Banking

SavingsChecking

Credit Cards

Types of Savings:Savings Account

Certificate of Deposit

Market Money Account

Consider Liquidity—how easily or quickly you can/want to withdraw your

money

Savings AccountsPutting money aside for short-term goals &

emergenciesInterest rates are usually about 1%

(maximum)Simple InterestCompound Interest

Pros: low risk, high liquidityCons: low interest rate

Money Market AccountSimilar to regular savings accountLimited check writing may be allowedHigher interest rate than savings accountHigher minimum balance to open and

maintain the account.

Pros: higher interest rate, high liquidityCons: minimum balance, limited withdrawals

Certificate of Deposit (CD)Money must remain in the account for a fixed

period of time (called the term)3 months – 5 years

Pay a penalty for withdrawing money earlyMinimum deposit

Pros: low risk, higher interest rateCons: low liquidity

Where does the interest come from?Banks pay interest to customers for the usage of

their money.Banks will take the majority of these deposits

(banks must keep a percentage of these deposits as reserves) and loan them out to other customers for mortgages, cars, school loans, businesses, etc…

The interest charged for these loans is greater than the interest that is paid to customers on their savings, money market accounts, and certificates of deposit.

This is the primary way that banks make money.

Final Thoughts on Savings Accounts:Individuals should use savings accounts, money market

accounts, and/or certificates of deposit to save for emergencies and/or short-term financial goals.

The money is safe and will be there when you need it.The interest rates paid on these accounts is typically

much lower than what you would receive by investing your money. That is why it is appropriate to invest your money for longer-term financial goals.

Also, the interest rates paid on these accounts typically does not keep pace with the rate of inflation.

Checking AccountsUsed for “every day purchases”

Usually do not pay any interest

Single vs. Joint Checking AccountsSingle : you are the only person with access to the accountJoint: you share the account and money in the account with

one or more personsBe careful about having joint checking accounts!

Pros: low risk, high liquidityCons: low/no interest rate, balance may be required to

avoid fees

Debit CardsDebit Cards: Money spent using your debit card is

withdrawn immediately from your checking account and sent straight to the company you are paying.

PIN (Personal Identification Number): is a secret code that only you should know that grants access to the money in your account at ATMs and merchants

Pros: Convenient, Allows you to carry less cash

Cons: Can easily lose track of account balance, Opens checking account up to fraud, Others can gain access to account if card is lost and/or if PIN is known

ChecksNever have your Social Security Number, Driver’s

License Number, or Phone Number printed on your checks

Many checks are now processed electronically

1. Date2. Payee Name 3. Amount in

numbers4. Amount written in

words5. Memo (optional)6. Payer Signature

Deposit SlipsAvailable in the back of your checkbook or at

the bank, used for making deposits at your bank

Direct DepositAutomatic deposit of wages into a consumer’s

bank accountConvenient and safer than paper check

deposits

FeesChecking Fee – fee for having a checking account open

Some banks offer free checking with direct deposit or certain minimum balances

Minimum Balance Fee – fee for failing to keep a certain minimum balance in your checking account

ATM Fee– fee charged for using another bank’s ATM

NSF Fee – non-sufficient funds (bounced check) – fee for over withdrawing on your account around $35

Other Bank Policies and Services

Automatic Withdrawals – bill payments are made automatically Best for fixed payments

Overdraft Protection *See next slide.

Overdraft ProtectionOverdraft “Protection”: Bank will cover payment

over the amount you have in your bank accountLike a short-term loan from the bank to cover a

purchaseExpensive fees to cover overdrafting

Overdraft Line of Credit: Purchase is covered by a line of credit.You must pay high interest

No overdraft protection: Your debit card will be declined

Any Questions?