Types of Savings: Savings Account Certificate of Deposit Market Money Account Consider Liquidity—...
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Transcript of Types of Savings: Savings Account Certificate of Deposit Market Money Account Consider Liquidity—...
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?