Section 5.2 Review

Section 5.2 Review

Savings Plans and Payment Methods

Regular Saving Accounts

• A regular savings account is a type of bank or credit union account where you can store money securely while earning some interest.  Their safety and reliability make them a great option for storing cash you want available for short-term needs.

• Benefits: Low or no minimum balance. Your access to funds will remain extremely liquid. FDIC insured.  Can be linked to your primary checking account. Many institutions allow you to open more than one savings account.

• Drawbacks: Low rate of return. Ready availability of funds may tempt you to spend what you’ve saved. Only six outgoing transactions per statement cycle. The rate you’ll earn is generally variable.

Certificates of Deposit

• A certificate of deposit (CD) is a savings alternative in which money is left on deposit for a stated period of time to earn a specific rate of return.  This period of time is called the term.  The date when the money becomes available to you is called the maturity date.

• Benefits: Offers a higher interest rate. Pays a guaranteed, predictable rate of return. FDIC insured. Can help fend off spending temptations since withdrawing the funds early triggers a penalty.

• Drawbacks: Cannot be liquidated before maturity without incurring an early withdrawal penalty. Typically earns less than stocks and bonds can over time. Earns a fixed rate of return regardless of whether interest rates rise during the term.

Money Market Accounts

• A money market account is a savings account that requires a minimum balance and earns interest that varies from month to month.  The rates float, or go up and down, as market rates change.

• Benefits: Higher interest rates than a regular savings account. FDIC insured. Often include checkwriting and debit card privileges.

• Drawbacks: Minimum balance, typically $1,000. Many will impose monthly fees if the balance falls below the minimum. Limited transactions, usually 6 per month.

U.S. Savings Bonds

• A U.S. savings bond is a common type of government bond, which is a bond issued by a governmental body to help fund federal spending.

• Benefits: Low minimum deposit. They are among the safest types of investments, as they are endorsed by the federal government and are, therefore, risk-free. Free from state and local taxes.  Offers a way to save for future expenditures.

• Drawbacks: Lower rate of return when cashed in before bond reaches maturity date. Takes between 15 and 30 years to mature. You must wait at least 1 year after purchase before redeeming a savings bond. If you redeem a bond within the first five years of purchase, you forfeit the last three months’ interest as a penalty.

Multiple Choice

Which type usually offers check writing and debit card privileges?

• Regular Savings Account

• MMA

• CDs

• U.S. Savings Bonds

Multiple Choice

Which account is the most liquid?

• Regular Savings Account

• MMA

• CDs

• U.S. Savings Bonds

Multiple Select

Which accounts are better for long-term saving? Select all that apply.

• Regular Savings Account

• MMA

• CDs

• U.S. Savings Bonds

Rate of Return

• The rate of return is the percentage of increase in the value of your savings from earned interest.

  
  

•  $\frac{Total\ Interest\ Earned}{Original\ Deposit}=Rate\ of\ Return$  

• Rate of return is presented as a percent.  To change a decimal to a percent, multiply by 100

• Ex. 0.03 x 100 = 3%

Multiple Choice

You put $1500 in an account that earned $42 in interest after one year. what is the rate of return?

• 0.028%

• 2.8%

• 35%

• 3.5%

Solution

 $\frac{\text{42}}{1500}=0.028$  

 $0.028\ \times100\ =\ 2.8\%$  

Rate of return = 2.8%

Compounding

• Compounding is the process in which interest is earned on both the principal – the original amount deposited – and on any previously earned interest.     

• Compounding may take place every year, every quarter, every month, or even every day.

• The more frequently your balance is compounded, the greater your yield, or rate of return, will be.

• Compounding can have a great impact on large amounts of money that are held in savings account for long periods.

Multiple Choice

An account that is compounded yearly will have a HIGHER rate of return than an account that is compounded monthly.

• True

• False

Truth in Savings

• According to the Truth in Savings law, financial institutions have to inform you of the following information: 

  Fees on deposit accounts. Interest rates. Annual Percentage Yield (APY). Terms and conditions of the savings plan.

• he annual percentage yield (APY) is the amount of interest that a $100 deposit would earn, after compounding, for one year.  The higher the APY is, the better the return. 

• The APY helps you determine the amount you can expect to earn on your money. Since the APY is stated as a percentage and as an annual rate, you can use it to compare savings plans that have different rates and compounding frequencies.

Evaluating a Savings Plan

• Inflation: You should compare the rate of interest you earn on a savings with the rate of inflation.

• Tax Considerations: taxes reduce the interest earned on savings. To avoid this, you can look into tax-exempt and tax-deferred saving plans.

• Liquidity: Check the savings plans you are considering to determine whether they charge a penalty or pay a lower rate of interest if you withdraw your funds early. Liquid accounts are better for short-term saving.

• Restrictions and Fees: Be aware of any restrictions or fees, such as minimum balance or withdrawal fees.

Types of Checking Accounts

• Regular/Basic: With these accounts you can deposit and withdraw money from an ATM, write checks, pay bills, and make purchases using a debit card. You may have to pay a monthly fee or maintain a minimum balance.

• Free: These accounts are like basic checking accounts, except there are no recurring fees and there is no minimum balance requirement.

• Interest-Bearing: These accounts are a combination of checking and savings accounts.  They give you a small return every month for the balance in your account.

• Activity/Low-Balance: These accounts are for customers who cannot maintain a minimum balance but want to receive banking services.

Multiple Choice

You ALWAYS have to have a minimum deposit to open a checking account.

• True

• False

Evaluating a Checking Account

• Restrictions: The most common restriction is that you keep a minimum balance. Other restrictions may include the number of transactions allowed and the number of checks you can write.

• Fees and Charges: you may pay a monthly service charge as well as fees for check printing, overdraft, and stop-payment orders.

• Interest: Interest rates, frequency of compounding, and the way in which interest is calculated all affect an interest-bearing checking account.

• Special Services: Checking account services include using ATMs, online banking, and overdraft protection – an automatic loan made to an account if the balance will not cover a payment.

Check Clearing

• Check clearing is a system that ensures that the money you deposited in the account is available for withdrawal. 

• When you deposit a check into your account, your bank usually holds that money until it clears with the bank on which it was drawn.  During this time you cannot withdraw that money. 

• By law, institutions are limited to holding funds from checks drawn on local banks to no more than two business days, and from checks drawn on non-local banks to no more than 5 business days.  Check clearing rules vary by bank.

Multiple Select

Which of the following will you see on a the front of a check? Select all that apply.

• Printed name and address of depositor

• Signature of payee

• Payment amount in numerals and words

• Date

Using a Checking Account

• You can open an individual (one owner) or joint (two or more owners) checking account.

• When you receive a checkbook you will also receive a check register.  This is a small booklet that you use to record activity in your account.

• If a check is lost or stolen, or if you want to take back your payment for a business transaction, you may ask the bank to issue a stop-payment order - a request that a bank not cash a particular check.

• Banks can now transmit electronic images of checks through the check-clearing process due to the "Check 21" Act.

Making Deposits

• Endorse, or sign, the back of each check you want to deposit.  The endorsement is the signature of the payee, the party to whom the check has been written.

• Do not endorse a check until you are ready to cash or deposit it.  

• Sign your name exactly as it appears on the front of the check.

• Use a pen so that your signature cannot be erased. 

• There are different ways to endorse a check: blank endorsement, restrictive endorsement, and special endorsement.

Multiple Select

To balance your checkbook, you will need...

(Select all that apply)

• Check Register

• Debit Card

• Bank statement

• Savings Account

Keeping Track of Your Checking Account

• Each month your bank will send you a statement that shows your checking account activity for the month. Your bank statement will list: Deposits, checks you have written, ATM withdrawals, debit card charges, interest earned, and fees.

• If you find that the balance on your bank statement is different from the balance in your check register, you can fill out a bank reconciliation form - a report that accounts for the differences between the bank statement and the checkbook balance.  This process is called balancing your checkbook.

  
  

Balancing Your Checkbook

• 1. Compare the checks you have written during the month with those that are listed on the bank statement as paid, or cleared. List all outstanding checks - checks you wrote but have not cleared. Subtract the total amount of outstanding checks from the balance on the bank statement

• 2. Determine whether any recent deposits are not on the bank statement. If so, add the amounts of those deposits to the bank statement balance. 

• 3. Subtract fees and charges listed on the statement from your checkbook balance. 

• 4. Add interest on to your checkbook balance. 

Other Payment Methods

• Certified Check: A certified check is a personal check with a guaranteed payment.  The financial institution deducts the amount from your account when it certifies the check. 

• Cashier's Check/Money Order: You pay the amount of the check or money order plus a fee.

• Travelers Check: These checks allow you to obtain cash in a country's currency when you are away from home.  You sign each check once when you purchase the checks and a second time when you cash them. 

• Travelers Card: Prepaid travelers cards allow travelers to get local currency from ATMs throughout the world.

Multiple Select

How do banks make money? Select all that apply.

• Interest on loans

• Service charges and fees

• Interest on savings accounts

• Interchange fees

How Banks Make Money

• Banks make a profit from interest on loans, interchange fees, and service charges and other fees.

• The amount of deposits held by a bank affects its ability to loan money.  The amount of money that banks can lend is affected by the reserve requirement set by the Federal Reserve.  The reserve requirement is 3% to 10% of a bank's total deposit, including your deposit.

• Banking your money benefits you as well as others in the economic system.