Banking

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Banking
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Types of Financial Institutions

• Commercial Banks (example Bank of America)
• Owned by shareholders and operated for profit
• Mutual Savings Banks (example Washington
  Mutual)
• Unlike commercial banks, savings banks have no
  stockholders the entirety of profits beyond the
  upkeep of the bank belongs to the depositors of
  the mutual savings bank.
• Savings and Loans (example Washington Federal
  Savings)
• Originally specialized in providing funds to home
  buyers, but now provide a variety of financial
  services
• Some are owned by shareholders and operate for
  profit, while others are owned by their
  depositors
• Credit Union (example SELCO)
• Non-profit financial institution owned by its
  members.
• The members have a common bond, such as working
  for a certain employer, belonging to a labor
  union, or living in a certain region
• Internet Bank (example ETrade Bank)
• Operates exclusively over the Internet using
  online banking. Since they do not have to
  maintain branch offices or employ tellers, they
  operate efficiently and can pass along their
  savings to customers.

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Choosing a Financial Institution

• Safety
• FDIC (Federal Deposit Insurance Corporation)
  insures savings, checking, and other deposit
  accounts in most commercial banks, mutual savings
  bank, and savings associations should the
  institution fail.
• Effective October 3, 2008, the basic limit on
  federal deposit insurance coverage was
  temporarily increased from 100,000 to 250,000
  per depositor through December 31, 2009. On
  January 1, 2010, FDIC deposit insurance for all
  deposit accounts will return to at least 100,000
  per depositor.
• Coverage for Individual Retirement Accounts
  (IRAs) is 250,000 per depositor.
• Deposit insurance for credit unions is
  administered by the National Credit Union
  Association (NCUA)

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Choosing a Financial Institution, Cont.

• Services and convenient access
• Are the services you want offered by the
  institutionsuch as loan services or online
  banking
• Are there branches near you with convenient hours
  of operation?
• Does the bank have online banking services such
  as bill pay or account transfers?
• Rates and Fees
• Compare interest rates, fees, and special account
  requirements
• Some institutions offer better terms if you
  maintain a certain balance or combination of
  balances

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Saving Basics

• Savings is the portion of current income not
  spent on consumption.
• Savings accounts provide an easily accessible
  place for people to store their money to meet
  daily living expenses and to have money for
  emergencies.
• Financial experts recommend individuals keep a
  minimum of three to six months of salary in a
  savings account.

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Saving vs. Investing

• Saving
• The portion of current income not spent on
  consumption.
• Place to store money for daily expenses and for
  emergencies.
• Liquidity is how quickly and easily an asset can
  be converted into cash. In an emergency, cash
  needs to be easily accessible. Savings accounts
  are more liquid than investment accounts.
• Generally yield a low interest rate, often
  barely meeting inflation.

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Saving vs. Investing, Cont.

• Investing
• The purchase of assets with the goal of
  increasing future income.
• Develop and implement a savings plan before
  beginning an investment.
• Investments are not liquid as savings.
• Rate of return, or annual return on the
  investment, varies, but is usually higher.

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Reasons People Should Save

• Emergencies It is recommended individuals have
  a minimum of three to six months of salary in
  savings accounts for emergencies. Examples of
  emergencies can include illness, losing a job, or
  immediate need to replace a large item such as a
  washing machine.
• Expenses Savings accounts can be used as a
  budgeting tool to manage monthly expenses.
• Future Purchases Money can be used to meet
  future goals such as a college education, new
  car, down payment on a home, or a new stereo.
• Investing After an individual has established a
  savings account, money should be invested monthly
  for future income.

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70-20-10 Rule

• Spend 70 of money you earn
• Save 20 of money you earn
• Invest 10 of money you earn

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Savings Options

• Regular Savings Account (or Share Account for a
  credit union)
• Major advantage is high liquidity (the ability of
  an asset to be converted to cash), but the
  tradeoff is lower interest.
• Are there service fees associated with a maximum
  number of withdrawals during a certain period of
  time?
• Is there a monthly fee if your balance falls
  below a set minimum?

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Savings Options, Cont.

• Money Market Account
• It is a combination savings-investment plan in
  which money deposited is used to purchase safe,
  liquid securities like government treasury-bonds.
• Money market accounts usually pay higher
  interest, have higher minimum balance
  requirements (sometimes 1000-2500), and only
  allow three to six withdrawals per month.
• Another difference is that, similar to a checking
  account, many money market accounts will let you
  write up to three checks each month. 

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Savings Options, Cont.

• Certificate of Deposit
• A deposit that earns a fixed interest rate for a
  specified length of time.
• Requires a minimum deposit
• The interest rate is usually higher than a
  regular savings account because CDs are less
  liquid
• If you take out any part of your money early,
  there is usually an early withdrawal penalty.
• A CD has a set maturity date the date on which
  an investment becomes due for payment. Within a
  stated number of days after the maturity date,
  most CDs will renew automatically.
• Instead of just allowing the interest to
  accumulate to maturity, some institutions will
  periodically send the interest in the form of a
  check or deposit the interest into a regular
  savings account.

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Saving Regularly

• Direct deposit of paychecks
• Automatic payroll deductions

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Simple Interest

• Simple interest is interest that is paid only on
  the principal -- the amount of the deposit
  remains the same, and the amount of interest is
  paid to the depositor at the end of each interval
  of time.
• For example, suppose the deposit is 1000, the
  yearly rate of interest is 6 percent, and the
  payment intervals are quarterly.
• If this is simple interest, the financial
  institution will pay the depositor 15 at the end
  of each quarter, for a total of 60 interest
  earned for the year (6 percent of 1000). The
  total assets of the depositor after one year will
  be 1060.

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Compound Interest

• Compound interest is paid on the principal and
  the previously accrued interest.
• The more frequently the interest is compounded,
  the greater the interest earned.
• Compound Interest Formula FV P(1i/n)tn
• Where FV Future Value
• P principal i Interest rate
• n intervals t time periods

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Compound Interest Example

• Example Alan invested 10,000 for five years
  at an interest rate of 7.5 compounded quarterly.
• P 10,000i 0.075 (7.5 as a decimal)
• n 4 (quarterly)
• t 5 (years)
• Therefore, the amount, FV, isFV 10,000 (1
  0.075/4)20 10,000 x (1 0.01875)20
• 10,000 x (1.01875)20
• 14,499.48
• So at the end of five years Alan would earn
  4,499.48 (14,499.48 - 10,000) as interest.