39
Chapter 5 Banking Services and Managing Your Money 5-1
Chapter 5
Banking Services and
Managing Your Money
5-1
Chapter Objectives• Provide a background on money management• Compare the types of financial institutions• Describe the banking services offered by financial
institutions• Explain how to select a financial institution• Describe the savings alternatives offered by
financial institutions
5-2
Background on Money Management
• Money management: describes the decisions you make over a short-term period regarding income and expenses
• Focuses on maintaining short-term investments to achieve both liquidity and an adequate return on investments
5-3
Background on Money Management (cont’d)
• Liquidity
• Refers to your access to ready cash to cover short-term and unexpected expenses
• Sources of liquidity:• Chequing and savings accounts, credit cards and/or
lines of credit, emergency funds
• Credit cards and lines of credit
• Emergency funds
5-4
Types of Financial Institutions
5-5
• Depository institutions: Financial institutions that accept deposits from and provide loans to individuals and businesses
Types of Financial Institutions (cont’d)
• Non-depository institutions: Financial institutions that do not offer federally insured deposit accounts but provide various other financial services
5-6
Types of Financial Institutions (cont’d)
5-7
• Depository Institutions• Chartered banks: financial institutions that
accept deposits and use the funds to provide business and personal loans
Types of Financial Institutions (cont’d)
5-8
• Schedule I banks: domestic banks
• Schedule II banks: foreign banks that have subsidiaries operating in Canada
• Schedule III banks: subsidiaries of foreign banks that are restricted in their authority to accept deposits
Types of Financial Institutions (cont’d)
5-9
• Financial Conglomerates: financial institutions that offer a diverse set of financial services to individual firms
Types of Financial Institutions (cont’d)
5-10
Types of Financial Institutions (cont’d)
5-11
• Trust and Loan Companies: financial institutions that, in addition to providing services similar to a bank, can provide financial planning services, such as administering estates and acting as trustee in the administration of trust accounts
Types of Financial Institutions (cont’d)
5-12
• Credit Unions and Caisses Populaires: provincially incorporated co-operative financial institutions that are owned and controlled by their members
Types of Financial Institutions (cont’d)
• Non-Depository Institutions
• Finance and Lease Companies: specialize in providing personal loans or leases to individuals
• Mortgage Companies: specialize in providing mortgage loans to individuals
5-13
Types of Financial Institutions (cont’d)
• Investment Dealers: facilitate the purchase or sale of various investments by firms or individuals by providing investment banking and brokerage services
5-14
Types of Financial Institutions (cont’d)
• Investment banking services include:
• assisting corporations and governments price securities and find investors to obtain financing for activities such as building projects and expansion plans
• Advising and evaluating mergers & acquisitions
• Brokerage services include:
• Facilitating the trading of existing securities by creating a market for stocks and bonds by matching willing buyers and sellers
5-15
Types of Financial Institutions (cont’d)
• Insurance Companies: non-depository institutions that sell insurance to protect individuals or firms from risks that can incur financial loss (e.g. RBC Insurance)
5-16
Types of Financial Institutions (cont’d)
• Mutual Fund Companies: sell units to individuals and use the proceeds to invest in securities to create mutual funds (e.g. RBC Global Asset Management)
5-17
Types of Financial Institutions (cont’d)
• Payday Loan Companies• Provide single payment , short-term loans
• High cost
• Cheque Cashing Outlets• 3rd party cheques cashed for a fee (e.g. Money Mart)
• Pawnshops
5-18
Fringe Finance Institutions in Kamloops: 1998 - 2011
19
Banking Services Offered By Financial Institutions
5-20
Banking Services Offered By Financial Institutions (cont’d)
5-21
• Chequing Services• Chequing accounts allow you to draw on funds
by writing cheques
• Debit card: a card that is not only used for identification, but also allows you to make purchases that are charged against an existing chequing account
Banking Services Offered By Financial Institutions (cont’d)
5-22
• Monitoring Your Account Balance• Monitor your account balance by recording cheques
in your chequebook as you write them.
• Cheque register: a booklet in your chequebook where you record the details of each transaction you make, including deposits, cheque writing, withdrawals, and bill payments
• Alternatively, ask your bank to send you a monthly statement
Banking Services Offered By Financial Institutions (cont’d)
5-23
• Banks charge fees for NSF (not sufficient funds) cheques
• You may lose some credibility when writing a bad cheque
• Debit cards eliminate the possibility of NSF cheques
Banking Services Offered By Financial Institutions (cont’d)
5-24
• Overdraft Protection: an arrangement that protects a customer who writes a cheque for an amount that exceeds their chequing account balance
Banking Services Offered By Financial Institutions (cont’d)
5-25
• Stop Payment: a financial institution’s notice that it will not honour a cheque if someone tries to cash it
• You must provide accurate information
• Normally, a fee is charged for this service
Banking Services Offered By Financial Institutions (cont’d)
5-26
• No Interest• Funds in a chequing account earn little or no
interest
• You should not deposit more funds in your chequing than you think you may need
• Many financial institutions have introduced accounts that both earn interest and provide chequing services
Banking Services Offered By Financial Institutions (cont’d)
5-27
• Online Banking: a service offered by financial institutions that allows a customer to check the balance of bank, credit card, and investment accounts, transfer funds, pay bills electronically, and perform a number of administrative tasks
Banking Services Offered By Financial Institutions (cont’d)
5-28
• Credit Card Financing
• Allow you to finance your purchases through various financial institutions using MasterCard and Visa
• Safety Deposit Box: a box at a financial institution in which a customer can store documents, jewellery, and other valuables
• An annual fee is charged
Banking Services Offered By Financial Institutions (cont’d)
• Automated Banking Machine (ABM): a machine that individuals can use to deposit and withdraw funds at any time of day
• A convenience fee is charged when you use an ABM other than one from your own bank
• A service package may be purchased to reduce or eliminate regular account fees charged by your own bank
5-29
Banking Services Offered By Financial Institutions (cont’d)
• Certified Cheque: a cheque that can be cashed immediately by the payee without the payee having to wait for the bank to process and clear it
5-30
Banking Services Offered By Financial Institutions (cont’d)
• Money Orders and Drafts: products that direct your bank to pay a specified amount to the person named on them
• Travellers Cheque: a cheque written on behalf of an individual that will be charged against a large, well-known financial institution or credit card sponsor’s account
5-31
Selecting a Financial Institution• Convenience
• Deposit Rates and Insurance
• Fees
5-32
Savings Alternatives Offered By Financial Institutions
• Tax-Free Savings Account (TFSA)• A registered investment account that allows you
to purchase investments with after-tax dollars, without attracting any tax payable on your investment growth
• Withdrawals are tax-free
• Contribution room can be carried forward to subsequent years
• Withdrawals can be recontributed in subsequent years
5-33
Savings Alternatives Offered By Financial Institutions (cont’d)
• Savings Deposits• Pay interest on deposits
• Funds can normally be withdrawn at any time
• Term Deposits• Offered as short-term or long-term investments
• Offer slightly higher returns than savings deposits, but lower returns than GICs because they are cashable
5-34
Savings Alternatives Offered By Financial Institutions (cont’d)
• Guaranteed Investment Certificates (GICs): an instrument issued by a depository institution that specifies a minimum investment, an interest rate, and a maturity date
5-35
Savings Alternatives Offered By Financial Institutions (cont’d)
• Canada Savings Bonds (CSBs): short-term to medium-term, high-quality securities issued by the Government of Canada• Canada Premium Bonds (CPBs) offer a more
competitive interest rate and are cashable once a year
5-36
Savings Alternatives Offered By Financial Institutions (cont’d)
• Two types of CSBs:• Regular interest bond pays out interest every year
• Compound interest bond reinvests the interest earned
• Interest income earned every year is taxable, even if it is reinvested
• Money Market Funds (MMFs): accounts that pool money from individuals and invest in securities that have short-term maturities, such as one year or less
5-37
Savings Alternatives Offered By Financial Institutions (cont’d)
• Determining the Optimal Allocation of Short-Term Investments1. Anticipate upcoming bills and have adequate
funds in your chequing account
2. Estimate additional funds needed in the near future and invest in a liquid investment
3. Use remaining funds in a way that will maximize your return, considering your risk tolerance
5-38
Savings Alternatives Offered By Financial Institutions (cont’d)
• Your optimal allocation will be different than the optimal allocation for another individual
• Your decision on how to invest your short-term funds should account for your willingness to tolerate risk
5-39
