Part 6—Managing Your Income Chapter 26 Banking, Saving, and Investing.

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Transcript of Part 6—Managing Your Income Chapter 26 Banking, Saving, and Investing.

Page 1: Part 6—Managing Your Income Chapter 26 Banking, Saving, and Investing.
Page 2: Part 6—Managing Your Income Chapter 26 Banking, Saving, and Investing.

Part 6—Managing Your Part 6—Managing Your IncomeIncome

Chapter 26Chapter 26

Banking, Banking, Saving, and Saving, and

InvestingInvesting

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Chapter ObjectivesChapter Objectives

SelectSelect the financial institutions and the financial institutions and banking services that will best meet your banking services that will best meet your financial needs.financial needs.

EndorseEndorse, deposit, write, and cash checks , deposit, write, and cash checks correctly.correctly.

BalanceBalance a checkbook. a checkbook. DescribeDescribe the special types of checks that the special types of checks that

can be used in place of personal checks and can be used in place of personal checks and cash.cash.

EvaluateEvaluate the basic types of savings plans. the basic types of savings plans. CompareCompare different types of investments. different types of investments.

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Key ConceptsKey Concepts

Commercial banks, savings banks, and credit Commercial banks, savings banks, and credit unions provide financial services to unions provide financial services to consumers.consumers.

Online banking provides more electronic Online banking provides more electronic services for the consumer than any other form services for the consumer than any other form of banking.of banking.

Having a savings and checking account is a Having a savings and checking account is a good method of establishing a credit rating good method of establishing a credit rating and saving money.and saving money.

Investments involve some degree of risk so Investments involve some degree of risk so you need to be sure to investigate before you you need to be sure to investigate before you invest.invest.

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Types of Financial Types of Financial InstitutionsInstitutions

Commercial banks:Commercial banks: Offer checking and savings accounts, U.S. Offer checking and savings accounts, U.S.

Savings Bonds, loans, and safe-deposit boxes.Savings Bonds, loans, and safe-deposit boxes. Deposits are insured by the Federal Deposit Deposits are insured by the Federal Deposit

Insurance Corporation (FDIC).Insurance Corporation (FDIC). Savings banks:Savings banks:

Offer savings plans for investors, mortgage Offer savings plans for investors, mortgage loans, and checking accounts.loans, and checking accounts.

Credit unions:Credit unions: Offer members loans, savings accounts, and Offer members loans, savings accounts, and

checking accounts.checking accounts. Deposits are insured by the National Credit Deposits are insured by the National Credit

Union Association (NCUA).Union Association (NCUA).

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Choosing a Financial Choosing a Financial InstitutionInstitution

Factors to consider:Factors to consider: Location.Location. Hours of operation.Hours of operation. Availability of online Availability of online

banking options.banking options. Safety of the financial Safety of the financial

institution.institution. Service fees.Service fees. Services offered.Services offered.

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Electronic BankingElectronic Banking

Electronic banking Electronic banking services include:services include: Online banking.Online banking. Electronic funds Electronic funds

transfer.transfer. Banking by phone.Banking by phone. Automated teller Automated teller

machines.machines. Debit cards.Debit cards.

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Online BankingOnline Banking

Online banking:Online banking: The use The use of a computer to of a computer to manage finances manage finances through an Internet through an Internet connection.connection.

Online banking offers Online banking offers more electronic services more electronic services than traditional banking.than traditional banking.

Allows you to make Allows you to make transactions 24 hours transactions 24 hours per day.per day.

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Electronic Funds TransferElectronic Funds Transfer

Electronic funds transfer (EFT): Electronic funds transfer (EFT): The The automatic transfer of funds to and from a automatic transfer of funds to and from a person’s bank accounts electronically.person’s bank accounts electronically. Direct deposit – with authorization, your Direct deposit – with authorization, your

paycheck is deposited directly into your paycheck is deposited directly into your checking and/or savings accounts each checking and/or savings accounts each payday.payday.

Electronic bill payments – with authorization, Electronic bill payments – with authorization, the bank will electronically pay certain bills for the bank will electronically pay certain bills for you each month.you each month.

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Banking by PhoneBanking by Phone

Allows customers to handle certain Allows customers to handle certain transactions through a push-button phone.transactions through a push-button phone. Pay bills.Pay bills. Transfer funds.Transfer funds. Check on the balance in an account.Check on the balance in an account.

Be sure to record these transfers as they Be sure to record these transfers as they occur so you have an up-to-date record occur so you have an up-to-date record and do not overdraw your account.and do not overdraw your account.

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Automated Teller MachinesAutomated Teller Machines

Automated teller machines Automated teller machines (ATMs) are remote (ATMs) are remote computer terminals that computer terminals that customers use to make customers use to make financial transactions.financial transactions.

ATMs are positioned in ATMs are positioned in convenient locations, such convenient locations, such as shopping centers, office as shopping centers, office buildings, and airports.buildings, and airports.

You will need an ATM card You will need an ATM card and a PIN to use an ATM.and a PIN to use an ATM.

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Debit CardsDebit Cards

Debit card:Debit card: A card A card that allows the that allows the immediate immediate withdrawal of withdrawal of funds from a funds from a checking account checking account without writing a without writing a check.check.

Can be used at Can be used at ATMs to withdraw ATMs to withdraw money.money. continued

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Debit CardsDebit Cards

Advantages of debit cards:Advantages of debit cards: They help you avoid carrying lots of cash.They help you avoid carrying lots of cash. When you use them you do not have to give When you use them you do not have to give

the store personal information.the store personal information. They prevent you from running up big balances They prevent you from running up big balances

and interest charges on credit cards.and interest charges on credit cards. They provide you with a detailed receipt of They provide you with a detailed receipt of

every purchase.every purchase. They are easier to use than checks when you They are easier to use than checks when you

are out of town.are out of town.

continued

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Debit CardsDebit Cards

Disadvantages of debit cards:Disadvantages of debit cards: The money you spend is automatically The money you spend is automatically

deducted from your account.deducted from your account. Without accurate records, you may overdraw Without accurate records, you may overdraw

your account.your account. You might be tempted to buy something you You might be tempted to buy something you

do not need.do not need. They can be used by another person if they are They can be used by another person if they are

lost or stolen.lost or stolen.

continued

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Debit CardsDebit Cards

Smart card:Smart card: An An advanced form of advanced form of debit card with an debit card with an embedded computer embedded computer chip to track certain chip to track certain purchasing purchasing information.information.

Cash card: Cash card: A prepaid A prepaid type of debit card, type of debit card, also called a stored-also called a stored-value card.value card.

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Checking AccountsChecking Accounts

Checking accounts provide:Checking accounts provide: A safe place to keep cash.A safe place to keep cash. An easy way to withdraw cash.An easy way to withdraw cash. A convenient way to make purchases and pay A convenient way to make purchases and pay

for them by mail.for them by mail. A detailed record of spending and receipts of A detailed record of spending and receipts of

payment.payment. A method of establishing a credit rating.A method of establishing a credit rating.

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Types of AccountsTypes of Accounts

A basic checking account allows you to A basic checking account allows you to deposit money and write checks.deposit money and write checks.

Express checking is for people who use online Express checking is for people who use online banking, banking by phone, or ATMs to do all banking, banking by phone, or ATMs to do all their banking.their banking.

An interest-bearing checking account allows An interest-bearing checking account allows you to earn interest and write checks on the you to earn interest and write checks on the same account. It is a savings and checking same account. It is a savings and checking account all in one.account all in one. At credit unions, these accounts are called share At credit unions, these accounts are called share

drafts.drafts. In commercial and savings banks, they are called In commercial and savings banks, they are called

a negotiable order of withdrawal (NOW) account.a negotiable order of withdrawal (NOW) account.

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Opening a Checking Opening a Checking AccountAccount

To open a checking account, talk to the person in To open a checking account, talk to the person in charge of new accounts, fill out a signature card, charge of new accounts, fill out a signature card, and make a deposit.and make a deposit.

You will get a checkbook with personalized checks You will get a checkbook with personalized checks and a register after you open your account.and a register after you open your account.

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Making DepositsMaking Deposits

Filling out a deposit slip:Filling out a deposit slip: Write in the date.Write in the date. Enter amount of deposit Enter amount of deposit

and record the total.and record the total. Enter the amount of cash Enter the amount of cash

you want to receive, if you want to receive, if any.any.

Subtract the amount Subtract the amount of cash from the total.of cash from the total.

Record that amount Record that amount as the total deposit.as the total deposit.

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Endorsing ChecksEndorsing Checks

Endorse: Endorse: Signing one’s name on the back Signing one’s name on the back of the check along the left end within the of the check along the left end within the area indicated.area indicated.

Blank endorsement – requires only the Blank endorsement – requires only the payee’s signature.payee’s signature. A check with a blank endorsement can be A check with a blank endorsement can be

cashed by anyone.cashed by anyone. Restrictive endorsementRestrictive endorsement – – payee’s payee’s

signature plus a statement indicating what signature plus a statement indicating what to do with the check, such as “For deposit to do with the check, such as “For deposit only” or “Pay to the order of.”only” or “Pay to the order of.”

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Writing ChecksWriting Checks

Name and address of person(s) authorized to use this check blank

Bank’s identification number

Check number

Name and address of bank

Check routing symbol

Bank’s identificationnumber

Account number continued

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Writing ChecksWriting Checks

When you write a check, fill in the When you write a check, fill in the following information:following information: Date.Date. Name of the payee.Name of the payee. Amount of the check in numbers.Amount of the check in numbers. Amount of the check in words.Amount of the check in words. Purpose of the check.Purpose of the check. Your signature.Your signature.

continued

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Writing ChecksWriting Checks

Payee’s name Date

Amount in numbers written close to the dollar sign

Reason for writing the check

Amount in words written as far to the left as possible and a line drawn through remaining space

Signature that matches your bank signature card

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Recording Changes to Recording Changes to Your AccountYour Account

Every time funds enter Every time funds enter or leave your account or leave your account you need to update you need to update your register.your register.

If you do not know If you do not know how much you have in how much you have in your account, you run your account, you run the risk of the risk of overdrawing.overdrawing.

You will be charged a You will be charged a fee for every fee for every overdraft.overdraft.

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Cashing ChecksCashing Checks

Two forms of identification (ID) are usually Two forms of identification (ID) are usually necessary to cash checks.necessary to cash checks.

When you are cashing a check, endorse it When you are cashing a check, endorse it in front of the teller.in front of the teller.

If you are cashing a two-party check, you If you are cashing a two-party check, you may be asked to verify the other person’s may be asked to verify the other person’s signature as well as your own.signature as well as your own.

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Balancing a CheckbookBalancing a Checkbook

Balancing your checkbook involves Balancing your checkbook involves comparing your monthly bank statement comparing your monthly bank statement to your register.to your register.

Be sure to enter any service charges or Be sure to enter any service charges or interest earned in your register.interest earned in your register.

Canceled check: Canceled check: A check that has been A check that has been processed/paid by the bank.processed/paid by the bank.

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Computerized Personal Computerized Personal Financial ManagementFinancial Management

You can buy You can buy software that will software that will help you manage help you manage your finances.your finances.

These programs These programs help you keep track help you keep track of your checking of your checking and savings and savings accounts, accounts, investments, credit investments, credit cards, and loans.cards, and loans.

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Special Types of ChecksSpecial Types of Checks

Traveler’s check: Traveler’s check: A convenient type of check A convenient type of check used by travelers that can be replaced if lost used by travelers that can be replaced if lost or stolen.or stolen.

Cashier’s check:Cashier’s check: A check drawn on a bank’s A check drawn on a bank’s own funds and signed by a bank officer.own funds and signed by a bank officer.

Certified check:Certified check: A personal check with a A personal check with a bank’s guarantee that the check will be paid.bank’s guarantee that the check will be paid.

Money order: Money order: An order for a specific amount An order for a specific amount of money payable to a specific payee.of money payable to a specific payee.

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Safe-Deposit Boxes Safe-Deposit Boxes

You can rent a safe-deposit box at a bank You can rent a safe-deposit box at a bank or other financial institution to protect or other financial institution to protect your valuables.your valuables.

When you use the box you have to sign When you use the box you have to sign your name, show ID, and give your key to your name, show ID, and give your key to the attendant.the attendant.

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Savings Accounts at Savings Accounts at Financial Institutions Financial Institutions

You may want to put part of your money You may want to put part of your money into some type of savings rather than into some type of savings rather than keeping all of it in your checking account.keeping all of it in your checking account.

Saving money at a financial institution Saving money at a financial institution gives you a safe place to keep your gives you a safe place to keep your money, pays interest, and can help you money, pays interest, and can help you establish a good credit rating.establish a good credit rating.

continued

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Savings Accounts at Savings Accounts at Financial InstitutionsFinancial Institutions

Types of savings programs:Types of savings programs: Regular savings account.Regular savings account. Money market deposit account.Money market deposit account. Certificate of deposit.Certificate of deposit.

It is important to understand how interest is It is important to understand how interest is determined before choosing a savings plan.determined before choosing a savings plan.

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Understanding InterestUnderstanding Interest

Interest is the amount of money a financial Interest is the amount of money a financial institution pays you for the use of your institution pays you for the use of your money.money.

Two methods of calculating interest:Two methods of calculating interest: Simple interest: Simple interest: Interest is paid only on the Interest is paid only on the

money initially deposited in the account.money initially deposited in the account. Compound interest: Compound interest: Interest paid on an initial Interest paid on an initial

deposit as well as on interest already earned.deposit as well as on interest already earned. Make sure you consider how often the Make sure you consider how often the

interest is compounded, the amount of time interest is compounded, the amount of time you plan on investing, and whether you will you plan on investing, and whether you will make deposits or withdrawals.make deposits or withdrawals.

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Regular Savings AccountsRegular Savings Accounts

Only takes a few dollars to start and allows Only takes a few dollars to start and allows you to make deposits and withdrawals in you to make deposits and withdrawals in varying amounts at any time.varying amounts at any time.

Funds can be withdrawn at any time Funds can be withdrawn at any time without a penalty fee. without a penalty fee.

This type of savings account pays the This type of savings account pays the lowest rate of interest.lowest rate of interest.

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Money Market Deposit Money Market Deposit AccountsAccounts

Requires a minimum Requires a minimum deposit, but pays a deposit, but pays a slightly higher slightly higher interest rate than a interest rate than a regular savings regular savings account.account.

You can write checks, You can write checks, usually with usually with restrictions, to make restrictions, to make withdrawals from a withdrawals from a money market money market account.account.

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Certificates of DepositCertificates of Deposit

Certificate of deposit (CD):Certificate of deposit (CD): Money Money deposited for a set period of time that deposited for a set period of time that earns a set rate of interest.earns a set rate of interest.

Your rate of interest will be higher the Your rate of interest will be higher the longer you hold a CD.longer you hold a CD.

If you cash in the certificate before the If you cash in the certificate before the time period is over, you lose a significant time period is over, you lose a significant amount of interest.amount of interest.

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Investing Your MoneyInvesting Your Money

There are many There are many investments that are investments that are safe and low risk that safe and low risk that can yield higher can yield higher returns than regular returns than regular savings accounts.savings accounts.

Types of investments:Types of investments: Securities.Securities. Retirement accounts.Retirement accounts. Real estate.Real estate.

continued

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Investing Your MoneyInvesting Your Money

Inflation:Inflation: A general increase in prices. A general increase in prices. Consumer Price Index (CPI): Consumer Price Index (CPI): A measure of A measure of

the average change in prices for consumer the average change in prices for consumer goods and services over time.goods and services over time. CPI is used to provide a basis for calculating CPI is used to provide a basis for calculating

annual cost-of-living increases for many annual cost-of-living increases for many current and retired workers.current and retired workers.

This adjustment to income gives consumers This adjustment to income gives consumers the same buying power from year to year, the same buying power from year to year, even though prices have risen.even though prices have risen.

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SecuritiesSecurities

Securities: Securities: Investments that represent Investments that represent either ownership or indebtedness.either ownership or indebtedness.

Stock: Stock: A share in the ownership of a A share in the ownership of a corporation.corporation.

Preferred stock: Preferred stock: Stock that pays set Stock that pays set dividends (profits) at set rates regardless of dividends (profits) at set rates regardless of the amount of profits the company earns.the amount of profits the company earns.

Common stock: Common stock: Stock that pays dividends Stock that pays dividends based on company earnings and economic based on company earnings and economic conditions.conditions.

Bond:Bond: A certificate of debt or obligation A certificate of debt or obligation issued by a corporation or a government.issued by a corporation or a government.continued

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SecuritiesSecurities

Mutual fund: Mutual fund: A company that collects A company that collects money from many investors and invests it money from many investors and invests it in securities.in securities.

Money market fund: Money market fund: A type of mutual fund A type of mutual fund that deals only in high-interest, short-term that deals only in high-interest, short-term investments, such as government investments, such as government securities and certificates of deposit.securities and certificates of deposit.

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Retirement AccountsRetirement Accounts

401(k) plan: 401(k) plan: Retirement savings Retirement savings plan offered through an plan offered through an employer.employer.

Individual retirement account Individual retirement account (IRA):(IRA): A type of retirement A type of retirement savings plan for employed savings plan for employed people.people. Traditional IRA - you pay taxes on Traditional IRA - you pay taxes on

the money when it is withdrawn the money when it is withdrawn after retirement.after retirement.

Roth IRA - the amount of money you Roth IRA - the amount of money you contribute is taxed, but withdrawals contribute is taxed, but withdrawals and earnings are not if you follow all and earnings are not if you follow all requirements.requirements.

continued

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Retirement AccountsRetirement Accounts

Keogh plan:Keogh plan: A tax- A tax-deferred retirement deferred retirement plan for self-plan for self-employed people or employed people or employees of employees of unincorporated unincorporated companies that do companies that do not have their own not have their own pension plans.pension plans.

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Real EstateReal Estate

Real estate is an Real estate is an investment in land or investment in land or buildings.buildings.

You may need a You may need a large amount of large amount of money to make the money to make the investment.investment.

There is considerable There is considerable risk in real estate, risk in real estate, but it can yield big but it can yield big returns.returns.

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Making InvestmentsMaking Investments

Investing tips:Investing tips: Set an investment goal. Begin with a small Set an investment goal. Begin with a small

investment and build from there.investment and build from there. Do not invest money you cannot afford to lose. Do not invest money you cannot afford to lose.

Very few investments are completely safe from Very few investments are completely safe from loss.loss.

Thoroughly examine your investment plan first. Thoroughly examine your investment plan first. Research the current outlook for the economy, Research the current outlook for the economy, and look for an investment that is expected to and look for an investment that is expected to increase in value.increase in value.

Find reliable professionals to help you make Find reliable professionals to help you make investments. Check their credentials and record investments. Check their credentials and record of achievements.of achievements.

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Thinking BackThinking Back

What is the correct What is the correct way to endorse, way to endorse, deposit, write, and deposit, write, and cash checks?cash checks?

What are the types of What are the types of special checks that special checks that can be used in place can be used in place of personal checks of personal checks and cash?and cash?

Explain the different Explain the different types of savings plans types of savings plans and investments. and investments.