With over 11,000 banks, 2,000 savings and loan associations, and 12,000 credit unions, an extensive financial services market exists.
While some financial decisions relate directly to goals, your daily activities require the use of financial services for various business transactions.
Managing Cash-cash, check, credit card, or automatic teller machine (ATM) card are the common payment choices. While most people desire ease of payment, they must also consider fees and the potential for impulse buying and overspending.
Common mistakes made when managing current cash needs include
Overspending as a result of impulse buying and using credit cards.
Having insufficient liquid assets (cash, checking account) to pay current bills.
Using savings or borrowing to pay for current expenses.
Sources of Quick Cash. No matter how carefully you manage your money, there may be times when you will need more cash than you currently have available. To cope with that situation, you have two basic choices: liquidate savings or borrow.
Today things are different. Several million Americans bank or pay bills online. Computerized financial services provide fast, convenient, and efficient systems for recording inflows and outflows of funds.
Direct Deposit. Each year, more and more workers are receiving only a pay stub on payday. Their earnings are automatically deposited into checking or savings accounts.
A debit card or cash card, activates ATM transactions and is linked to a bank account. A debit card is in contrast to a credit card, since you are spending existing funds rather than borrowing additional money.
ATM Fees. ATM convenience can be expensive. As the opening case points out, a person who uses an ATM several times a week can incur service charges of several hundred dollars a year.
To reduce ATM fees, experts suggest that you
Compare ATM fees at different financial institutions before opening an account. Get the fee schedule in writing.
Use your own bank's ATM whenever possible to avoid surcharges imposed when using the ATM of another financial institution.
Withdraw larger cash amounts, as needed, to avoid fees on several small transactions.
Consider using personal checks, traveler's checks, credit cards, and prepaid cash cards when away from home.
Lost Debit Cards. A lost or stolen debit card can be expensive.
If you notify the financial institution within two days of losing the card, your liability for unauthorized use is $50. If you wait any longer, you can be liable for up to $500 of unauthorized use for up to 60 days; beyond that time, your liability is unlimited. However, some card issuers use the same rules for lost or stolen debit cards as used for credit cards: a $50 maximum.
You are not liable for unauthorized use if, for example, a con artist uses your account number to make a purchase. Reporting the fraud within 60 days of receiving your bank statement protects your right not to be charged for this transaction.
Point-of-Sale Transactions. Your financial institution may
issue two types of debit cards for these transactions.
An online card operates like an ATM card, with an instant transfer
of funds from your account. Online transactions require that you enter
your secret personal identification number (PIN) to authorize the transaction.
Offline card transactions are processed like credit card charges;
your PIN is not required. However, these transactions do not increase
the amount owed. Instead, the funds are deducted from your bank account
after a day or two.
Stored-Value Cards. Prepaid cards for buying telephone service,
transit fares, highway tolls, laundry service, library fees, and school
lunches are becoming very common.
Smart Cards "Smart cards," sometimes called "electronic
wallets," look like ATM cards; however, they also include a microchip.
This minicomputer stores prepaid amounts for buying goods and services.
In addition, the card stores data about a person's account balances, transaction
records, insurance information, and medical history.
Electronic Cash CyberCash Inc. ( www.cybercash.com)
is one of the main contenders in the market that is developing electronic
money. The company plans to create electronic replicas of all existing
payment systems-cash, checks, credit cards, and coins.
When making decisions about spending and saving, consider the trade-off between current satisfaction and long-term financial security. Common trade-offs related to financial services include the following:
Higher returns of long-term savings and investment plans may be achieved at the cost of low liquidity, the inability to obtain your money quickly.
The convenience of a 24-hour automatic teller machine or a bank branch office near your home or place of work must be weighed against service fees.
The "no fee" checking account that requires a non-interest-bearing $500 minimum balance means lost interest of nearly $400 at 6 percent compounded over 10 years.
You should evaluate costs and benefits in both monetary and personal terms to choose the financial services that best serve your needs.
Many types of businesses, such as insurance companies, investment brokers, and credit card companies, have become involved in financial services previously limited to banks. Banks have also expanded their competitive efforts by opening offices that specialize in financial services such as investments, insurance, or real estate.
Commercial Banks. A commercial bank offers a full range of financial services, including checking, savings, and lending, along with many other services. Commercial banks are organized as corporations, with individual investors (stockholders) contributing the capital the banks need to operate.
Savings and Loan Associations. While the commercial bank traditionally served businesses and individuals with large amounts of money, the savings and loan association (S&L) specialized in savings accounts and loans for mortgages. In recent years, savings and loan associations have expanded their services to include checking accounts, specialized savings plans, loans to businesses, and other investment and financial planning services.
Mutual Savings Banks. Another financial institution that serves individuals is the mutual savings bank, which is owned by depositors and, like the traditional savings and loan association, specializes in savings accounts and mortgage loans. Mutual savings banks are located mainly in the northeastern United States. Unlike the profits of other types of financial institutions, the profits of a mutual savings bank go to the depositors, paying higher rates on savings.
Credit Unions. A credit union is a user-owned, nonprofit, cooperative financial institution. Traditionally, credit union members had to have a common bond such as work, church, or community affiliation.
Life Insurance Companies-while the main purpose of life insurance is to provide financial security for dependents, many life insurance policies contain savings and investment features. In recent years, life insurance companies have expanded their financial services to include investment and retirement planning.
Investment companies, also referred to as mutual funds, offer banking-type services. A common service of these organizations is the money market fund, a combination savings-investment plan in which the investment company uses your money to purchase a variety of short-term financial instruments. Unlike accounts at most banks, savings and loan associations, and credit unions, investment company accounts are not covered by federal deposit insurance.
Making loans to consumers and small businesses is the main function of finance companies. These loans have short and intermediate terms with higher rates than most other lenders charge. Some finance companies have expanded their activities to offer other financial planning services.
Mortgage companies are organized primarily to provide loans to purchase homes.
Pawnshops make loans based on the value of tangible possessions such as jewelry or other valuable items. Many low- and moderate-income families use these organizations to obtain cash loans quickly. Pawnshops charge higher fees than other financial institutions.
Most financial institutions will not cash a check unless the person has an account. The more than 6,000 check-cashing outlets (CCOs) charge anywhere from 1 to 20 percent of the face value of a check; the average cost is between 2 and 3 percent. However, for a low-income family, that can be a significant portion of the total household budget.
Hundreds of banks now have "cyber" branches where customers
can check balances, pay bills, transfer funds, compare savings plans,
and apply for loans on the Internet.
Wells Fargo (www.wellsfargo.com)
and Bank of America (www.bankamerica.com)
were two of the first banks to do business on the Web. The Security
First Network Bank (www.sfnb.com)
was one of the first financial institutions to operate exclusively on
the Internet.
Access to all accounts and transactions is available 24 hours a day,
seven days a week.
The basic concerns of a financial services customer are simple:
Where can I get the best return on my savings?
How can I minimize the cost of checking and payments services?
Will I be able to borrow money when I need it?
The services the financial institution offers are likely to be a major factor. Personal service is important to many customers. Convenience may be provided by business hours, branch offices, automatic teller machines, and online service. Convenience and service have a cost, so be sure to compare fees and other charges at several financial institutions.
Regular savings accounts, traditionally called passbook accounts, usually involve a low or no minimum balance. Today, instead of a passbook showing deposits and withdrawals, savers receive a monthly or quarterly statement with a summary of transactions.
A regular savings account usually allows you to withdraw money as needed. However, these time deposits may require a waiting period of up to 30 days to obtain your funds.
Club Accounts.
Offered mainly at smaller financial institutions, are designed to meet a specific goal. Examples are vacation and Christmas club accounts in which you make a weekly deposit. A club account is a forced-savings method that usually pays very low interest.
Certificates of Deposit.
Higher earnings are commonly available to savers when they leave money on deposit for a set time period. A certificate of deposit (CD) is a savings plan requiring that a certain amount be left on deposit for a stated time period (ranging from 30 days to five or more years) to earn a specific rate of return. Most financial institutions impose a penalty for early withdrawal of CD funds. Financial institutions offer certificates of deposit with a variety of features:
Rising-rate or bump-up CDs
Stock-indexed CDs
Callable CDs
Global CDs
Promotional CDs
Current information about CD rates at various financial
institutions may be obtained at www.bankrate.com .
Interest-Earning Checking Accounts
These interest-earning accounts usually pay a low interest rate.
Money Market Accounts and Funds
To meet consumer demand for higher savings rates, a savings plan with a floating interest rate was created. A money market account is a savings account that requires a minimum balance and has earnings based on market interest rates.
Earnings on savings can be measured by the rate of return,
or yield, the percentage of increase in the value of your savings
from earned interest. For example, a $100 savings account that
earned $5 after a year would have a rate of return, or yield,
of 5 percent.
Compounding
The yield on your savings usually will be greater than the
stated interest rate. Compounding refers to interest
that is earned on previously earned interest. Each time interest
is added to your savings, the next interest amount is computed
on the new balance in the account.
The more frequent the compounding, the higher your rate of
return will be. For example, $100 in a savings account that
earns 6 percent compounded annually will increase $6 after a
year. But the same $100 in a 6 percent account compounded daily
will earn $6.19 for the year. Although this difference may seem
slight, large amounts held in savings for long periods of time
will result in far higher differences.
The rate of return you earn on your savings should be compared
with the inflation rate. When the inflation rate was over 10 percent,
people with money in savings accounts earning 5 or 6 percent were
experiencing a loss in the buying power of that money.
In general, as the inflation rate increases, the interest rates
offered to savers also increase. This gives you an opportunity
to select a savings option that will minimize the erosion of your
dollars on deposit.
Tax Considerations
Like inflation, taxes reduce interest earned on savings. For
example, a 10 percent return for a saver in a 28 percent tax bracket
means a real return of 7.2 percent
Remember that taxes usually are not withheld from savings and
investment income. Consequently, you may owe additional taxes
at year-end due to earnings on savings.
Liquidity
Some savings plans impose penalties for early withdrawal or
have other restrictions. With certain types of savings certificates
and accounts, early withdrawal may be penalized by a loss of interest
or a lower earnings rate.
Safety
Most savings plans at banks, savings and loan associations,
and credit unions are insured by agencies affiliated with the
federal government. This protection prevents a loss of money due
to the failure of the insured institution.
The Federal Deposit Insurance Corporation (FDIC) administers
separate insurance funds: the Bank Insurance Fund and the Savings
Association Insurance Fund. Credit unions may obtain deposit insurance
through the National Credit Union Association (NCUA). Some state-chartered
credit unions have opted for a private insurance program.
The FDIC insures deposits of up to $100,000 per person per financial
institution; a joint account is considered to belong proportionally
to each name on the account. For example, if you have a $70,000
individual account and an $80,000 joint account with a relative
in the same financial institution, $10,000 of your savings will
not be covered by federal deposit insurance ($70,000 plus one-half
of $80,000 exceeds the $100,000 limit).
Regular checking accounts usually have a monthly service charge
that you may avoid by keeping a minimum balance in the account.
Some financial institutions will waive the monthly fee if you
keep a certain amount in savings. Avoiding the monthly service
charge can be beneficial. For example, a monthly fee of $7.50
results in $90 a year. However, you lose interest on the minimum-balance
amount in a non-interest-earning account.
Activity accounts charge a fee for each check written and
sometimes a fee for each deposit in addition to a monthly service
charge. However, you do not have to maintain a minimum balance.
An activity account is most appropriate for people who write
only a few checks each month and are unable to maintain the
required minimum balance.
Interest-earning checking accounts, sometimes called NOW accounts
(NOW stands for negotiable order of withdrawal), usually require
a minimum balance. If the account balance goes below this amount,
you may not earn interest and will likely incur a service charge.
The share draft account is an interest-earning checking
account at a credit union. Credit union members write checks,
called share drafts, against their account balances.
A certified check is a personal check with guaranteed payment.
The amount of the check is deducted from your balance when
the financial institution certifies the check.
A cashier's check is a check of a financial institution.
You may purchase one by paying the amount of the check plus
a fee.
You may purchase a money order in a similar manner from
financial institutions, post offices, and stores.
Only one person is allowed to write checks on an individual
account. A joint account has two or more owners, with any authorized
person allowed to write checks if it is specified as an "or"
account. In contrast, an "and" account with two owners
requires the signatures of both owners on checks.
Both an individual account and a joint account require a signature
card. This document is a record of the official signatures of
the person or persons authorized to write checks on the account.
Making Deposits
A deposit ticket is the form you use for adding money to your
checking account.
Each check you deposit requires an endorsement-your signature
on the back of the check-to authorize the transfer of the funds
into your account. The following are three common endorsement
forms:
A blank endorsement is your signature.
A restrictive endorsement consists of the words for deposit
only, followed by your signature.
A special endorsement allows you to transfer a check to an
organization or another person.
Writing Checks
Before writing a check, record the information in your check
register and deduct the amount of the check from your balance.
The procedure for proper check writing consists of the following
steps:
Record the current date.
Write the name of the person or organization receiving the
payment.
Record the amount of the check in figures.
Write the amount of the check in words; checks for less than
a dollar should be written as "only 79 cents," for
example, with the word dollars on the check crossed out.
Sign the check in the same way you signed the signature card
when you opened your account.
Make a note of the reason for payment to assist with budget
and tax preparation.
A stop-payment order may be necessary if a check is lost or
stolen or if a business transaction was not completed in a satisfactory
manner. A verbal stop-payment order is valid for 14 days; a written
order stays in effect for six months. After that time, it may
be necessary to renew the order and fill out a new stop-payment
form.
Maintaining a Checking Account
Each month you will receive a bank statement, a summary of the
transactions for a checking account. This document reports deposits
made, checks paid, interest earned, and fees for items such as
service charges and printing of checks. The balance reported on
the bank statement probably will differ from the balance in your
checkbook. Reasons for a difference are checks that you have written
but have not yet cleared, deposits you have made since the bank
statement was prepared, interest added to your account, and deductions
for fees and charges.
To determine your true balance, you should prepare a bank reconciliation.
This report accounts for differences between the bank statement
and your checkbook balance. The steps you take in this process
are as follows:
Compare the checks you have written over the past month with
those reported as paid on your bank statement. Use the canceled
checks from the financial institution, or compare your check
register with the check numbers reported on the bank statement
(many financial institutions no longer return canceled checks
to customers). Subtract from the bank statement balance the
total of the checks written but not yet cleared.
Determine whether any recent deposits are not on the bank
statement. If so, add the amount of the outstanding deposits
to the bank statement balance.
Subtract any fees or charges on the bank statement and ATM
withdrawals from your checkbook balance.
Add any interest earned to your checkbook balance.
