Chapter 7: BankingPersonal Financial Management

CHAPTER 7.1FINANCIAL SERVICES AND INSTITUTIONS

Beginning of Banking

• 1791

• First central bank – 8 branches

• Today - 11,000 banks, 2,000 savings and loan associations, and 12,000 credit unions.

Types of Financial Services

• Savings

• Payment Services

• Borrowing

• Other financial services

Savings

• Essential for any personal finance plan.

• Time Deposit – money that is left in a financial institution for months or years.

• Examples: money in any type of savings account and CDs• Selection of savings plan should be based on

interest rates, liquidity, safety, and convenience.

Payment Services

• Checking Account – most commonly used payment service

• Demand Deposit – money that you place in a checking account• You can withdraw the money at any time, or on

demand.

Borrowing

• Short-Term• Credit cards, personal cash loan

• Long-Term• Mortgage, auto loan

Other Financial Services

• Insurance protection

• Stock – money paid for investment into a business (securities)

• Bond – A form of a loan or IOU (securities)

• Mutual Funds – pools money from multiple investors to purchase securities

Electronic Banking Services

• Direct Deposit – automatic deposit of net pay into an employees designated banking account

• Automatic Payments – authorization needed, your bank withdrawing money monthly for a payment or bill

• ATM – computer terminal that allows for the withdrawal of money, deposits, and transfers

Document Detectives

• Textbook Page 193

• Answer question #1-6 in your notes

Evaluating Financial Services

• Balance your short-term needs with your long-term needs

• Location and convenience

• Fees

• Re-evaluate occasionally

Types of Financial Institutions

• Safety

• Deposit Institutions

• Non-Depository Institutions

Safety

• Record, examine history

• Federal Deposit Insurance Corporation (FDIC)• Protects deposits in banks• Insures each account in a federally chartered

bank up to $100,000 per account

Deposit Institutions• Commercial banks – for-profit institution that offers a

full range of financial services.

• Savings and loan associations – traditionally specialized in savings accounts and mortgage loans but now offers many of the same services as commercial banks.

• Mutual savings banks – owned by depositors, specialize in savings accounts and mortgage loans. Lower interest rates on loans and pay a higher rate on savings accounts.

• Credit unions – nonprofit, owned by its members and organized for their benefit.

Non-Depository Institutions

• Life Insurance Companies – provide financial security for dependents.

• Investment Companies – combine money with funds from other investors in order to purchase securities, mutual funds.

• Finance Companies – Advice, loans for consumers and small businesses, investing

Problematic Financial Businesses• Pawnshops• Make loans based on the value of tangible possessions• Interest charged

• Check Cashing Outlets• Charge from 1-20% of the face value of a check

• Payday Loans• Write a check to get a ‘loan’ • Personal check not cashed for 14 days• Interest charged and rolled over, a continuous cycle

• Rent-to-Own Centers• Own an item if consumers complete a certain number of monthly

or weekly payments.• Interest charged – end up paying more than the item is valued.

Section 1: Assessment

• Textbook page 201

• #1-7

• Complete on separate sheet of paper and turn in