Case study
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Chap5.docx5 Managing Checking and Savings Accounts
YOU MUST BE KIDDING, RIGHT?
Kayla Patterson realized about two weeks ago that she had misplaced her debit card. At first she was not worried because she reasoned that it had to be somewhere at home. Last week she received her account statement. She looked at her statement today and found that $200 had been withdrawn from her account on five different occasions ($1000 total). She immediately called her bank to report the fraudulent withdrawals. How much of this money will Kayla lose because of the unauthorized withdrawals?
A. $0
B. $50
C. $500
D. $1000
The answer is C, $500. Because Kayla waited more than two days after realizing the card was lost to report it to her financial institution, federal law states that she is liable for the first $500 in unauthorized uses. If she had notified the bank within two days, her loss would have been only $50. If Kayla failed to notify her bank of the loss within 60 days, the law states that she would lose all of the money taken fraudulently. Immediately report a lost debit card!
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
Identify the goals of monetary asset management and sources of such financial services.
Understand and employ the various types of accounts available to meet the goals of monetary asset management.
Describe your legal protections when conducting monetary asset management electronically.
Discuss your personal finances and money management more effectively with loved ones.
WHAT DO YOU RECOMMEND?
Nathan Rosenberg and Alyssa Adams are to be married in two months. Both are employed full time and currently have their own apartments. Once married, they will move into Alyssa’s apartment because it is larger. They plan to use Nathan’s former rent money to begin saving for a down payment on a home to be purchased in four or five years. Nathan has a checking account at a branch of a large regional commercial bank near his workplace where he deposits his paychecks. He also has three savings accounts—one at his bank and two small accounts at a savings and loan association near where he went to college. Nathan pays about $30 per month in fees on his various accounts. In addition, he has a $10,000 certificate of deposit (CD) from an inheritance; this CD will mature in five months. Alyssa has her paycheck directly deposited into her share draft account at the credit union where she works. She has a savings account at the credit union as well as a money market account at a stock brokerage firm that was set up years ago when her father gave her 300 shares of stock. She also has $9300 in an individual retirement account invested through a mutual fund.
What would you recommend to Alyssa and Nathan on the subject of managing checking and savings accounts regarding:
1. Where they can obtain the services that they need for managing their monetary assets?
2. Their best use of checking accounts and savings accounts as they begin saving for a home?
3. The use of an asset management account for managing their monetary assets?
4. Their use of electronic banking?
5. How they can best discuss the management of their money and finances?
YOUR NEXT FIVE YEARS
In the next five years, you can start achieving financial success by doing the following related to checking and savings accounts:
1. Use a free, interest-earning checking account for your day-to-day spending needs.
2. Start now to build an emergency fund sufficient to cover three months of living expenses.
3. Use a pay-yourself-first approach as you begin to build other savings and investments.
4. Secure your electronically accessible accounts with strong user IDs, PINs and passwords.
5. Use all your checking and savings accounts appropriately by never overdrawing the accounts and by reconciling them monthly.
Your financial success will depend in part on how well you manage your monetary assets. These assets were defined in Chapter 3 as cash and low-risk, near-cash items that can be readily converted to cash with little or no loss in value. If you are a college student, your monetary assets are probably the largest component of your net worth and are the major focus of the activities you consider “personal finance.” Monetary assets represent all your money.
People use monetary assets in one of two ways. First, they use them for day-to-day spending. They buy food, clothing, entertainment, and many products and services. Spending usually requires cash or the use of a check or a debit card to access funds in a checking account. (Using credit is covered in Chapters 6 and 7.) Checking accounts are appropriate places to keep money that you will spend within the next three to six months or so. The second way that people use monetary assets is to accumulate funds to meet needs that will occur six months to, perhaps, three to five years in the future. You could keep these funds in a checking account, but various types of savings accounts pay more interest. With savings accounts, the focus is on holding money safely until needed in the future for spending or investing. The money in most checking and savings accounts is fully insured by the federal government.
The third way that people use monetary assets is to make investments. Investments are the best places to put money you will not need for 5, 10, or even 20 years in the future. The magic of the world of investments is that over long periods of time, it is quite possible to watch your money triple or quadruple over the original amount invested. Investments are examined in Chapters 13 through 16.
5.1. WHAT IS MONETARY ASSET MANAGEMENT?
LEARNING OBJECTIVE 1
Identify the goals of monetary asset management and sources of such financial services.
Monetary asset (cash) management encompasses how you handle cash on hand, checking accounts, savings accounts and certificates of deposit, money market accounts, and other monetary assets.
monetary asset (cash) management How you handle your monetary assets.
5.1a The Goals of Monetary Asset Management
The goals of monetary asset management are to maximize interest earned and to minimize fees while keeping funds safe and readily available for living expenses, emergencies, and saving and investment opportunities. Successful monetary asset management allows you to earn interest on your money while maintaining reasonable liquidity and safety. Liquidity refers to the speed and ease with which an asset can be converted to cash. Safety means that your funds are free from financial risk.
liquidity Ease with which an asset can be converted to cash.
5.1b Who Provides Monetary Asset Management Services?
The financial services industry comprises companies that provide checking, savings, and money market accounts and possibly credit, insurance, investment, and financial planning services. These companies include depository institutions such as banks and credit unions, stock brokerage firms, mutual funds, financial services companies, and insurance companies. Table 5-1 matches these various types of firms with the financial products and services that they offer. As you can see, there is considerable overlap. For example, State Farm, which most people recognize as an insurance company, also owns a mutual fund and a bank.
financial services industry Companies that provide monetary asset management and other services.
Depository Institutions Depository institutions are financial institutions in the United States that are legally allowed to accept monetary deposits from consumers and make loans. They all can offer some form of government account insurance on deposited funds and are government regulated. They offer a wide range of financial services, including loans. Examples of depository institutions are commercial banks, savings banks, and credit unions. Although each is a distinct type of institution, people often call them all simply banks. Internet banks are similarly regulated and operate entirely online, and because they avoid the “bricks and mortar” costs of conventional institutions they often pay higher interest rates.
depository institutions Organizations licensed to take deposits and make loans.
Table 5-1 Today’s Providers of Monetary Asset Management Services
|
Providers |
What They Sell |
Examples of Well-Known Company Names |
|
Depository institutions (banks, mutual savings banks, and credit unions) |
Checking, savings, lending, credit cards, investments, and trust advice |
Citibank, Chase, Bank of America, Wells Fargo |
|
Mutual funds |
Money market mutual funds, tax-exempt funds, bond funds, and stock funds |
Fidelity, T. Rowe Price, Vanguard |
|
Stock brokerage firms |
Securities investments (stocks and bonds), mutual funds, and real estate investment trusts |
Schwab, Fidelity |
|
Financial services companies |
Checking, savings, lending, credit cards, securities investments, real estate investments, insurance, accounting and legal advice, and financial planning |
American Express, Edward Jones, Raymond James |
|
Insurance companies |
Property and liability, health and life insurance, credit services, financial planning services |
Allstate, Aetna, State Farm |
Commercial banks are a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products. They are under federal and state regulations. They offer numerous consumer services, such as checking, savings, loans, safe-deposit boxes, investment services, financial counseling, and automatic payment of bills.
commercial banks A type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products.
Savings banks (or savings and loan associations-S&Ls) focus primarily on accepting savings and providing mortgage and consumer loans. They offer checking services through interest-earning NOW accounts (discussed later in this chapter). Savings banks generally pay depositors an interest rate about 0.10 to 0.20 percentage points higher than the rate found at commercial banks.
Accounts in federally chartered commercial banks and savings banks are insured against loss by the Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC), which is an agency of the federal government. The regulator of these banking entities is the office of the Comptroller of the Currency.
A credit union (CU) also accepts deposits and makes loans. Credit unions operate on a not-for-profit basis and are owned by their members. The members/owners of the credit union all share some common bond, such as the same employer, church, trade union, fraternal association, or neighborhood. People in the family of a member are also eligible to join.
credit union (CU) Member-owned, not-for-profit, insured financial institutions that provide checking, savings, and loan services to members.
Federally chartered credit unions have their accounts insured through the national Credit Union Share Insurance Fund (NCUSIF), which is administered by the National Credit Union Administration (NCUA). State-chartered credit unions are often insured by NCUSIF, and most others participate in private insurance programs. Credit unions usually pay higher interest rates and charge lower fees than commercial banks or savings banks.
A Mutual Savings Bank (MSB) is similar to a savings bank in that it also accepts deposits and makes housing and consumer loans. State laws permit these banks to operate in only 17 states, primarily those in the eastern United States. They are called “mutual” because the depositors own the institution and share in the earnings. Generally, MSBs have the DIF insurance coverage. Like savings banks, they offer interest-earning checking accounts.
Bias Toward the Familiar and Comfortable
People engaged in managing checking and savings accounts have a bias toward certain behaviors that can be harmful, such as a tendency toward sticking with the familiar and comfortable. Young adults often bank where their parents do and will stay with that bank for years. What to do? Look for the depository institution that charges the lowest fees and pays the highest interest, which is probably a credit union.
DO IT IN CLASS
Deposit Insurance Protects Your Money Deposits in depository institutions are insured against loss of both the amount on deposit and the accrued interest by various insurance funds. Not a single depositor has lost a dime of insured funds since the inception of deposit insurance during the Great Depression of the 1930s. This federal deposit insurance for your deposits at any one institution works as follows:
federal deposit insurance Insures deposits, both principal amounts and accrued interest, up to $250,000 per account for most accounts.
1. The maximum insurance on all of your single-ownership (individual) accounts (held in your name only) is $250,000.
2. The maximum insurance on all of your joint accounts (accounts held with other individuals) is $250,000.
3. The maximum insurance on all of your retirement accounts is $250,000.
4. A maximum of $250,000 in insurance per beneficiary is available on payable at death accounts (accounts set up so that the funds go to a designated person[s] upon the death of the account holder).
Thus, individuals might have several increments of insurance for their accounts at any one institution. Funds on deposit at other institutions will also have these same limits. So if your rich uncle had $140,000 in individual accounts at each of two different institutions, you would have a total of $280,000 of deposit insurance.
Other Financial Services Providers Depository institutions are not the only providers of monetary asset management services. Mutual funds, stock brokerage houses, and insurance companies provide some monetary asset management services as well. The services they do not provide are government-insured checking and savings accounts; however, many of these companies also own banks and thus do provide insured deposits through their banking entities.
Mutual funds are investment companies that raise money by selling shares to the public and then invest that money in a diversified portfolio of investments. Most have created cash management accounts to provide a convenient and safe place to keep money while awaiting alternative investment opportunities. Money deposited in a mutual fund is not insured by the federal government, although some mutual fund companies purchase insurance privately for the noninvestment portions of customers’ accounts. Mutual funds are the subject of Chapter 15.
mutual funds Investment companies that raise money by selling shares to the public and then invest that money in a diversified investment portfolio.
Stock brokerage firms are licensed financial institutions that specialize in selling and buying stocks, bonds, and other investments and providing advice to investors. They earn commissions based on the buy and sell orders that they process. Stock brokerage firms typically offer cash or mutual fund accounts into which clients may place money while waiting to make investments. The noninvestment portion of an account (for example, cash held in the account prior to making an investment) is protected by the Securities Investor Protection Corporation (SIPC), a nongovernment entity. Insurance companies provide property, liability, health, life, and other insurance products (These topics are covered in Chapters 10–12.). Many offer monetary asset services, such as money market accounts.
CONCEPT CHECK 5.1
1. Identify the primary goals of monetary asset management.
2. Explain the circumstances when it would be appropriate to have funds in a checking account, a savings account, or in investments.
3. Describe your insurance protections when you have funds on deposit in a depository institution as opposed to other financial services providers.
5.2 CHOOSE APPROPRIATE MONETARY ASSET ACCOUNTS
LEARNING OBJECTIVE 2
Understand and employ the various types of accounts available to meet the goals of monetary asset management.
There are various categories monetary asset accounts. Each has its own costs and benefits. Depending on the complexity of your mix of monetary assets you can select the tools that meet your needs: (1) Low-cost, interest-earning checking accounts from which to pay ongoing, current living expenses, and (2) Interest-earning savings accounts in financial institutions in which you accumulate and hold funds for upcoming expenditures or investments.
5.2a Conduct Day-to-day Spending Using Interest-earning Checking Accounts
A checking account at a depository institution allows you to write paper checks against amounts you have on deposit. Checks transfer your deposited checking account funds to other people and organizations. Checking accounts also can be accessed by using a debit card (or check card) in an automated teller machine (ATM), a point-of-sale (POS) terminal at a retail store or on your cell phone, tablet or computer. When you use a debit card, funds are instantaneously removed from your account.
checking account At depository institutions, allows depositors to write checks against their deposited funds, which transfer deposited funds to other people and organizations.
Whenever you deposit money into, withdraw funds from, or make any payment out of a checking account, you should record the transaction. To do so record the date, amount, and purpose of the transaction in the check register provided with your paper checks or in an electronic recordkeeping software program and calculate your new account balance. Failure to know your available account balance can lead to costly fees when you overdraw your account.
Types of Checking Accounts at Depository Institutions Checking accounts may or may not pay interest. Demand-deposit accounts are checking accounts that pay no interest. Instead, select an interest-earning checking account (also called a negotiable order of withdrawal [NOW] account). A share draft account is the credit-union version of a NOW account. NOW accounts and share draft accounts may pay higher interest rates on larger balances (such as amounts above $1000). The combination of a base rate and a higher rate is called tiered interest . For example, an account might pay 0.30 percent on the first $2000 and 0.50 percent on any additional funds in the account. Super NOW accounts are also available, and they pay slightly higher interest rates but place a limit on the number of checks that can be written each month.
interest-earning checking account Any account on which you can write checks that pays interest.
tiered interest A way to calculate interest where the account that pays lower interest on smaller deposits and higher interest on larger balances.
Figure 5-1 The Relationship Among Checking, Savings, and Investment Accounts
Protect Yourself from Overdraft Fees
An overdraft, or bounced check, occurs any time you write a check or use a debit card when there are insufficient funds in the account. If funds to cover the usage are not available, the bank will charge you a fee that averages $33 nationally. And the merchant to whom a bad check was written will charge you a similar fee. The costs could total $60 to $80 for one bad check or overdraft!
It is easy to fall victim to these charges if you are not careful. One reason is that banks can choose the order in which they process checks/debits. Let’s say you write a large check one day. The next day you use your debit card for three small purchases and the check shows up at your bank for payment. There might be enough money in your account to cover the three small items but not the check. The bank can choose to process the check first. You are now overdrawn and the three debit card items are overdrafts, as well. You now have four overdrafts. If the bank had cleared the debits first you would only have had one overdraft.
Almost $40 billion dollars in overdraft fees were collected by banks in a recent year. Such fees are one of their biggest profit centers. Don’t be part of this equation. Your financial institution likely offers three ways to avoid overdraft fees:
1. Automatic funds transfer agreement . The amount necessary to cover an overdraft will be transmitted from your savings account to your checking account, as long as you keep sufficient funds in your savings account. An automatic funds transfer agreement is the least expensive of these alternatives.
2. Automatic overdraft loan agreement . The needed funds will be automatically loaned to you by your bank if you have an overdraft line of credit or will be charged as a cash advance to your Visa or MasterCard credit card account with the same bank. Note that the loan may be advanced in fixed increments of $100. If you need only $10, for example, you will consequently be responsible for paying interest on amounts not needed. A cash advance fee of $10 or $20 may also be assessed by the credit card company and a high interest rate starts just as soon as you access the funds.
3. “Opt-in” overdraft/bounce protection . The bank will honor overdrafts up to a certain limit, such as $1000, by loaning the money to the account holder. In return, the customer must pay a $25 to $40 fee for each overdraft. Then, the customer must repay the funds usually within a month. With some plans, the money is repaid as soon as any money is deposited back in the account.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that you “opt in” for the opt-in protection. Think twice before you do so. Many new users of checking accounts rack up high levels of fees because they do not really understand opting-in. Opting in means that the bank will not alert or stop you when you use your debit card or write a check when there are insufficient funds. Use of a debit card for $3.50 for a drink and some chips could trigger a fee ten times as high.
You must keep track of your own account balance and ensure that you have enough in your account each and every time you access the funds. Banks love it when people opt-in and they receive about 25 percent of their revenue from overdraft fees. Opting in is a high-risk and high-cost way to cover overdrafts. You should be able to get by with options 1 or 2 above. If you do want to opt in, read the rules of the plan before you make the decision.
Of the billions of dollars in overdraft fees assessed each year, most were to young and low-income customers. Will you be a victim? The choice is yours. Consider these ways to deal with overdrafts listed from best to worst:
|
Ways to cover your overdrafts |
Examples of possible cost for each overdraft. You should know what your bank charges |
|
Practice good account management |
$0; you have no overdrafts |
|
Automatic funds transfer agreement |
$0 to $5 transfer fee |
|
Overdraft line of credit |
$15 annual fee + 18% APR |
|
Automatic overdraft cash advance from a credit card |
$3 to $10 cash-advance fee + 18% APR |
|
“Opt-in” overdraft/bounce protection |
$20 to $30 |
Patti Fisher and Irene Leech
Virginia Tech, Blacksburg, Virginia
College students can sometimes benefit from a lifeline banking account that offers access to certain minimal financial services that every consumer needs—regardless of income—to function in our society. An applicant’s income and net worth determine acceptance into a lifeline program. The cost of lifeline banking accounts is extremely low, often about $5 per month, although they do not pay interest.
Checking Account Balance Requirements and Fees Most interest-earning checking accounts have a balance requirement that, if not met, will result in the assessment of a monthly fee and, often, forfeiture of any interest earned for the month. An account with no balance requirement is preferable but these are increasingly rare in today’s banking world.
Balance requirements are structured as either a minimum-balance or average-balance requirement. With a minimum-balance account , the customer must keep a certain amount (perhaps $500 or $1000) in the account throughout a specified time period (usually a month or a quarter) to avoid a flat service charge (usually $5 to $15). A fee is assessed whenever the triggering event occurs—that is, when the balance drops below the specified minimum. With an average-balance account , a service fee is assessed only if the average daily balance of funds in the account drops below a certain level (perhaps $800 or $1200) during the specified time period (usually a month or a quarter).
minimum-balance account Checking account that requires customers to keep a certain minimum amount for a specified time period to avoid fees.
average-balance account Checking account for which service fees are assessed if the account’s average daily balance drops below a certain level during a specified time.
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Most depository institutions will waive the assessment of monthly fees for depositors who have their paychecks or other regular deposits made electronically via direct deposit from the payer into the depositor’s account. People interested in getting their money’s worth in banking would be wise to avoid as many of the charges shown in Table 5-2 as possible.
Free Checking Is Not Really Free Lots of banks offer “free” checking accounts. What this typically means is that there is no minimum-balance requirement or monthly maintenance fee on the account. However, there can be fees for writing checks when there are insufficient funds in the account, using another bank’s ATM, inactivity on the account, and other events. Make sure you understand how and when your bank assesses fees.
Endorse Your Checks Properly
Endorsement is the process of writing on the back of a check to legally transfer its ownership, usually in return for the cash amount indicated on the face of the check. Choosing the proper type of endorsement can protect you from having the check cashed by someone else against your wishes.
A check with a blank endorsement contains only the payee’s signature on the back. Such a check immediately becomes a bearer instrument, meaning that anyone who attempts to cash it will very likely be allowed to do so, even if the check has been lost or stolen.
A special endorsement can be used to limit who can cash a check. To make this kind of endorsement, you write the phrase Pay to the order of [person’s name] on the back along with your signature. The person named in such a “two-party check” will likely only be able to deposit it in an account at a financial institution.
A restrictive endorsement uses the phrase For deposit only written on the back along with the signature and can only be deposited into an account. For further safety, you can include the name of your financial institution and account number as part of the endorsement.
Mary Ann Whitehurst
Southeastern Crescent Technical College, Griffin, Georgia
Table 5-2 Costs and Penalties on Checking and Savings Accounts
|
Account Activity |
Reasons for Assessing Costs or Penalties |
Assessed on Checking or Savings |
|
Automated teller machine (ATM) transactions |
A customer’s account is assessed a fee (often $1 to $3) for each transaction on an ATM; an additional fee may be charged for using an ATM not owned by the financial institution. |
Checking, savings |
|
Telephone, computer, or teller information |
Fees are assessed for access or requests for account information by telephone, by computer, or in person (often $2 per transaction) after a number of free requests (perhaps three) have been made. |
Checking, savings |
|
Maintenance fees on a minimum-balance account (often waived if paychecks are directly deposited electronically) |
The account balance falls below a set minimum amount, such as $300. A set fee of $10 to $20 per month is often charged. |
Checking |
|
Maintenance fees on an average-balance account (often waived if paychecks are directly deposited electronically) |
The average daily account balance for the month falls below a set amount, such as $500. The cost is usually based on a set fee, a scaled amount (the more the account falls below the average, the greater the cost), or a percentage of the amount the account falls below the average. |
Checking |
|
Stop-payment order |
A customer asks the financial institution to not honor a particular check; the fee is $25 to $30 per check. |
Checking |
|
Bad check “bounced” for insufficient funds |
Charges of $25 to $40 or more are assessed for each check written or deposited to your account marked “insufficient funds.” |
Checking |
|
Early account closing |
Charges are assessed if a customer closes an account within a month or quarter of opening it. Charges range from $10 to $20. |
Checking, savings |
|
Delayed use of funds |
Amounts deposited by check cannot be withdrawn until rules allow it. |
Checking, savings |
|
Inactive accounts |
A monthly penalty may be assessed for inactive accounts (ones with no activity for six months to a year), sometimes $10 monthly. |
Checking, savings |
|
Excessive withdrawals |
Some savings institutions assess a penalty ($2 to $5) when withdrawals exceed a certain number per month. |
Savings |
|
Early withdrawal |
Amounts withdrawn before the end of a quarter earn no interest for that quarter. |
Savings |
|
Deposit penalty |
Deposits made during the current quarter earn no interest until the beginning of the next quarter. |
Savings |
What Happens When You Write a Check? When you write a paper check, you either simultaneously make a copy that serves as your record that the check was written or make a note of the transaction in your check register. When the check is paid by your bank, it is said to have cleared the bank.
The check itself is treated in one of two ways. In the traditional method, a canceled check is sent to your bank so that the funds can be paid to whomever you had written the check. Typically today, the check is scanned by the receiving bank or the business to which you wrote it and an electronic substitute check is created and transmitted immediately to your bank. As a result, the check can clear your bank in a matter of minutes or hours. Under the Check Clearing for the 21st Century Act, your bank must quickly correct any errors in the processing of paper and substitute checks. Check your statement each month to ensure that errors have not occurred.
Stop-Payment Order A stop-payment order is a notice made by a depositor to his or her bank directing the bank to refuse payment on a specific check drawn by the depositor. To issue such an order, you can telephone your bank and stop payment on the check or you may do it online if your bank allows it. You will need the check number, which is in the upper right hand corner, the dollar amount of the check, the date on the check or the date the check was issued, the person the check is payable to and finally the reason for issuing a stop payment.
stop-payment order Notifying your bank not to honor a check when it’s presented for payment.
A stop-payment order works only if the check has not yet cleared. A fee of $15–$35 will be charged. If the stop payment order is issued on time the person in receipt of the check will not be able to cash it.
Don’t Pay for an Idle Account
If you have money untouched in an account for too long of a time period (such as 6 months) the bank may assess you with an “inactivity fee” of perhaps $10 per monthly statement. One way to beat the fee is to have another account automatically deposit a small amount into the account each month so it won’t be idle.
How to Reconcile Your Bank Accounts
It is good to maintain records of the activities occurring in your various banking accounts. You should record all checks written, debit card transactions, and deposits in your check register as they take place. It is also smart to go online every few days to confirm your deposits, withdrawals, and checking transactions.
DO IT IN CLASS
You also should conduct an account reconciliation in which you compare your records with your bank’s records, checking the accuracy of both sets of records and identifying any errors. The best time to do so is when you receive your monthly account statement from your bank. Account reconciliation is a three-step process:
1. Bring your own records up to date.
2. Bring the bank’s records up to date.
3. Reconcile the results from Steps 1 and 2.
If the revised balance in your records and the revised balance from the bank statement differ, you will need to find where the error occurred. First, check the additions and subtractions in your records. Next, make sure that all previous entries in your records are properly reported on the account statement.
Looking for errors when Steps 1 and 2 yield differing results is a necessary but tedious task. Fortunately, it is less likely to be necessary today because of electronic banking. Many people go online frequently to check their balances and review their account activity for accuracy. In this way, they can catch errors early and are always very confident that their balances are exactly as shown in their own records. Here is a table you can use to guide your reconciling efforts.
|
STEP 1: Bring Your Own Records Up to Date |
Amount |
|
1. Enter balance from your check register. |
$ |
|
2. Add deposits not yet recorded. |
$ |
|
3. Subtract checks and other withdrawals not yet recorded. |
$ |
|
4. Subtract bank fees and charges included in the monthly statement and not yet recorded. |
$ |
|
5. Add interest earned. |
$ |
|
ADJUSTED CHECKBOOK REGISTER BALANCE |
$ |
STEP 2: Bring the Account Statement Up-to-Date
|
1. Enter ending balance from bank statement. |
$ |
|
2. Add deposits made since bank statement closing date. |
$ |
|
3. Subtract outstanding checks written since bank statement closing date. |
$ |
|
ADJUSTED BANK STATEMENT BALANCE |
$ |
STEP 3: Compare adjusted checkbook register balance and adjusted bank statement balance. If the two balances do not match, identify where the error occurred.
You should reconcile your bank account monthly.
About Special Purpose Payment Instruments
There are some payment instruments that you might find useful from time to time.
Certified Checks
A certified check is a personal check drawn on your account on which your financial institution imprints the word certified, signifying that the account has sufficient funds to cover its payment. The financial institution simultaneously places a hold on that amount in the account until the check clears. The fee for a certified check is usually $10 to $15.
Cashier’s Checks
Some payees insist on receiving payment in the form of a cashier’s check drawn on the account of the financial institution itself and, thus, backed by the institution’s finances. To obtain such a check, you would pay the financial institution the amount of the cashier’s check and pay a fee of $10 to $15.
Money Orders
A money order is a checking instrument bought for a particular amount with a fee assessed based on the amount of the order. Many financial institutions, including retailers such as Wal-Mart and the U.S. Postal Service, sell money orders.
5.2b Money Market Accounts Offer Limited Check Writing
When income begins to exceed expenses on a regular basis, perhaps by $300 or $500 each month, a substantial amount of excess funds can quickly build up. Although this situation is a comfortable one, it is wise from a monetary asset management point of view to move some of the excess funds into an account that pays more interest.
A money market account is any of a variety of interest-earning accounts that pays relatively high interest rates (compared with regular savings accounts) that are based on current interest rates in the money markets, and they offer some limited check-writing privileges.
money market account Interest-earning accounts that pay relatively high interest rates and offer limited check-writing privileges.
The funds on deposit are not loaned out to consumers but instead are invested in the “money market” for short-term loans to businesses. Money market accounts are offered by depository institutions (where they are called money market deposit accounts (MMDA) ), stock brokerage firms, financial services companies, and mutual funds.
money market deposit accounts Government-insured money market account with minimum-balance requirements and tiered interest rates.
How to Find a Better Bank
The largest and most well-known national banks have some of the worst fee assessments. For a better deal check out small local banks, credit unions, and online banks that meet your needs at, www.creditunion.coop, and www.bankrate.com. Make sure the institution provides federally insured accounts.
5.2c Money Market Mutual Funds Also Have Checking Privileges
A money market mutual fund (MMMF) is a money market account in a mutual fund investment company (rather than at a depository institution) where the funds are invested in short-term debt securities such as US Treasury bills and commercial paper. Money market accounts can be used much like a checking account.
money market mutual fund (MMMF) Money market account in a mutual fund rather than at a depository institution.
MMMFs pool the cash of thousands of investors and earn a relatively safe return by buying the highest rated debt, which matures in under 13 months. The portfolio must maintain a weighted average maturity (WAM) of 60 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements. Interest is calculated daily, and an investor can withdraw funds at any time. Money market mutual funds historically pay the highest rate of return that can be earned on a daily basis by small investors.
MMMFs require a minimum deposit ranging from $500 to $1000. Dozens of mutual fund companies offer unlimited check writing with no minimums on the amount of each check. Electronic transfers are permitted, but ATMs cannot be used. Although MMMFs are not insured by any federal agency, they are considered extremely safe. To open an MMMF account, you can contact a mutual fund company online. A few of the more prominent MMMFs are managed by American Century (www.americancentury.com), Dreyfus (www.dreyfus.com), Fidelity (www.fidelity.com), T. Rowe Price (www.troweprice.com), and Vanguard (www.vanguard.com).
5.2d Accumulate and Hold Funds Using Savings Accounts
When you are trying to accumulate and hold funds you want to take advantage of the time element to earn more interest than a checking account would pay. Most people start out by opening a savings account; sometimes called a statement savings account. Funds on deposit in a savings account are considered time deposits, which require that account holders give 30 to 60 days notice for withdrawals (although this restriction is almost never enforced). Although savings account deposits are extremely safe, the interest rate paid is only slightly higher than on a checking account. The actual dollar amount of interest you will earn depends on four variables:
1. Amount of money on deposit
2. Method of determining this balance
3. Interest rate applied to the balance
4. Frequency of compounding (such as annually, semiannually, quarterly, monthly, or daily)
The Truth in Savings Act requires depository institutions to disclose a uniform, standardized rate of interest so that depositors can easily compare various checking and savings options that pay interest. This rate, called the annual percentage yield (APY) , is a percentage based on the total interest that would be received on a $100 deposit for a 365-day period given the institution’s annual rate of simple interest and frequency of compounding. The more frequent the compounding, the greater the effective return for the saver.
annual percentage yield (APY) Return on total interest received on a $ 100 deposit for 365-day period, given the institution’s simple annual interest rate and compounding frequency.
A grace period is the time in days during which deposits or withdrawals can be made and still earn interest from a given day of the interest period. For example, if deposits are made by the tenth day of the month, interest might be earned from the first day of the month. For withdrawals, the grace period generally ranges from three to five days. Thus, if a saver withdrew money from an account within three to five days of the end of the interest period, the savings might still earn interest as if the money remained in the account for the entire period.
Interest Is Taxable
Any interest earned on your checking and savings accounts must be reported as income on your federal and state income tax returns. Your financial institutions should send you a Form 1099 statement that reports your interest income for the previous year; that information also is sent to the IRS. Failure to receive a Form 1099 does not absolve you of the requirement to report the earnings.
Be a Better Saver
When asked, Americans typically complain that they cannot save because “there simply is no money left over at the end of the month.” This is evidence that these people are thinking about savings in the wrong way. Instead, they should follow the adage “ pay yourself first ,” which means to treat savings as the first expenditure every payday. This builds savings into your budget right from the beginning.
pay yourself first Treating savings as the first expenditure after—or even before— getting paid rather than simply the money left over at the end of the month.
Your first “pay yourself first” goal should be to create an emergency fund in case of job layoff, long illness, or other serious financial calamity. Most people do not have a sufficient emergency savings fund. Instead, they rely on credit cards when an emergency or unforeseen need arises. For a person with a $42,000 in take home pay, the recommended three-month emergency fund might be $10,500 ($42,000/12 = $3500 for each month).
People who should consider keeping more funds available—perhaps income to cover six months to a year of living expenses—are those who depend heavily on commissions or bonuses or who own their own businesses. Next, save funds to meet short-term goals. Then, you can save for retirement, a down payment on a home, or a child’s college education by breaking your long-term goals into short-term benchmarks. Saving is not glamorous; slow and steady wins the race.
Super smart savers have as much as 20 percent of their paychecks directly deposited to savings, and they save as much as 75 of any raises or bonuses. Such people find that savings is liberating. When you have money when you need it you are independent. Then you do not owe any credit card debt or owe money to your parents. Your financial life is good.
Some time deposits, such as a certificate of deposit, are classified as a fixed-time deposit. As such, they have a specific time period that the savings must be left on deposit. A certificate of deposit (CD) is an interest-earning savings instrument purchased for a fixed period of time. The required deposit amounts range from $100 to $100,000, while the time periods range from seven days to eight years. The interest rate in force when the CD is purchased typically remains fixed for the entire term of the deposit. Depositors collect their principal and interest when the CD expires. Certificates of deposit are insured similarly to checking and savings accounts.
certificate of deposit (CD) An interest-earning savings instrument purchased for a fixed period of time.
Variable-rate (or adjustable-rate) certificates of deposit pay an interest rate that is adjusted (up or down) periodically. Typically, savers are allowed to “lock in,” or fix, the rate at any point before their CDs mature.
A bump-up CD is one where the interest rate can go up. Thus, if interest rates in general go up, the holder can elect to increase the interest rate to the now higher going rate. If interest rates don’t rise, there is the opportunity cost of having to keep the lower interest rate for the term of the CD. When purchasing a bump-up CD, be sure to find out how many times you are allowed to bump-up the interest rate, and whether you have to extend the term of the CD with each bump-up.
Brokered certificates of deposit often pay the highest yields and are available through stockbrokerage firms. Brokered CDs are bought by a brokerage firm in bulk for the purpose of reselling to brokerage customers. They are FDIC insured and usually do not have sales commissions.
Millenials Are Good Savers
Young adults between 18 and 34 seem to be better savers than their parents. They save a higher percentage of their income and have higher retirement account balance than predecessors at the same age. They must be getting the message about wise management of their personal finances.
Avoid “investment certificates” because they are not CDs. They are not insured and can be recalled by the financial institution and reissued at a lower interest rate prior to their maturity. Sometime the issuer goes bankrupt and the saver loses 100 percent of his or her money. Always ask “Is this a CD or an investment certificate?” If it’s a CD, then verify that information.
Money withdrawn from a CD before the end of the specified time period is subject to interest penalties, and these vary by institution. The most common penalty is still three months’ interest for CDs with maturities of less than one year, and six months’ interest for CDs with maturities of one year and longer. If the penalty exceeds the interest amount, you will get back less than you deposited. The institution, if necessary, will take the penalty from your principal. Consequently, before putting money into a CD, make sure that it is appropriate to tie up your funds in this way.
CDs might appear to be a low-risk place to hold funds. But, there is a risk if interest rates in general go up while your money is in the CD. The risk is that you have the opportunity cost of not being able to move your money to an account that is paying the newer higher interest rate. The uncertainty about changing rates is referred to as interest-rate risk. Bump-up CDs discussed above help reduce this risk.
CD laddering is a technique that smoothes out the fluctuations in interest rates and lowers interest-rate risk. Here’s how laddering works. Let’s say you have $10,000 you would like to put into a CD. To start, simply go to www.bankrate.com and find the best rate you can get at the time. Then you purchase five CDs: CD #1 for $2000 for a one-year term, CD #2 for $2000 for a two-year term, CD #3 for $2000 for a three-year term, CD #4 for $2000 for a four-year term, and CD #5 for $2000 for a five-year term.
As the CDs mature, you renew each of them for five years. After five years, you continue to have one CD mature each year, and you renew at the highest current market rate you can find. You do not have to stay with the same financial institution. As interest rates fluctuate over time, you always have some CDs at lower rates and some at higher rates. As a result, you are always earning an average rate overall, thus avoiding the possibility of having of your money earning very low rates. And you always will be able to access at least some of your money within a relatively short time frame.
Use a Savings Calculator
An easy-to-use savings calculator can be found at www.bankrate.com/calculators/savings/compound-interest-calculator-tool.aspx. You can determine how much to save to reach your goal or find out what your savings will be worth at a future date.
5.2f Asset Management Accounts Can Serve Both Checking and Savings Functions
An asset management account (AMA) is a multiple-purpose, coordinated package that gathers most of the customer’s monetary asset management vehicles into a unified account and reports them on a single monthly statement. Included in this package might be transactions in a money market mutual fund and in checking, credit card, loan, and stock brokerage accounts. Also known as central-asset accounts, AMAs are offered through depository institutions, stock brokerage firms, financial services companies, and mutual funds. The mutual fund sweeps your funds into and out of an account with a depository institution on your behalf. AMAs enable you to conduct all of your financial business with one institution.
asset management account (AMA, or central asset account) Multiple-purpose, coordinated package that gathers most monetary asset management vehicles into a unified account and reports activity on a single monthly statement to the client.
Turn Bad Habits into Good Ones
Do You Do This?
Ignore your account statements
Talk about money only when there is a problem
Pay fees every month for checking
Overdraw your checking account
Keep most of your money in your checking account
Do This Instead!
Read each statement for completeness and accuracy
Schedule regular “money talks” with your family
Explore low- or no-fee accounts at a credit union
Keep track of your balance online and reconcile your account monthly
Earn higher returns in a savings account, money-market account, or certificate of deposit
How Ownership of Accounts (and Other Assets) Is Established
When you open a new account, you will be asked to sign a signature card that can be used to verify the signatures of the owners of the account. Accounts can be owned either individually or jointly.
An individual account has one owner who is solely responsible for the account and its activity. At the death of the individual owner, the account becomes part of his or her estate and will go to heirs in accordance with the owner’s will. If desired, individual accounts can be set up with a payable at death designation whereby a person is named in the account to receive the funds upon the death of the individual owner. This allows that person to gain quick access to the funds after the owner’s death but does not give the person any rights to the account while the owner is still alive.
A joint account has two or more owners, each of whom has legal rights to the funds in the account. The forms of joint ownership discussed here apply to all types of property, including automobiles and homes, as well as checking and savings accounts. Three types of joint ownership exist:
1. Joint tenancy with right of survivorship (also called simply joint tenancy ) is the most common form of joint ownership, especially for husbands and wives. In this case, each person owns the whole of the asset and can dispose of it without the approval of the other(s). With accounts at financial institutions, the financial institution will honor checks or withdrawal slips possessing any of the owners’ signatures. An advantage of a joint account is that in case of death of one of the owners, the property continues to be owned by the surviving account holder(s).
DO IT IN CLASS
2. Tenancy in common is a form of joint ownership in which two or more parties own the asset, but each retains control over a separate piece of the property rights. In most states, the ownership shares are presumed to be equal unless otherwise specified. When one owner dies, however, his or her share in the asset is distributed to his or her heirs according to the terms of a will (or if no will exists, according to state law) instead of automatically going to the other co-owners.
3. Tenancy by the entirety , which is recognized in about 26 states, is restricted to property held between a husband and a wife. Under this arrangement, no one co-owner can sell or dispose of his or her portion of an asset without the permission of the other. This restriction prevents transfers by one owner without the knowledge of the other. It takes both signatures to write a check.
Dual-earner couples often prefer to own some property together and some property separately. If you own a business and default on a loan, for example, your creditors usually cannot attach your home if it is in your spouse’s name. Nonworking spouses, however, should get their name on all deeds and investments; in the event of divorce, courts typically award property to the people who legally own it.
In community property states—in which all of the money and property acquired during a marriage is legally considered the joint property of both spouses—the rights of both husbands and wives are equally protected. Likewise, all debts are jointly owed. These jurisdictions include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Typically, $10,000, spread across all subaccounts, is required to open an AMA. AMAs assess an annual fee, usually $100. If the account fee is 1 percent, this would reduce your return by 1 percentage point ($100/$10,000). AMAs usually have other features that attract investors as well—for example, free credit and debit cards, a rebate of 2 percent on credit card purchases, free traveler’s checks, free bill-pay services, inexpensive term life insurance, inexpensive stock trades, and an investment advisory newsletter.
CONCEPT CHECK 5.2
1. Distinguish among the time-frame differences for checking, savings, and investment accounts.
2. Explain why is there no such thing as free checking and list two checking account fees that you could avoid by using your account appropriately.
3. Describe reasons to keep money in a savings account rather than a checking account.
4. Explain the benefits of a pay-yourself-first approach to saving.
5. Explain the benefits and drawbacks of certificates of deposit.
5.3 ELECTRONIC MONEY MANAGEMENT
LEARNING OBJECTIVE 3
Describe electronic money management, including your legal protections.
Monetary asset management can be summed up today with the phrase “paper, plastic, or neither.” “Paper” comprises the traditional cash- and check-based systems. “Plastic” is the use of a debit or other type of card to access your funds. You should always make a photocopy of both sides of your cards should it be lost or stolen. “Neither” is the use of your computer or smartphone to access and use your accounts.
Electronic money management occurs whenever transactions are conducted without using paper documents. Most of these activities involve electronic funds transfers (EFTs) , in which funds are shifted electronically (rather than by check or cash) among your various accounts and to and from other people and businesses.
electronic funds transfers (EFTs) Funds shifted electronically (rather than by check or cash) among various accounts or to and from other people and businesses.
5.3a Using “Plastic” in Monetary Asset Management
There are many types of plastic devices used to access your money.
1. ATM cards allow you to withdraw money from or transfer money among your checking and savings accounts at an automatic teller machine. You must use a personal identification number (PIN) to use the card.
2. Debit cards do ATM cards one better—you can also use them to make purchases via a point-of-sale (POS) terminal at retail outlets. Using a debit card to make a purchase immediately transfers money from your account. You typically use a PIN or provide your signature when using a debit card. Some merchants will also provide a discount when you use a debit, rather than credit, card.
3. Prepaid cards allow users to function as though they have a bank account, providing services through its mobile app such as direct deposit, online bill pay, and check deposits. The card can be used at ATMs as well as purchases online and at retail cash registers. Walmart offers the American Express Bluebird prepaid card. T-Mobile and Sprint offer similar cards. Fees are low, and the companies provide private insurance rather than FDIC insurance.
4. Preloaded debit cards are cards that are tied to funds in an account at a financial institution and are used much like an ordinary debit card. Parents might use such a card to provide funds to a child away at college. Employers sometimes use such a card to pay their employees.
5. Stored-value cards contain a magnetic strip or bar code that encrypts the amount of money stored via the card. Some stored-value cards can be “reloaded” with additional funds. A gift card is an example of such a stored-value card. Others, such as those offered at some colleges, can be used for student meal plans and at participating retailers on- and off-campus.
There are risks associated with some stored value cards since many have an activation fee, expiration date (no shorter than five years), and an inactivity fee if there is no activity within a 12-month time period. Cards that can only be used at one retailer carry risk should the retail company go bankrupt.
Money Websites for Managing Checking and Savings Accounts
Popular websites for managing checking and savings accounts, including reconciling statements are:
BankRate.com (www.bankrate.com/cd.aspx)
Consumer Financial Protection Bureau (www.consumerfinance.gov/)
Federal Deposit Insurance Corporation (www.fdic.gov)
National Credit Union Administration (www.ncua.gov/Pages/default.aspx)
The New York Times (www.nytimes.com/pages/your-money/)
Yahoo Finance (finance.yahoo.com/saving-spending/)
6. Electronic benefits transfer (EBT) cards are used by the government to pay military personnel and provide Social Security and other government benefits.
7. Credit cards allow you to make purchases or obtain cash with credit from the bank or retailer that issued the cards. These are debts that must be paid back, often with interest. In some states, merchants are allowed to charge a higher price when a credit card is used, such as for gasoline.
Regardless of the type of card you are using, you should always make a photocopy of both sides of your card for verification should the card ever be lost or stolen.
5.3b Electronic Money Management Can Be Easy but Is Not Always Free
There are costs assessed with the use of some electronic banking. An ATM transaction fee may be assessed for using an ATM. Fees may be levied by your financial institution as well as by the institution that provides the ATM if you are using an ATM linked to a national network.
ATM transaction fee Payments levied each time an automated teller machine (ATM) is used.
Retail transaction fees of $1 to $3 also may be assessed whenever you make a purchase via a POS terminal at a retail store. This is most likely to happen when you use a PIN number. Such a usage occurs when you hit the “debit” button on the terminal. You can usually avoid the fee if you hit “credit” instead. Rather than use your PIN, you sign for the purchase. The transaction is still a debit transaction but is processed in a way that costs less for your bank. You also have additional legal protections for signed debit transactions as discussed later.
Fees can be assessed for other uses of electronic money management. Some banks charge for online banking services such as bill paying and verification of your account balances. Often the fees for these services are a fixed monthly rate for all usage that may be cheaper than writing checks and mailing payments. These paper-based services are often free. Smartphone Apps let you use your phone to pay for everything. Transactions are fee-free when paired with your bank account or debit card. You can avoid almost all such fees by shopping for an account that matches your banking habits. Otherwise you will waste money on unnecessary banking fees.
Avoid and Reduce ATM Fees
You can avoid ATM fees altogether by banking at an institution that does not charge ATM fees at its banks. The average ATM fee for using another bank’s ATM is over $4.
You can minimize your ATM fees by writing a check for cash and simply managing your money. You also may make a few large withdrawals rather than more frequent small withdrawals. A $3 fee on a $20 withdrawal is 15 percent; on a $100 withdrawal it is 3 percent. Do you really want to give 15 percent, or even 3 percent, of your money to your bank? The annual percentage rates for each of these transactions is well over 400 percent.
5.3c Use Electronic Banking Safely
Federal and state regulations have been adopted to provide protections for the use of debit cards and other electronic banking. The Electronic Funds Transfer Act is the governing law, and the Federal Reserve Board’s Regulation E provides specific guidelines on ATM and debit card liability. When you sign up for electronic banking services, the depository institution must inform you of your rights and responsibilities in a written disclosure statement.
Users also must be provided with written receipts when using an ATM or POS terminal. These receipts show the amount of the transaction, the date on which it took place, and other pertinent information. General protection of a customer’s account takes the form of a periodic statement sent by the financial institution that shows all electronic transfers to and from the account, fees charged, and opening and closing balances. Users of electronic banking services and electronic funds transfers (EFTs) should regularly compare the information on this periodic statement with their written receipts.
periodic statements Monthly reports that show all electronic transfers to and from accounts, fees charged, and opening and closing balances.
Use Complicated PINs and Passwords
Your personal identification numbers (PINs) and on-line passwords unlock your accounts. Use as complicated a PIN as your financial institution will allow with upper- and lower-case letters, numbers and symbols. You should write them down in case you forget them, but never keep the written record with the card.
Fixing Account Errors If you find an error in your periodic statement, notify the issuing organization in writing as soon as possible. Use the notification procedures found in the disclosure statement accompanying your monthly statement. If the institution needs more than ten business days to investigate and correct a problem, generally it must return the amount in question to your account while it conducts the investigation.
If an error did occur, the institution must permanently correct it promptly. If the institution decides that no error occurred, it must explain its decision in writing and let you know that it has deducted any amount temporarily credited during the investigation. In such a case, the institution must honor withdrawals against the credited amount for five days, allowing you time to deposit additional funds. You may ask for copies of the documents on which the institution relied in its investigation and again challenge the outcome if you believe that a mistake was made.
Protections for Lost ATM and Debit Cards The sooner you report the loss of an ATM or debit card, the more likely you will be to limit your liability if someone uses the card without your permission. Cardholders are liable for only the first $50 of unauthorized use if they notify the issuing company within two business days after the loss or theft of their card or PIN.
Note that fraudulent debit card transactions using a PIN are not afforded this pro-tection! After two days, cardholder liability for unauthorized use rises to $500. Some issuers, including Visa and MasterCard, have usually have policies that voluntarily waive enforcement of this liability. However, you risk unlimited loss for the card’s misuse if, within 60 days after the institution sends your financial statement to you, you do not report an unauthorized transfer or withdrawal. Thus, you could lose all of the money in your account.
DO IT IN CLASS
How to Protect Against the Privacy Risks from Using Your Mobile Device to Manage Money
People today are using their smartphones, ipads, and tablet computers for managing money and transferring personal financial data. Yet many underestimate the degree to which the data transmitted and stored via the device is ripe for identity theft. Here are some things you can do to protect yourself:
1. Do not store ID numbers and passwords in your phone.
2. Use the blocking mechanism such as a password (and make it complex) provided with your device.
3. Erase the flash-chip memory using the “hard reset” function (or destroy the chip and/or SIM card) when discarding, trading-in, or recycling your phone.
Sean’s Success Story
Sean’s good efforts at establishing an emergency fund and regularly saving $300 or more per month have enabled him to build a cash reserve in excess of $14,000. He initially kept the funds in his checking and savings accounts but realized that the earnings off those funds were minimal, and there was always the temptation to dip into the funds for an occasional splurge. He decided to buy two $5000 CDs, one with a one-year maturity and another with a two-year maturity. He also opened up a money market account with $2000, leaving the remaining $2000 in his savings account for emergencies.
These regulations apply to debit cards and other cards used to make electronic funds transfers (EFTs). The protections offered for fraudulent use of debit cards are not as strong as when your credit card is used fraudulently. It is much safer to use a credit card for certain transactions, especially those made online. States may have laws that provide additional protection for consumers in EFT transactions.
Most homeowner’s and renter’s insurance policies (discussed in Chapter 10) already cover your liability for theft of both debit and credit cards. If you are not currently protected, such insurance coverage generally can be added for $15 or $20 a year. Many companies sell similar insurance as a separate policy for an annual premium of $30 to $99.
Some firms sell a card registration service that will notify all companies with which you have debit and credit cards in the event of loss. For $50 to $100 a year, you need make only one telephone call to report all card losses. Of course, you can also notify debit and credit card companies yourself at no cost.
card registration service Firm that will notify all companies with which you have debit and credit cards if your cards are lost or stolen.
Protect Your Privacy Yourself Having the law and insurance on your side when banking electronically or online is a good thing, but it is better to not have problems in the first place. Most victims of identity theft are between the ages of 20 and 29. Here are some tips for reducing the risk:
• Study your statements. Ask about anything that looks unusual or the least bit in error. A small $1 charge to a debit or credit card is a red flag that someone is checking to see if an account number is valid and hoping that you won’t notice. Big charges may come later.
• Avoid banking via computer or mobile device on a public or unsecured wireless system away from home. Use your wireless system at home only if it is fully protected.
• Be cautious about social networking and job search sites. Would you put personal information on a sign outside your home? Of course not, so avoid doing so where all the world can see on your social networking pages.
• Never provide account information if you get an e-mail from your bank. It’s likely from a scam artist, because banks never email customers seeking information.
Your Worst Financial Blunders in Managing Checking and Savings Accounts
Based on others’ financial woes, you will make mistakes in personal finance when you:
1. Keep too much money in a checking account where it earns very little interest.
2. Fail to reconcile your accounts on a regular basis.
3. Keep money matters and worries to yourself.
• When finished banking via computer, always hit the log off button at the top of the page and then close the browser window.
• Avoid using someone else’s computer to manage your account. If you do, shut down the computer completely when finished.
• Regularly change your passwords and keep them to yourself.
• Keep your financial papers away from the eyes of roommates and houseguests.
• Buy a shredder and use it.
• Make and save paper copies of all your electronic transactions until you can verify their accuracy on your next account statement.
CONCEPT CHECK 5.3
1. Distinguish among credit cards, debit cards, and a stored-value card.
2. List the steps you should take if you find an error in your periodic statement regarding an electronic transaction.
3. Summarize the rules that apply if you lose your ATM or debit card and it is used without your authorization.
5.4 THE PSYCHOLOGY OF MONEY MANAGEMENT
LEARNING OBJECTIVE 4
Discuss your personal finances and money management more effectively with loved ones.
A common cause of tension in personal relationships is conflict over money. Mutual trust in money matters can be developed—and must be—to have happy relationships and achieve financial success.
5.4a Managing Money and Making Financial Decisions Are Different
Managing money includes such tasks as handling the checkbook, overseeing the budget, and doing the household shopping. Couples should agree on who will carry out these day-to-day chores and then carry through on their responsibilities. Financial experts recommend that each person in a relationship keep some money of his or her own. This can encourage independence and self-control in a relationship rather than dependency on the other person. This can be accomplished by setting up three checking accounts: a discretionary account for each individual (two accounts) and a third, joint account. Then clearly specify the budget categories for spending related to each account.
While managing family money is a significant task, decision making is where most disagreements arise. Shared decision making is the best model when defining goals and setting up a budget; when contemplating any major expense, such as buying vehicles and housing; and when conferring on key topics such as insurance, estate planning and investments, and long-term financial plans.
5.4b People Connect Strong Emotions to Money
People often attach a number of emotions to money, including freedom, trust, self-esteem, guilt, indifference, envy, security, comfort, power, and control. They bring with them the patterns, beliefs, and attitudes that were prevalent in their family of origin.
The Financial Side of Popping the Question
Before you pop the question about marriage, or say “yes!” if asked, stop to consider the following financial questions. If you haven’t discussed them or, worse, have been afraid to bring them up, perhaps it is time to take a big step back before you take the big step forward.
1. Do you know how much your sweetie owes including student loans, to whom, and his/her plan for paying the debts off and when?
2. Have you seen each other’s credit reports and know each other’s credit score?
3. Do you know what type of wedding you would like (and your sweetie would like), how much it would cost, and from where the money will come?
4. Do you have any concerns about how your sweetie spends money, and have you discussed the concerns and resolved them to your joint satisfaction?
5. Do you budget? Does your sweetie budget? Have you discussed your budgets?
And for those of you who are thinking that these questions aren’t important because you plan to live together before marriage, you should think again. Money issues are the number one problem area for both cohabiting couples and newlyweds.
Author Judith Viorst suggests that becoming responsible and adept at managing one’s financial matters represents a true passage into adulthood. This evolution involves communicating effectively with others on money matters. Addressing questions openly and calmly helps keep emotions in check. Separately writing down the answers to the following questions and then bringing the answers to the table in a meeting can be an effective way to discuss money matters.
1. What is my biggest money worry today?
2. What are we doing well financially?
3. Is there an issue in our finances that I would like to understand better?
4. If we needed to cut back our spending, what three areas are off limits and what three are fair game?
5. What money issues do we avoid and how can we bring them out into the open?
How to Develop Money Sense in Children
A major theme of this chapter is that checking and savings accounts and investments are an integral part of reaching your financial goals. By progressively building savings funds and then investing, you can achieve financial success. Parents can help children develop money sense by providing them with opportunities to manage their own money while still young and guiding this behavior toward appropriate patterns. Financially clueless parents beget financially clueless children. Do not let this happen. Instead, do the following to increase your children’s ease in handling money:
1. Give an allowance . Even children as young as 5 years old should have some money of their own. An allowance should be the source of these funds in the preteen years. The amounts of allowance should fit the family income level. Allowances are a means for teaching money management.
2. Encourage work . Once children reach their preteen years, there are many opportunities to earn their own money. When children see what it takes to make money, it is easier for them to know the real cost of spending.
3. Set reasonable limits . Children should be given age-appropriate limits for spending in various categories and should be required to save a portion of their money. However, parents should not stop children from “wasting their money” or bail them out of every mistake. We often learn best from experience, not from what someone else tells us is best.
4. Teach them to make good choices through increasingly complex activities . The dollar amounts and the areas of discretionary spending can increase as the child becomes older. A 7-year-old might be allowed to spend a portion of his or her own money on toys, snacks, and gifts to charity at church or school. A 14-year-old might be allowed to buy meals and clothing as well. More responsibility and autonomy should be given only as the child exhibits the ability to handle less complicated tasks.
5. Help them learn to wait . Children should have autonomy over at least some of their own money. But the remainder, perhaps 50 percent, should be saved. Then when children desire some high-cost item, they can see that saving for a while can help them reach their goal.
6. Talk about family finances with children . In many families, money matters are a taboo subject. Children need to see that parents must work at managing the family finances. They should know what it costs to raise a family and to make ends meet. Otherwise, kids will grow up with unrealistic expectations and behaviors that will be passed on to their children.
7. Be a role model . Children learn more from what they see than what they are told. Avoid borrowing money from, or loaning money to, children. They will learn that credit is easy. And, certainly, all intrafamily loans should be paid back on time. Otherwise, they will think people can borrow without paying back. Save money yourself, and tell your children that saving means that you can’t have something you, or they, want right away.
5.4c How to Talk About Financial Matters
Discussions about money matters are not always easy. Some people who are entirely rational about other issues are unpredictable or even careless in money matters. Adults need to accept that honest differences may exist among people and respect these values. The following ideas will help you discuss money with more confidence and candor.
Get to Know Yourself The first step in learning to talk with others about financial matters is to understand your own approach to money. Consider the emotions described earlier to help you get started. It is constructive to discuss any differences in how you view yourself as compared with how your partner views you. Write these down.
Focus on Commonalities Successful communication about money requires that the effort be aimed toward agreeing on common goals and reaching a consensus of opinion without substantially compromising the views of others.
Learn to Manage Financial Disagreements Give all family members time to express their views when discussing financial matters. Each also needs to listen to what others are saying and feeling. If talking proves too difficult, have each person separately write down his or her concerns. By swapping notes, ideas and concerns can be shared. Schedule a time and place for financial talks, decide on agenda items, and leave other conflicts outside the door.
Recall from Chapter 3 that Harry and Belinda Johnson had a significant disagreement when setting up their budget to allow for their anniversary party and spending for holiday gifts at the end of the year. As a result, they ended up with a draft budget that did not balance for the year as planned expenses exceeded anticipated income. They agreed to disagree and postponed decisions that will need to be made on how to cover their shortfalls. They will need to do better in the future.
Use Positive “I” Statements Messages focusing on “I” describe the behavior in question, the feelings you experienced because of the behavior, and any tangible effect on you. For example, a spouse might say, “I feel upset when we use credit cards because I do not know where we will find the money to pay the bills at the end of the month.” “I” messages say three things: what (the behavior), I feel (feelings), and because (reason). Using “I” messages helps build stronger relationships because they tell the other person “I trust you to decide what change in behavior is necessary.”
Each member of the family should be aware of and involved with important financial decisions.
Beware of “I” statements that begin with “I need you to.…” “You” statements are blaming statements, such as “You always ...,” “You never ...,” and “If you don’t, I will.…” These statements have a high probability of being condescending to other people, of making them feel guilty, and of implying that their needs and wants are not as important as yours.
Be Honest and Talk Regularly Achieving consensus requires that each person be honest when talking about money matters. It further demands that couples regularly talk about finances. Perhaps begin by deciding to talk about money matters for only ten minutes at a time. Also be prepared to compromise. When you make decisions together, take action on them. Focus attention on current financial activities and issues as well as long-term financial planning. Use these discussions to forge overall long-term strategies for dealing with your family finances. Once the proper base has been established, short-term issues are more likely to fall into place.
Money Topics to Discuss with Your Partner
When you find the right partner, it is smart to do the following:
• Change beneficiaries. Life insurance policies, retirement accounts, and mutual fund accounts all have beneficiaries (the people who will receive the funds at your death) named when you set them up. (See Chapters 12, 15, and 17.)
• Coordinate employee benefits. Couples often have two incomes today, so each has a menu of employee benefits from which to choose. As a result, one spouse may drop a benefit that is being received via the other’s plan. (See Chapter 1.)
• Update life insurance coverage. Focus on term life insurance for the bulk of your needs. (See Chapter 12.)
• Review auto and homeowner’s insurance coverages. Also inventory your personal property. (See Chapter 10.)
• Update names with government agencies. If one or both partners’ names are changed as a result of your new status, you need to notify the Social Security Administration and driver’s licensing office of that change. You will need to show your marriage certificate as proof of the change.
• Close redundant bank accounts. Reducing the number of accounts that each partner brings into the marriage can save money on account fees. Decide which accounts are “yours, mine, or ours.” (See Chapters 5 and 6 for more on managing accounts.)
• Get out of debt. One or both of you may bring debts into the new family. Because a couple can live together a little more cheaply than two individuals who live apart, funds can be freed up to pay off credit card, student, and other loans. (See Chapters 6, 7, and 9.)
• Decide on how to manage money. Decide on who pays what bills and makes investment decisions. Decide on whether or not each person will have individual control over certain money. Decide on who pays for the debts that precedes the relationship. Decide on who pays for gift giving. Decide on what money tasks you will do together, such as establishing annual financial goals, making purchases with debt, and agreeing on which expenditures require joint agreement, like expenses over $300.
• Save for retirement separately. Day-to-day living expenses will go down somewhat when you team up as a couple. Use some of that money to allocate additional amounts to your retirement plans. (See Chapter 17.)
• Update estate transfer plans. With a new “number one” in your life, you should change (or set up) your will, durable power of attorney, living will, and health care proxy. (See Chapter 11.)
5.4d Complications Brought by Remarriage
Remarriage merges financial histories, values, and habits as well as households. Some remarried couples—and those choosing to live together following a previous relationship—may have substantial combined incomes bolstered by child-support payments from a former spouse. In many cases, at least one person may be paying (instead of receiving) alimony and child support. When “his,” “her,” and “our” children are included in the household, living expenses can be quite steep.
Special concerns for blended families include determining who assumes financial responsibility for biological offspring and stepchildren; handling resentment over alimony and child-support payments; and managing unequal assets, incomes, responsibilities, and debts. Even gift giving can become a quandary. These challenges can be mitigated with effective communication.
Many remarried people use “his” and “her” funds and require the legally responsible parent owing financial support to a previous spouse or to children to make such payments out of his or her own money. Professor Jean Lown of Utah State University suggests that, “What is best is what the couple can agree on.”
DO IT NOW!
Guard Your Monetary Assets
You know more about personal finance after reading this chapter, so get started right now by:
1. Use complicated passwords, vary them among accounts, and change them regularly.
2. Go on-line two or three times each week to monitor activity and accuracy of your checking account balances.
3. Use a shredder to destroy paper account documents no longer needed for transaction verification or tax records.
CONCEPT CHECK 5.4
1. Explain why it is difficult for many people in relationships to talk about money matters.
2. Identify four ways you could more effectively communicate about money matters.
3. List four things that parents can do to help their children be better money managers.
WHAT DO YOU RECOMMEND NOW?
Now that you have read the chapter on managing checking and savings accounts, what would you recommend to Nathan Rosenberg and Allysa Adams in the case at the beginning of the chapter regarding:
1. Where they can obtain the monetary asset management services that they need?
2. Their best use of checking accounts and savings accounts as they begin saving for a home?
3. The use of a money market account for their monetary asset management?
4. Their use of electronic banking in the future?
5. How they can best discuss the management of their money and finances?
BIG PICTURE SUMMARY OF LEARNING OBJECTIVES
LO1 Identify the goals of monetary asset management and sources of such financial services.
Maximizing interest earnings and minimizing fees on savings and checking accounts is the goal of monetary asset management. The primary providers of monetary asset management services include depository institutions (such as insured accounts at banks and credit unions), stock brokerage firms, mutual funds, financial services companies, and insurance companies.
LO2 Understand and employ the various types of accounts available to meet the goals of monetary asset management.
Day-to-day monetary asset management is conducted best via an interest-earning checking account that is used to pay monthly living expenses. Money market accounts provide similar functions and, though not insured, are extremely safe. When setting up an account, consider charges, fees, and penalties. For funds not needed for six months to five years into the future you can use some type of savings oriented accounts that allow you to accumulate and hold funds and earn higher rates of interest. Savings accounts are where most people start. Certificates of deposit (CDs) allow you to safely earn even higher returns if you are willing to forgo liquidity. When your income begins to exceed expenses on a regular basis, it is wise to move excess funds into a money market account. Asset management accounts combine the functions of checking and savings and more into one package account at many of the providers of monetary asset management services.
LO3 Describe your legal protections when conducting monetary asset management electronically.
Electronic money management occurs whenever banking transactions are conducted via computers without the customer using paper documents. Electronic banking includes the use of automatic teller machines (ATMs), point-of-sale (POS) terminals, debit cards, and stored-value cards. The Electronic Funds Transfer Act protects consumers who use electronic money management.
LO4 Discuss your personal finances and money management more effectively with loved ones.
Recognize the psychological and emotional aspects of money, and identify your own approaches to money. Communicate openly and frequently about money matters by using “I” statements.
LET’S TALK ABOUT IT
1. Bank Account Fees. Describe some examples of checking and savings account transactions that result in assessment of fees or penalties. Which are the least and most avoidable?
2. Avoiding Overdraft Fees. You know someone who recently had $90 in overdraft fees for two small debit card transactions. Explain to him why such high fees resulted from such small transactions and the relative benefits of having an automatic funds transfer agreement versus an automatic overdraft loan agreement versus overdraft protection.
3. Forms of Account Ownership. When would you recommend using an individual account, a joint tenancy with right of survivorship account, and a tenancy by the entirety account for your monetary assets?
4. Opting in. Many people desire protection from the possibility of overdrawing their checking account. Banks make it easy by allowing you to opt into overdraft protection. Explain how this and other overdraft protections work and why the true cost of opting in may exceed the benefits.
5. Earning Higher Interest on Your Savings. When might it be appropriate for you to save via a certificate of deposit versus a money market account?
6. Lost/Stolen Debit Cards. What should you do if your ATM or debit card is lost or stolen? Why?
7. Talking About Money. Have you ever had a disagreement with a friend or family member over a money issue? How might you communicate differently now?
8. Money Issues for Young Couples. Review the questions for those contemplating marriage that are listed on page 158. Discuss the importance of these questions. Most couples do not discuss these issues early in a relationship. Why do you think that is so, and what do you think you will do should the challenge arise for you?
DO THE MATH
1. Invest Now or Later? Twins Kimberly and Kaitlyn are both age 27. Beginning at age 27, Kimberly invests $2000 per year for ten years and then never sets aside another penny. Kaitlyn waits ten years and then invests $2000 per year for the next 30 years. Assuming they both earn 7 percent, how much will each twin have at age 67? (Hint: Use Appendix A.1 and A.3 or visit the Garman/ Forgue companion website.)
2. The Benefit of a Higher APY. Isabel Lopez, age 18, recently received an inheritance of $50,000 from her grandmother’s estate. She plans to use the money for the down payment on a home in ten years when she finishes her education. Right now the funds are in a savings account paying 1.0 percent APY. How much would Isabel have in ten years if instead she purchased a ten-year CD paying 3.0 percent? (Hint: Use Appendix A.1 or visit the Garman/ Forgue companion website.)
3. Reconciling a Checking Account. Andrew Parker has a checking account at the credit union affiliated with his university. Illustrated below are his check register and monthly statement for the account. Reconcile the checking account and answer the following questions.
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(a) What is the total of the outstanding checks?
(b) What is the total of the outstanding deposits?
(c) Why is there a difference between the uncorrected balance in the check register and the balance on the statement?
(d) What is the updated and correct balance in the check register to the right?
4. Saving for College. You want to create a college fund for a child who is now 3 years old. The fund should grow to $30,000 in 15 years. If an investment available to you will yield 6 percent per year, how much must you invest in a lump sum now to realize the $30,000 when needed? (Hint: Use Appendix A.2 or visit the Garman/ Forgue companion website.)
5. Saving for Retirement. You plan to retire in 40 years. To provide for your retirement, you initiate a savings program of $4000 per year yielding 7 percent. What will be the value of the retirement fund after 40 years? (Hint: Use Appendix A.3 or visit the Garman/Forgue companion website.)
FINANCIAL PLANNING CASES
CASE 1
How Should the Johnsons Manage Their Cash?
In January, Harry and Belinda Johnson had $3540 in monetary assets (see page 99): $1178 in cash on hand; $890 in a statement savings account at First Federal Bank earning 1.0 percent interest compounded daily; $560 in a statement savings account at the Far West Savings and Loan earning 1.1 percent interest compounded semiannually; $160 in a share account at the Smith Brokerage Credit Union earning a dividend of 1.3 percent compounded quarterly; and $752 in their non-interest-earning regular checking account at First Interstate.
(a) What specific recommendations would you give the Johnsons for selecting checking and savings accounts that will enable them to effectively use the first and second tools of monetary asset management?
(b) Their annual budget, cash-flow calendar, and revolving savings fund (see Tables 3-6, 3-7, and 3-8 on pages 87–89) indicate that the Johnsons will have additional amounts to deposit in the coming year. What are your recommendations for the Johnsons regarding use of a money market account? Why?
(c) What savings instrument would you recommend for their savings, given their objective of saving enough to purchase a new home? Support your answer.
(d) If the Johnsons could put most of their cash on hand ($1000) into a money market account earning 1.4 percent, how much would they have in the account after one year?
(e) Recall from Chapter 3 that Harry and Belinda had significant disagreements regarding their anniversary dinner and holiday gift spending and ended up not having a draft balanced budget for the year. Provide some advice for the couple about how to resolve or, better, prevent such disagreements in the future.
CASE 2
Victor and Maria Hernandez Need to Save Money Fast
The Hernandez family is experiencing some financial pressures, even though the couple has a combined income of $66,000. Also, their eldest son, Joseph, will start college in only three years. Maria is contemplating going to work full time to add about $25,000 to the family’s annual income.
(a) How will this change in income affect the family’s emergency fund needs?
(b) How much should they save annually for the next three years if they want to build up Joseph’s college fund to $20,000, assuming a 3 percent rate of return and ignoring taxes on the interest? (Hint: Use Appendix A.1 or visit the Garman/Forgue companion website.)
(c) Given their 25 percent marginal tax rate, what is the Hernandezes’ after-tax return on their savings and how would that affect the amount they would need to save each year?
(d) What savings options are open to the Hernandezes that could reduce or eliminate the effects of taxes on their savings program?
CASE 3
Julia Price Thinks About Using Checking and Savings Accounts
Julia’s six-figure salary has allowed her to build up a considerable cash reserve of over $20,000. She initially had basic checking and savings accounts. She also has a credit card with her bank that she uses to make most of her purchases, thereby earning reward points. She is careful to pay the account balance in full each month. Over time, she purchased several CDs. About three years ago, she also opened a money market deposit account at her bank in which she keeps almost $10,000. Last week she got a call from the bank suggesting that she open a cash management account to coordinate her accounts and maximize her overall earnings. She is hesitant to do so as she feels her current arrangement meets her needs. Offer your opinions about her thinking.
CASE 4
Liability for a Lost ATM Card
Joshua Franz earned $4600 during the summer and put $3500 of the money in a newly opened savings account for use during the school year. It is now November 4th and Joshua went to the bank to withdraw $1000. The teller informed him that there was only $200 in the account. When Josua protested, the teller informed him that there had been three ATM $1100 withdrawals from the account on the last day of the month in August, September and October. Joshua typically neglects to open the statements he had received on the third day of each month. When he got home he could not find the ATM card he had received when he opened the account in mid-August and recalled that he had found his car door open in his parking lot in late August but had thought nothing was taken. When he opened the statements he saw the record of each of the withdrawals. He went immediately back to the bank to tell them of the loss. How much money will Joshua lose because of these fraudulent transactions?
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CASE 5
The Impact of Federal Deposit Insurance
Alexandra Bronson, age 58, has done a very good job of accumulating savings over the years. She has all of her accounts at the same depository institution and has multiple accounts. Her balances are as follows:
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$130,000 in a joint-checking account with her husband; $145,000 in a joint-savings account with her sister from an inheritance they received; $100,000 in a savings account in her own name with her sister as the payable at death party (also from the inheritance); and $75,000 in a savings account in her own name. She also has an individual retirement account (IRA) in her own name with a balance of $459,000. How much federal deposit insurance does Alexandra have in these accounts, and how much of her funds remain uninsured?
CASE 6
How Ownership Affects Who Will Receive Assets After a Death
Bang Liu passed away recently at age 67. Among his assets where the following items. 1) Checking and savings accounts with a total balance of $45,000 with his widow, Fen, held in joint tenancy with right of survivorship. 2) A paid-for $330,000 home with his widow, Fen, held in joint tenancy with right of survivorship. 3) A $144,000 vacation cottage owned equally with his brother held in tenancy in common. 4) A dry cleaning business valued at $280,000 owned equal shares with his business partner, Fai, held in tenancy in common. 5) An automobile valued at $14,000 owned individually. 6) Two savings accounts of $20,000 each with his daughter named as payable at death party on one and his son named as payable at death party on the other. Bang’s will names his widow as his sole heir. For each asset, identify who will receive all, or what portions, of the asset.
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CASE 7
Which Is Better: A Minimum-balance Account or an Average-balance Account?
Aaron Searle, a service station owner from Moscow, Idaho, has been paying $30 per month in fees on his checking account for about a year. He is considering changing banks but fears that the fees will be similar no matter where he banks. He has tracked his high-, low- and average-balance on his account for the last six months and found the following:
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In your opinion, would Aaron be better off with a minimum-balance account or an average-balance account to minimize his fees? What other advice would you have for Aaron regarding the avoidance of a monthly fee on his account?
CASE 8
Deciding Among the Tools of Monetary Asset Management
Kwaku Addo, a licensed physical therapist from Columbia, Missouri, earns $4200 per month take-home pay and has the funds directly deposited in his checking account. He spends only about $3500 per month, and the excess funds have been building up in his account for about two years.
(a) What other types of accounts are available to Kwaku?
(b) How might he manage his accounts to earn as much interest as possible and keep his money safe?
(c) How might he use electronic money management to accomplish these tasks?
BE YOUR OWN PERSONAL FINANCIAL MANAGER
1. Checking and Savings Accounts. Create a table outlining the rates, rules, and fees of your checking and savings accounts. Use Table 5-2 on page 146 as a guide for the types of information to include. Assess the appropriateness of the accounts for you and shop for more appropriate accounts if necessary using Worksheet 23: Selecting a Checking Account That Meets My Needs from “My Personal Financial Planner” as a guide for your selection process.
2. Keep Your Accounts Current. Go online every few days to monitor checking account activity. Use the “Did You Know?” box on page 147 or Worksheet 24: Reconciling My Checking Account from “My Personal Financial Planner” to help reconcile your account monthly.
3. Protect Your Privacy. Confirm the existence and amount of each transaction in your checking and savings accounts soon after receiving your account statements. Report any discrepancies immediately.
4. Prepare for Possible Identity Theft. Create a table listing all of your checking, savings, and credit card accounts. For each, list the account number and customer service address and telephone number. Store the document in a safe location for easy access should you find that any unauthorized use has occurred or that the account “plastic” has been lost or stolen.
5. Talk About Money. If married or cohabiting, schedule a regular time to discuss finances with your partner. Use the material on pages 157–161 as a guide for the topics and tone of the discussions. To get your conversation started, you might pose the following questions: If we unexpectedly received $10,000 tax free, what would we do with it? If we had to cut our spending by 10 percent, where would we make the reductions?
ON THE NET
Go to the Web pages indicated to complete these exercises.
1. Visit the website for the Federal Reserve Board, where you will find articles (www.federalreserve.gov/consumerinfo/bankaccountservices.htm) on checking accounts. Browse through the articles to find five things you could do that would help you get the most out of your checking account.
2. Visit the website for Bankrate.com at www.bankrate.com/checking.aspx for information about checking accounts. Use the search box to find articles on “Check 21,” which governs check clearing and processing. How might the rules of Check 21 affect your use of your checking account?
3. Visit the Bankrate.com website at www.ban4krate.com/compare-rates.aspx where you will find information about rates of return on certificates of deposit. What is the best rate for a one-year CD and a five-year CD in a large city near your home (look in the state, then the city)? How do these rates compare with the average rates nationally and the highest rates nationally?
4. Visit the website for FDIC at www.fdic.gov. Use the search box to find articles on “internet banking.” Read the article titled “Safe Internet Banking.” After reading the information, make a list of important positive and negative aspects of Internet banking. Is Internet banking right for you?
ACTION INVOLVEMENT PROJECTS
1. Checking Accounts Where You Live. Select several banks, savings banks, or credit unions in your community. Contact each to gather information on the types of checking accounts they offer and the basic rules of the accounts, including overdraft protections, fees, and interest rates. Make a table that summarizes your findings, and identify one institution that best meets your needs.
2. Account Monitoring. Survey five of your friends about their patterns of monitoring their checking and savings accounts. Compare what they do to your own pattern.
3. Debit and ATM Activity. Survey five of your friends about the patterns and amounts of their typical debit and ATM card usage. Compare their patterns to your own and those recommended in this chapter.
4. Money Talk. Survey five couples to ascertain their patterns of money talk. Ask each the following questions: “What are the areas of your finances that are easiest to discuss?” “What are your areas of most difficulty?” “How do you resolve disagreements?” Make a table that summarizes your findings and identify one institution that best meets your needs.
Visit the Garman/Forgue companion website at www.cengagebrain.com .
