Chapter 5

The Banking System

Ch. 5 Objectives

• Explain the purpose and use of checking accounts and savings accounts

• Prepare checks and deposit slips and maintain a checkbook register

• Prepare a bank reconciliation between checkbook register and bank statement

• Explain how you can grow your savings with compound interest

Slide 2

Financial Planning

Three main influences when considering financial planning:

• Life Situation

• Personal Values

• Economic Factors

Slide 3

Why Save and Invest Money?

• Allow your money to grow• Keep up with inflation • Earn interest on interest• Make your money work for you

Through:– Compounding interest– Investment growth

Slide 4

Time Value of Money

A dollar you receive in the future will be worth less than a dollar you receive today

Did You Know?

Small amounts saved and invested can easily grow into larger sums

– If a person saved a dollar each day by not having a candy bar or soda, they would save $365 per year, if the $365 was deposited into a certificate of deposit (CD) with 5% interest, the money could grow to nearly $400 in one year!

Cash Management

The daily routine of handling money to take care of individual or family needs

• Effective cash management includes having money available for:– Living expenses– Emergencies– Savings– Investing

Slide 7

Cash Management ToolsFinancial accounts used to assist with cash management

Tool Interest Special FeaturesChecking Account 1.5% •Checks used in place of cash

•Easy access

Saving Account 2.3% •Temporary holding place•Easy access

Money Market Account

2.6% •Minimum balance•Tiered interest rates•Limited withdrawals

Certificate of Deposit

4 – 5.4% •Penalty for early withdrawal•Not easy to access funds

Savings Bond 4 – 5.4% •Tax advantages•Not easy to access funds

Why Have Checking Account?

• Checking Account – A demand deposit account on which checks are drawn

•Check - a written order to a bank to pay a person or business.

Checking Accounts

Why open a checking account?– Safe place to keep money (Insured by the FDIC)– Easy to pay bills by mail (writing a check)– Easy access to money to make cash purchases

• Withdrawal money• Write checks against the account• Debit cards• Internet Banking

Checking Account Features• May be interest earning• Minimum balance requirements

– (Money Market Checking)• Charge transaction fees• Limited number of checks written

monthly• Reduces the need to carry large

amount of cash

Opening a Checking Account• What will I need?

– Money! ($50 or $100)– Personal information– Identification – Provide an official signature

• What will I be given?– Checkbook– Checkbook register– Debit card

Slide 13

Checkbook Register

5-1 Checking Accounts

A way to track your account transactions

Withdrawals and Deposits

• A withdrawal involves taking money from your account.o Writing checkso Using debit cards

• A deposit of money can be made to your account.o Endorsing checkso Direct deposit

Writing a Deposit Slip

Sally Smith500 Great StreetYourtown, NJ 55555

93-456-9540

Dollar Cents

CASH

CHECKS 154 . 01List Singly

Total From Other Side

SUBTOTAL 154 . 01

*Less Cash Received

NET DEPOSIT $ 154 . 01

Date: 9/2/2006

Sally Smith___________Sign here

Guardian Angel Banking423 South 15th

Yourtown, NJ 55555

0123456789 : 1234567890

Deposit Slip

(If you need some cash now)

Writing a Check

Sally Smith500 Great StreetYourtown, NJ 55555

93-456-954045086244786

503

Date: 9/6/2006

Pay to the

Order Of The Pizza Place $ 9.50

_Nine dollars_----------------------------------------------------------------50/100_ DollarsGuardian Angel Banking423 South 15th

Yourtown, NJ 55555

Memo __Pizza_ ___ Sally Smith____0123456789 : 1234567890 : 503

Endorsing A CheckSignature on the back of the check approving it for

deposit. Checks must be endorsed to be deposited*

Three Types• Blank• Restrictive• Special

*Safest way to endorse the check is to wait until going to the bank to deposit

Slide 17

Blank Endorsement

• Receiver of the check signs his/her name

• Anyone can cash or deposit the check after it has been signed

Slide 18

Endorse Here

X Sally Smith_________

DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE________________________________

Restrictive Endorsement

• More secure than blank endorsement

• Receiver writes “for deposit only” above his/her signature– Allows the check only to be

deposited, not cashed

Slide 19

Endorse Here

For Deposit Only – Acct. 654986

X Sally Smith_________

DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE_______________________________

Special Endorsement

• Receiver signs and writes “pay to the order of” (fill in person’s name)

• Allows the check to be transferred to a second party– Also known as a third-party

check

Slide 20

Endorse Here

Pay to the order of Mike Smith

X Sally Smith_________

DO NOT WRITE, STAMP OR SIGN BELOW THIS LINE. RESERVED FOR FINANCIAL INSTITUTION USE_______________________________

Check 21

• Check clearing for the 21st Century Act (check 21)– Current trend that changes how money is

withdrawn and deposited into accounts

How Check 21 Works

• Prior to Check 21– Paper checks physically moved from place to

place

• After Check 21– Paper checks scanned to computer to create a

“substitute check” (truncated)– Substitute check is transferred electronically from

place to place

Slide 22

Monthly Statement

• Comes from your bank

• Lists information about each transaction during the period

• Lists the current balance during the period

Reconcile a Bank Statement

Bank reconciliation - the process of adjusting the checkbook register and bank statement so they agree

• Consider the following:o deposits in transito outstanding checkso transposition errors

What Is the Purpose of Savings?

Savings Account - a demand deposit account for the accumulation of money

• It is a safe place to hold money to meet future needs and wants

• It pays interest at a low rate

5-2 Savings Accounts

Liquidity How quickly and easily an asset can be converted

into cash. Liquid assets are important for emergency situations

Investors should - Invest in both liquid and non-liquid tools

Liquidity Checking Account

Savings Account

Money Market Account

Certificate of Deposit(CD)

Savings Bond

IRA (401K)- Individual Retirement Account

Most Liquid

Least Liquid

Cash Management Tools

A financial account used to assist with daily cash management

Tool Interest Special Features

Checking Account 1.5% •Checks used in place of cash•Easy access

Saving Account 2.3% •Temporary holding place•Easy access

Money Market Account

2.6% •Minimum balance•Tiered interest rates•Limited withdrawals

Certificate of Deposit 4 – 5.4% •Penalty for early withdrawal•Not easy to access funds

Savings Bond 4 – 5.4% •Tax advantages•Not easy to access funds

Slide 29

Watch Your Money Grow!

5-2 Savings Accounts

How can you grow your savings?

Through…

• Principal

• Simple interest

• Compound interest

Computing Simple Interest –

Simple Interest – interest computed on principal once during a certain time period

• P = amount of money invested

• R = interest rate

• T = time period that money will be set aside

Simple Interest

Interest (I) = Principal (P) × Rate (R) × Time (T)

= $1,000 × 6% annual rate × 6 months

= $1,000 × 0.06 × 6/12 = $30

Computing Compound Interest- see Charts on page 165 and 166

Compound Interest – interest earned on both the principal and previously earned interest

Quarterly CompoundingAnnual Interest Rate 6%

Beginning Rate EndingYear Balance 6% Quarter Balance

1 2 3 4

1 $100.00 0.015 $1.50 $1.52 $1.55 $1.57 $106.14

2 $106.14 0.015 $1.59 $1.62 $1.64 $1.66 $112.65

3 $112.65 0.015 $1.69 $1.72 $1.74 $1.77 $119.57

Future Value of Money

Rule of 72

How long will it take to double my money?

• Divide annual interest rate into 72

Example: if you invest $50 at 6% interest, your money will grow to $100 in 12 years

( 72 ÷ 6 = 12 years)

Slide 33

Focus On . . .

The FDIC• Protects depositors of insured U.S. banks against

loss if the bank fails (up to $250k per account• Covers all types of deposits• Covers principal and accrued interest• Does not insure some items

o Examples: stocks, bonds, valuables• Insures deposits in different banks separately

5-2 Savings Accounts

Slide 34

Available Banking Services

• Safe deposit boxes

• Overdraft protection

• ATMs

• Cashier’s checks

• Financial advising

• Loans

• Internet banking

• Bank cards

5-3 Banking Services and Fees

Costs of Banking

• Monthly account fees• Nonsufficient fund fees• Special service fees

o Examples: stop payment, cashier’s check, money order

• ATM fees• Inactive account fees

What Are Consumer Responsibilities?• Maintain your balance.

o Avoid writing bad checks. o NSF means bounced check

• Monitor your account.o Reconcile your bank

account.• Know your rights.

o Be aware of consumer protection laws.

Slide 37

Success Skills

• Understand your position.• Understand the other party’s position.• Create a proposed solution.• Identify what is important and what you are

willing to give up.

5-3 Banking Services and Fees

NegotiatingIt is the process of reaching an agreement that benefits both parties.