Transcript Checking Account

Financial Instruments and
Institutions
CHAPTER PLAYLIST SONG:
“Material Girl” by Madonna
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
“There are three faithful friends – an old wife, an old
dog, and ready money” ~ Benjamin Franklin
 LO 4-1 Identify which bank products are the best fit
for the different personal finance life stages.
 LO 4-2 Use and efficiently manage checking and
share draft accounts.
 LO 4-3 Assess financial institutions and accounts to
determine which ones best meet your needs.
4-2
Aligning Financial Instruments with Personal Finance Life
Stages
 Dependent Life Stage (Age 0-15)
 Independent Life Stage (Age 16-24)
 Early Family Life Stage (Age 25-40)
 Empty Nest Life Stage (Age 41-65)
 Retirement Life Stage (Age 66+)
4-3
Dependent Life Stage (Age 0-15)
 Savings Accounts
 Certificate of Deposit (CD): An instrument
issued by a bank guaranteeing the payment of a fixed
interest rate for holding a sum of money until a
designated time in the future
 529 Plan: Funds set aside to go toward postsecondary education expenses
 Neb. 529 Plan
4-4
Prepaid Tuition / College Savings Plans
4-5
Independent Life Stage (Age 16-24)
 Checking Account – Debit Card
 Electronic (Internet) Banking and Bill Payment
Services
 Credit Cards
 Auto Loans
 Student Loans
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Federal Student Loans to Students
Federal Student Loans to Parents
Private Student Loans
4-6
Subsidized vs. Unsubsidized Federal Student Loans
4-7
Independent Life Stage (Age 16-24) (cont.)
 IRA (Individual Retirement Account): Funds
set aside to be withdrawn after age 59 1/2 without
penalty
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Traditional IRA: Contributions reduce your taxable income
- “pretax” contributions; money or interest earned grows taxdeferred until the year it is withdrawn
Roth IRA: Contributions are made after taxes on your
income. The money contributed grows tax-free and
withdrawals are usually tax -free
Cannot withdraw money from an IRA until you reach the age
of 59 ½ without penalty
4-8
Early Family Life Stage (Age 25-40)
 401(k) Plan: Employees can make tax-deferred
contributions to a trust and direct their funds to be
invested among a variety of choices, taking payment
when they retire or leave employment
 Mortgage: A loan secured to buy property by
putting a lien (legal claim) on the property that is not
released until the loan is paid
 Foreclosure: If the borrower fails to pay on the
mortgage loan, the lender can seek a court order sale
of the property. Money from the sale of the property
goes to paying off the debt of the mortgage
4-9
Types of Mortgages
 Borrow 90% of the value of the house or more and pay it
back over a period of up to 30 years
 Fixed rate – fixed interest rate for the life of the loan
 Adjustable rate – the interest rate on the mortgage
can adjust every 1, 3, 5, or 7 years depending on the
interest rate adjustment period you pick
 Balloon – the rate is fixed and the entire loan comes
due in 3, 5, or 7 years, depending on the term you pick
4-10
Early Family Life Stage (Age 25-40) (cont.)
 HELOC (Home Equity Line Of Credit): A line of
credit secured by a mortgage on a home; similar to a
credit card
 Investments

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Savings
Mutual Funds
Stocks
Bonds
Real Estate
4-11
Empty Nest Life Stage (Age 41–65)
 Continue with investments
 Savings
 Mutual Funds
 Stocks
 Bonds
 Real Estate (vacation home)
 Retirement
 Establish a trust fund for kids and start estate
planning
4-12
Retirement Life Stage (Age 66+)
 Reverse Mortgage: A loan secured by the value of
one’s home whereby the homeowner receives either a
monthly or a lump sum from the lender. The loan is
paid in full from the proceeds of the sale of the house
when the homeowner dies or moves out of the house.
4-13
Checking and Share Draft Accounts
 Checking Account: An account that allows the
holder to write checks against deposited funds
 Share Draft Account: An account held in a credit
union that operates like a checking account in a bank
 Commercial Bank: A financial institution that
accepts deposits and uses the funds to provide
private business and personal loans
 Demand Deposit Account: A transaction account
that is payable on demand
4-14
Checking and Share Draft Accounts (cont.)
 Credit Union: A non-profit depository institution
that serves members who have a common affiliation
 Negotiable Instrument: An agreement that is
dated, payable for a specific amount of money,
signed by the person who owns the account, and
payable to another party
4-15
Written Check Example
4-16
Sample Checking Account Statement
4-17
Sample Checking Account Register
4-18
Reconciling Your Checking Account
1.
Mark every checking account register item that
appears on your statement.
If there is an item on your statement that is not
listed in your check register, determine if it is
accurate. If the item is correct, add it in your
check register. If the item is incorrect, call your
financial institution to have it investigated.
4-19
Reconciling Your Checking Account
4-20
Types of Checking Accounts
 Basic Checking
 Free Checking
 Interest-Bearing Checking
 ATMs (Automated Teller Machines):
Machines that allow bank customers to perform
banking transactions without the aid of a teller
 Debit Card: Transfers money from a checking
account to the account of the retailer, usually
through the Visa/MasterCard network
4-21
Overdraft Protection
 Transfers money from savings to checking to
cover overdrafts
 Transfers money from a line of credit to
checking to cover overdrafts
 Benefits



Saves you money in overdraft fees and merchant fees
Saves you embarrassment
Saves you time
4-22
Financial Institutions
Financial Intermediaries: Financial Institutions
that accept money for deposits and then lend the
money for a profit
 Commercial Banks
 Credit Unions
 Savings Institutions
4-23
Finding the Right Financial Institution
 Commercial Banks
For profit
 Owned by stockholders
 Can be state regulated or regulated by the federal government
 Can be large (US Bank) or small (home-town bank)
 Specialize in loans to businesses, but offer a wide range of products
and services for consumers
 Credit Unions
 Not-for-profit
 Member owned
 Small compared to commercial banks
 Savings Institutions

4-24
Deposit Insurance
 Federal Deposit Insurance Corporation (FDIC)
 National Credit Union Administration (NCUA)
 Provide up to $250,000 of insurance to account holders if a
financial institution declares bankruptcy
 Based on ownership of account
 Funded by the banks or credit unions
 Insurance ceiling will revert back to $100,000 on January 1,
2014
4-25
Finding the Right Financial Institution
 Convenience
 Products & Service
 Cost
 Minimum Balance
 Transaction Costs
 Overdraft Fees
 Other Fees
4-26
Product and Service Comparison Checklist
4-27
Learn
 LO 4-1 Identify which bank products are the best fit
for different personal finance life stages.
 LO 4-2 Know how to balance and manage a
checking and share draft account.
 LO 4-3 Assess financial institutions and accounts to
determine which ones best meet your needs.
4-28
Plan & Act
 Create a timeline of your goals and match them with
the appropriate financial instruments (Worksheet
4.1)
 Bring your check register up-to-date (Worksheet 4.2)
 Reconcile your check register (Worksheet 4.2)
 Evaluate your local financial institutions to assess
the best option for you (Worksheet 4.3)
4-29
Evaluate
 Are you at the right financial institution for your
current and future financial needs?
 Do you have the right accounts and services for your
current and future financial needs?
 Are you on track to reach your goals?
4-30