Personal Finance - PowerPoint PPT Presentation

Personal Finance

Chapter 5

Banking

• How to Manage Your Cash
• Daily Cash Needs
• Lunch, movies, gas, or paying for other activities
• Carry cash
• Go to an ATM
• Credit Card
• Know pros and cons
• ATM Fees
• Risk of overspending, avoid impulse buying, & overusing credit cards

5-1

• Sources of Quick Cash
• For times when you need more than you have:
• Savings or borrow money (loan)
• Each one comes with a trade off
• You may have immediate access to the funds you need but long term goals may be delayed
• College, Car, or starting a new business

5-1

• Types of Financial Services
• Savings
• Safe Storage of funds for future use
• Essential for any personal finance plan
• Time Deposit – Money that is going to be left in a financial institution for months or years.
• Payment Services
• Transferring money from personal account to a business or individuals for payment
• Checking Account – Most common used payment service
• Demand Deposit – Money you place in a checking account. Because you can withdraw it at any time.

5-1

• Types of Financial Services
• Borrowing (Credit)
• Short Term – using a credit card or personal cash loan
• Long Term – Apply for a mortgage or car loan
• Other Financial Services
• Insurance Protection
• Stocks, Bonds, Mutual Funds
• Income Tax Assistance
• Financial Planning Services

5-1

• Electronic Banking Services
• Direct Deposit
• An automatic deposit of net pay to an employee’s designated bank account
• Instead of paper check employees receive printed statement that lists deductions and information about their earnings.
• Saves, time, money and effort
• Automatic Payments
• On line bill paying
• Can pay each company through an online bill service
• Set up bill pay through your bank online.

5-1

• Electronic Banking Services
• ATM – Automated Teller Machine
• A computer terminal that allows a withdrawal of cash from an account
• Can also make deposits and transfer money
• Where are ATM’s located?
• To use you must apply for a debit card from your bank.
• A cash card that allows you to withdrawal money or pay for purchases from checking or savings account.
• ATM Fees –
• Compare before opening an account
• Use you banks ATM machines to avoid additional fees

• Plastic Payments
• Point of Sale Transactions
• Using debit card to make purchases at retail stores, restaurants or elsewhere
• Store Value Cards
• Prepaid cards that you use for:
• Bus or Subway
• School lunches
• Long distance phone calls

• Types of Financial Institutions
• Federal Deposit Insurance Corporation (FDIC): Protects deposits in banks
• Insures each account in a federally chartered bank up to $250,000 per account.
• Deposit Institutions
• Commercial Banks: A for profit institution that offers a full range of financial services.
• Checking, savings, and lending
• Savings and Loans: Financial Institution that traditionally specializes in Savings accounts and Mortgages.
• Mutual Savings Banks: Specializes in Savings accounts and mortgages
• Usually lower interest rates, on mortgages, than commercial banks & Higher interest rates for savings accounts.
• Credit Unions: Non profit financial institution that is owned by its members and organized for their benefit.
• Labor unions, college alumni association.

• Non-Deposit Institutions
• Life Insurance Companies
• Investment Companies
• Stocks, bonds, mutual funds
• Finance Companies
• Make high interest loans to consumers and small businesses that have below average credit ratings.
• Mortgage Companies
• Loans for home purchase.

• Regular Savings Account
• Ideal for frequent deposits and withdrawals
• Interest you earn is low compared with other savings plans
• Certificates of Deposit (CD’s)
• Savings alternative where money is left on deposit for a stated period of time to earn a specific rate of return.
• Money Market Accounts
• Savings account that requires a minimum balance and earns interest that varies from month to month
• May pay a penalty if balance goes below stated amount ($1000)
• U.S. Savings Bond
• Purchase from the Federal Government
• Not taxed on interest earned until you cash it.

• Evaluating Savings Plans
• Rate of Return
• The percentage of increase in the value of your savings from interest earned
• Compounding – The process in which interest is earned on both the principal (original amount) and previously earned interest.
• Truth in Savings – Financial institutions must inform you of the following:
• Fees on deposit accounts
• Interest Rates
• Annual Percentage Yield (AYP) – amount of interest that a $100 deposit would earn, after compounding, for one year.
• Terms and conditions of savings plan

• Evaluating Savings Plans
• Inflation
• Compare rate of interest with rate of inflation
• Tax Considerations
• Taxes reduce the interest earned on savings
• Liquidity
• Know what the penalties are for making withdrawals from your account early.
• Restriction and Fees
• Know all the restrictions and fees before opening an account

• Types of Checking Accounts
• Regular Checking Accounts
• Usually no minimum balance
• If there is a minimum balance make sure not to drop below it or you will be charged a monthly service charge.
• Interest Earning Checking Account
• Pay interest if you maintain a minimum balance.

• Evaluating Checking Accounts
• Restrictions
• Know what they are, most common is keeping a minimum balance
• Fees and Charges
• Monthly service charge
• Check printing, overdrafts, and stop payments
• Interest
• The way interest is calculates and frequency of compounding.
• Special Services
• Overdraft Protection – an automatic loan made to an account if the balance will not cover a check