Chapter 5

The Banking System

Slide 2

What Is the Purpose of a Checking Account?

5-1 Checking Accounts

• A checking account is a demand deposit account on which checks are drawn.

• Why do people have checking accounts?

• A check is a written order to a bank to pay a person or business.

Slide 3

What Is the Purpose of a Checking Account?

5-1 Checking Accounts

• To open a checking account, the account holder will need some money.

• Usually it only takes 50 to 100 to open an account.

• To open an account you will need to give up some personal information such as your social security number

• A bank account be individual or joint

Checkbook Register

• Account holders should verify all amounts deducted

• A checkbook register is a tool that can be used to tracking checking account transactions

• This register tracks both deposits and withdrawals.

• A deposit is adding money to a checking or savings account.

Slide 5

Checkbook Register

5-1 Checking Accounts

Slide 6

Making Withdrawals and Deposits

5-1 Checking Accounts

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

Writing Checks• Checks are legal transfers of money. • Postdated checks are checks written with a date that will occur

in the future. – Banks usually will not hold the check until the future and will

process them without regard to the date• Debit card: used to withdraw money from your checking

account• It allows you to make purchases by swiping the card through a

point of sale terminal at the stores counter• Debit card and credit cards do not have the same protection.

– Credit cards allow you to reverse and dispute charges.– If a debit card is stolen, funds can be withdrawn from your account.

• Check fraud and forgery

Slide 8

Making Withdrawals and Deposits

5-1 Checking Accounts

• A deposit of money can be made to your account.o Endorsement: signature

o Blank: signature of payee is written on backo Restrictive: restricts or limits use of checko Special: transfers the rights to cash the check to

someone elseo Direct deposit: wages or benefits are automatically

deposited into a bank accounto An electronic funds transfer uses a computer based

system to move money from the drawers account to the payees account

Slide 9

How Do You Reconcile a Bank Statement?

5-1 Checking Accounts

• Bank reconciliation is the process of adjusting the checkbook register and bank statement so they agree.

• The bank statement lists checks, withdrawals, deposits, service charges, interest, and fees.

• Consider deposits in transit, outstanding checks, and transposition errors.

Fees

• When a paper check is transformed into a digital image it is considered truncated.

• Fees can include monthly service fees (5 to 20) and transaction fees (20 cents)

Slide 11

What Is the Purpose of Savings?

• A savings account is a demand deposit account for the accumulation of money.

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

• Can be linked to checking account

5-2 Savings Accounts

Slide 12

How Can You Grow Your Savings?

5-2 Savings Accounts

• Principal is the money set aside on which interest is paid.

• Simple interest is computed once during a time period.

• Compound interest is earned on both principal and interest earned previously.

Slide 13

Computing Simple Interest

5-2 Savings Accounts

• P = amount of money set aside

• R = interest rate

• T = time 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

The Future Value of Money

• Saving a single sum

– Saving a lump sum for a period of time

• Saving on a regular basis

– Setting aside money regularly

– Annuity: when you set aside a fixed amount on a regular basis over time

• Rule of 72

– How long will it take my investment to double?

– Divide the annual interest rate into 72

– Invest $50 at 6%

– It will double in 12 years (72/6=12) Slide 14

Slide 15

Computing Compound Interest

5-2 Savings Accounts

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

Slide 16

What Are Your Savings Options?

5-2 Savings Accounts

• Money market accounts earn the market rate of interest.

• Certificates of deposit (CDs) pay a fixed interest rate for a time period.

• U.S. savings bonds pay a guaranteed minimum interest rate.

• Individual retirement accounts (IRAs) help you save for retirement.

Places To Save Your Money

• Online only banks: banks placed solely online.– Not always FDIC insured

• Brokerage Firms: generally pay higher on savings accounts– Not always FDIC insured

• International banks: Will become more commonplace as we get older and wont be so scary.

Slide 17

Slide 18

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

5-2 Savings Accounts

Slide 19

What Banking Services Are Available to Consumers?

• Safe deposit boxes– Secure container located in

the bank vault• Overdraft protection

– If you write a check the your account does not have enough to cover, bank will cover it

• ATMs• Cashier’s checks

– Check issued from bank funds

5-3 Banking Services and Fees

Slide 20

What Banking Services Are Available to Consumers?• Money Order

– Type of check used to pay bills or make payments for which money is guaranteed

• Financial advising

• Loans

• Internet banking

• Bank cards

5-3 Banking Services and Fees

Slide 21

What Are the Costs of Banking?

5-3 Banking Services and Fees

• Monthly account fees– Service fee for maintaining a

checking account ($10-$20)• Nonsufficient fund fees

– Bounced Checks: check that in not honored by a bank and returned to the payee’s bank because of nonsufficient funds is a bounced check

– Cost $30-$40 per check

Slide 22

What Are the Costs of Banking?

5-3 Banking Services and Fees

• Special service feeso Examples: stop payment, cashier’s check, money

order• ATM fees

– Fee from another bank to withdraw money – $2-$7

• Inactive account fees– Does not meet minimum account usage

requirements– $5-$15

Slide 23

What Are Consumer Responsibilities?

5-3 Banking Services and Fees

• 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.

Slide 24

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.