 40% of all mortgage loans) • Today are more similar to commercial banks • Credit Unions • Cooperative venture owned by depositors and borrowers • Organized to serve specific groups of people • Non-profit so offer lower interest rates on loans, pay higher interest rates on deposits • Generally don’t want to take a great deal of risk Chapter 9

  12. What are the Major Financial Institutions? • Brokerage Firms • Offer central asset management accounts • Combines a checking account, debt/credit card, and a money market fund with a traditional brokerage account • Cash earned from dividends, interest, etc. is automatically swept into a money market account • You start earning interest on your money immediately • You can write a check (or use debit/credit card) to access your funds • Minimum investment required, which varies across brokerage firms • Check out minimum investment amount and fees (if any), customer service, choice of money market funds, credit/debit card features, margin rates Chapter 9

  13. Checking Accounts • Regular checking accounts • Some banks require a minimum balance (average is $500) which give you unlimited check writing privileges • Some banks charge no fee unless you exceed a certain number of checks per month • Banks can pay interest on checking accounts but rarely do • Special checking accounts • Require no minimum balance • Most banks charge a per check fee ($0.10-$0.15 per check) plus monthly maintenance fee • May be a good choice for college student if write only a few checks Chapter 9

  14. Checking Accounts • Overdraft Protection • If you write a check for an amount greater than the balance in your checking account it is still covered • You pay a fee (essentially interest on a short-term loan) • NOW Accounts (Negotiable Order of Withdrawal) • Combined checking and savings account • Pays interest on balance (but lower rate than savings account) • Can write checks (actually are authorizations to take money from savings) • Minimum balance of about $1,000 • If balance drops below the minimum a fee is charged • Shop around! • NOW accounts at credit unions are called Share-Draft Accounts Chapter 9

  15. Checking Account Basics • A checking account allows you to write checks to make payments. • A check is a written order to a bank to pay the amount stated to the person or business named on it. • A checking account is also called a demand deposit, because the money may be withdrawn at any time—that is, “on demand.” Chapter 9

  16. (continued) Checking Account Basics • Checks follow a process through the banking system. • The payee cashes your check. • The bank that cashed the check returns it to your bank. • Your bank withdraws the money from your account and sends it to the other bank. • Your bank then stamps the back of your check, indicating that it has cleared. • A canceled check is a check that has cleared your account. Chapter 9

  17. (continued) Checking Account Basics • Many banks no longer send paper checks to other banks for processing. • To make processing faster and more efficient, they exchange check information electronically by transmitting an image of the check, called a substitute check. • A substitute check can be used in the same way as an original check. Chapter 9

  18. (continued) Checking Account Basics • You must also maintain enough money in your account to cover all the checks you write. • A check written for more money than your account contains is called an overdraft. • A bank that does not honor a check usually stamps the check with the words “not sufficient funds” (NSF) and returns the check to the payee’s bank. • When this occurs, the check has bounced. • Your bank will charge you a fee for each NSF check processed. Chapter 9

  19. (continued) Checking Account Basics • Floating a check is writing a check and hoping to deposit money to cover it before the check clears. • Floating a check is very risky because today’s electronic systems allow checks to process very quickly. • Floating a check is illegal in most states. Chapter 9

  20. Checking Account Advantages • Convenience • Safety • Built-in record keeping system • Access to bank services Chapter 9

  21. Opening a Checking Account • Signature authorization form • Initial deposit Chapter 9

  22. Parts of a Check CheckNumber Name and Address of Maker Date ABA Number Payee Numeric Amount WrittenAmount Memo Signature Account and Routing Numbers Chapter 9

  23. Using Your Checking Account • Writing checks • Paying bills online • Making deposits • Using a checkbook register • A checkbook register is a booklet used to record checking account transactions. Chapter 9

  24. Bank Reconciliation • The process of matching your checkbook register with the bank statement is known as bank reconciliation. Chapter 9

  25. Reconciling Your Checking Account 1. Write ending balance from bank statement. 2. Add credits or deposits not on statement. 3. Total lines 1 and 2. 4. List checks, withdrawals, and debits made but not shown on statement. 5. Total outstanding checks/debit transactions. 6. Subtract line 5 from line 3.(Result should match checkbook balance) Chapter 9

  26. Endorsing Checks • A check generally cannot be cashed until it is endorsed. • To endorse a check, the payee signs the top part of the back of the check in ink. • There are three major types of endorsements. • Blank endorsement • Special endorsement • Restrictive endorsement Chapter 9

  27. Blank Endorsement • A blank endorsement is the signature of the payee written exactly as his or her name appears on the front of the check. Chapter 9

  28. Special Endorsement • A special endorsement, or an endorsement in full, is an endorsement that transfers the right to cash the check to someone else. Chapter 9

  29. Restrictive Endorsement • A restrictive endorsement restricts or limits the use of a check. Chapter 9

  30. Types of Checking Accounts • Joint accounts • Special accounts • Standard accounts • Interest-bearing accounts • Share accounts Chapter 9

  31. Banking Services and Fees GOALS • Describe banking services available at most financial institutions. • List and explain fees charged by financial institutions for their services. Chapter 9

  32. Banking Services • A full-service bank is one that offers every possible kind of service, from savings and checking accounts to credit cards, safe deposit boxes, loans, and ATMs. • Other services commonly offered are online banking, telephone banking, certified checks, cashier’s checks, money orders, and debit cards. • Most banks offer FDIC (Federal Deposit Insurance Corporation) insurance, which protects the deposits of customers against loss up to $250,000 per account. Chapter 9

  33. Guaranteed-payment Checks • A certified check is a personal check that the bank guarantees or certifies to be good. • A cashier’s check, also called a bank draft, is a check written by a bank on its own funds. • Traveler’s checks are check forms in specific denominations that are used instead of cash while traveling. Chapter 9

  34. Money Orders • Banks sell money orders to people who do not wish to use cash or do not have a checking account. • A money order is like a check, except that it can never bounce. • There is a charge for purchasing a money order. • You also can purchase money orders through the post office and local merchants. Chapter 9

  35. Debit Cards • A debit card is a plastic card that deducts money from a checking account almost immediately to pay for purchases. • The debit card is presented at the time of purchase. • When a debit card is used, the amount of the purchase is quickly deducted from the customer’s checking account and paid to the merchant. Chapter 9

  36. Bank Credit Cards • You can apply to a full-service bank for a bank credit card, such as a Visa or MasterCard. • If you meet the requirements and are issued a card, you can use it instead of cash at any business that accepts credit cards. • Banks offering national credit cards usually charge both an annual fee for use of the card and interest on the unpaid account balance. Chapter 9

  37. Overdraft Protection • Overdraft protection allows you to cover checks or withdrawals up to a specified amount, usually between $100 and $1,000, depending on the typical balance in your account. • With overdraft protection, your checks will be covered even if you have insufficient funds in your checking account. Chapter 9

  38. Automated Teller Machines • An Automated Teller Machine is often called an ATM. • To use ATMs, you must • Have a card that is electronically coded • Know your personal identification number (PIN) • Getting cash is a common ATM transaction. • Using a debit card you can withdraw cash from your checking or savings account. • Using a Visa or MasterCard, you can receive a cash advance electronically. Chapter 9

  39. Online and Telephone Banking • Online and telephone banking services give you the ability to access your accounts from a computer or telephone anytime, day or night. • Services include: • Transferring money from one account to another • Paying bills by authorizing the bank to disburse money • Getting account balances • Seeing which checks have cleared and which deposits have been entered Chapter 9

  40. (continued) Online and Telephone Banking • Most banks also allow and encourage electronic transfers of money. • An electronic funds transfer (EFT) uses a computer-based system that enables you to move money from one account to another without writing a check or exchanging cash. Chapter 9

  41. Stop Payment Orders • A stop-payment order is a request that the bank not honor a specific check. • The usual reason for stopping payment is that the check has been lost or stolen. • Most banks charge a fee for stopping payment on a check. Chapter 9

  42. Safe Deposit Boxes • Financial institutions offer customers a safe deposit box to store valuable items or documents. • They charge a yearly fee based on the size of the box. • Keeping important documents and other items in a safe deposit box ensures that the items won’t be stolen, lost, or destroyed. Chapter 9

  43. (continued) Safe Deposit Boxes • Examples of items commonly kept in a safe deposit box include • Birth, marriage, and death certificates • Deeds and mortgage papers • Stocks and bonds • Jewelry • Coin collections Chapter 9

  44. Loans and Trusts • Financial institutions also make loans to finance the purchase of cars, homes, home improvements, vacations, and other items. • Banks can also provide advice for estate planning and trusts. • Banks can act as trustees of estates for minors and others. • A trustee is a person or an institution that manages property for the benefit of someone else under a special agreement. Chapter 9

  45. Notary Public • A notary public verifies a person’s identity, witnesses the person’s signature on a legal document, and then “notarizes” the signature as valid. • Financial institutions typically have a person on their staff who is a notary public. • This person provides notary services for account holders, usually without charge. • For noncustomers, however, there is typically a small fee. Chapter 9

  46. Financial Services • Purchasing or selling savings bonds • Investment brokerage services Chapter 9

  47. Bank Fees • Banks charge fees to their customers to help cover their operating costs. • The best way to avoid fees is to choose the right kind of account. • Shop around and find the account that is right for you. • Be aware of the rules of your account, so that you don’t violate them and be required to pay high fees. Chapter 9

  48. Loan fees Trustee fees Check cashing fees Per-check fees Monthly service fees Overdraft fees NSF check charges ATM transaction fees Safe deposit box fees Teller service fees Minimum balance fees Fees for guaranteed-payment checks Notary service fees Online bill payment fees Fees to return canceled checks Examples of Bank Fees Chapter 9

  49. Consumer Loans • Car loans • Mortgage loans • College loans • Home improvement loans • Unsecured personal loan Chapter 9

  50. Bank Credit Cards • Allow consumers to purchase items in lieu of cash or check • Can also get a cash advance • Even pay your taxes Chapter 9