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Financial Planning
Three main influences when considering financial planning:
• Life Situation
• Personal Values
• Economic Factors
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 2
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 5
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
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
Checking Account Features
• May be interest earning
• Minimum balance requirements
• 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
Checkbook Register
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
Endorsing A Check
Signature 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
Blank Endorsement
• Receiver of the check signs his/her name
• Anyone can cash or deposit the check after it has been signed
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
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
two-party check
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
Objectives:
1.Prepare a bank reconciliation
2.Explain how you can grow your savings with interest
Warm Up:
Explain the difference between the three different types of endorsement.
Write this down.
Quiz on Wednesday 11/19/12
Agenda:
1.Complete warm up2.Bank reconciliation P.P.3.Follow along notes4.Chapter 5 activity packet
Daily Information 11/15/12
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
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
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
Savings Bond
Most Liquid
Least Liquid
Watch Your Money Grow!
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
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)
Focus On . . .
The FDIC• Protects depositors of insured U.S. banks
against loss if the bank fails• 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
Available Banking Services
• Safe deposit boxes
• Overdraft protection
• ATMs
• Cashier’s checks
• Financial advising
• Loans
• Internet banking
• Bank cards
Costs of Banking
• Monthly account fees
• Nonsufficient fund fees
• Special service feeso 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.
• Monitor your account.o Reconcile your bank
account.• Know your rights.
o Be aware of consumer protection laws.
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