Financial Management

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1 I. Banking landscape today In the past year alone, banks have taken many actions to make up for lost profits, including eliminating free checking, raising fees, and pushing customers to buy more financial products from them. The shifting landscape of banking has yielded checking accounts that have become increasingly complicated and difficult to sift through and compare: On average, big banks offer 5-8 different checking accounts. At any given big bank, there are 5 to 20 different ways to waive monthly fees. Usage fees like ATM, overdraft, and even ancillary fees are expensive, but are often buried in footnotes or not disclosed at all ( so comparing differences between banks can be difficult!) Bank Failures and the Federal Deposit Insurance Corporation (FDIC): FDIC insurance protects you from losses if your bank goes belly-up. The FDIC was created as a result of thousands of bank failures in the 1920s and 1930s. Amid chaos and fear about continuing bank failures, the Banking Act of 1933 created the FDIC as a temporary measure to restore order (signed into law by President Franklin D. Roosevelt) o the Banking Act of 1935 made the FDIC a permanent agency. The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. FDIC Bank Failure Statistics: II. How do I compare banks, checking/savings accounts (etc.)? erdwallet.com Launching a new tool to find free checking that enables users to compare over 120 different checking accounts across all types of financial institutions, including alternatives to big banks like credit unions with open membership and direct banks. With a few simple questions, the NerdWallet tool determines the best checking account based on an individual s ability to maintain a minimum balance, direct deposit, and meet all other requirements. In addition, the tool allows those seeking higher rates to find interest checking. FindaBetterBank.com Conduct their own research for the largest US banks and audit the information provided by community banks and credit unions. Their branch location database is sourced from the FDIC and is updated with information provided by banks and credit unions. 1

2 BankRate.com Internet banks often offer the best rates. Credit unions also have good deals, but their basic checking accounts aren t usually as strong as those at online-only banks. Car loans, mortgages, and certificates of deposit are where credit unions really shine. Important things to consider Minimum balance requirements Many brick-and-mortar banks charge you a monthly fee if your balance is below a certain amount. (They make more money from accounts with high balances.) Most Internet banks don t charge these fees, but be sure to check some banks charge a lot of money simply to store your money! ATM Fees Any bank that doesn t have branches won t have many (or any) ATM machines. Assume you ll be hit with a fee from a visiting bank as much as $2 or $3 for using an ATM that s not part of your bank s network. The good news is that many Internet banks reimburse you for fees charged by other banks ATMs. (See below ATM Rebates ) Ask about the reimbursement policy and make sure there s no caps on how much or how often you ll be repaid. Overdraft fees banks make a lot of money by letting you overdraw your account and then charging you a $30 fee ( or interest on the amount you overdrew, or both). Many banks will automatically sign you up for this overdraft service without asking you first. Annual Percentage Yield (APY) Tool for evaluating how much a deposit earns you. It is a standardized way of comparing investments. Your job as a consumer is to put your money where it will get the highest APY. APY is telling you how much you re really making on your money. In general, you ll find that the APY is higher for more frequent compounding periods. Ask your financial institution how often they compound. If your money is compounded daily as opposed to quarterly, you ll be able to earn a better APY. and helpful features/functionality to look out for: Online Bill Pay Many banks and credit unions offer an option to make payments directly to your creditors online from your savings or checking account for no fee. Add your payees and schedule one-time or automatic/recurring payments. 2

3 o or, if you choose, you can have your service provider (i.e., Verizon) automatically withdraw you bill total from your savings or checking when due. o Banks and credit unions generally offer this service. o This program saves you the cost of a postage stamp and avoids any delays in US mail processing. o but be careful! If you do not have a regular pay date the automatic withdrawal from the service provider could overdraw your account, resulting in avoidable fees! Mobile Check Deposit Take a picture of both sides of your endorsed check with your camera. Check the info on the verification screen and submit. You have rapid confirmation that your images have successfully uploaded and your check is being processed. Skip the deposit slips, lines, and ATMs! Deposit checks anytime and anywhere. /Text Alerts Receive up-to-date status of your checking or savings account(s). Request alerts when changes take place on your account, allowing you to effectively manage your account balances and avoid additional fees. keep a (moderate) archive of recent transactions you can easily retrieve/reference when speaking with Customer Service about questions or concerns on your account. Keep an electronic paper trail, just in case, for any significant or questionable changes on your account. always document a confirmation or ticket # when speaking with a customer service representative, if available. ATM Rebates With ATM rebates, ATM fees from an out-of-network bank ATM is rebated to your account. III. Credit vs. Debit card Debit cards are intended by banks for consumers who need to use liquid (or readilyavailable) cash from the bank at a moment s notice. Lawmakers put debit cards and credit cards into different categories (due to the debit vs. credit market divide) so consumer protection varies. Scenario #1: A retailer accidentally drawing too much from your account ( refunding may not be as quick with Debit vs. Credit.) Scenario #2: A gas station may place a $50-$100 card block (or hold ) on your debit or credit card to confirm funds exist in your account to cover the charge. Once the gas is purchased, the $50-$100 block on your funds may not be released right away possibly resulting in bounced check(s) or overdraft fee(s)! 3

4 o there is no difference on how retailers, such as gas stations, treat card blocking on debit or credit cards. Consider the following before signing up for a credit card: 1. Annual Percentage Rate (APR) o How much you will be charged in interest on the money you borrow from a creditor. o Credit card issuers typically waive interest charges if the balance is paid in full each month and most will charge full interest on the entire outstanding balance, from the date of each purchase, if the total balance is not paid. (ref The Lure of Free below) o Under Federal law, the introductory APR% period must last at least six months, and the credit card company must tell you what your rate will be after the introductory period expires. Example: Your introductory rate may be 8% for six months and then go up to 15%. Is there a minimum purchase requirement to keep rate? 2. Annual Fee o What is it? o Why is it being charged? o When will it be charged? o How will it be charged? 3. Customer Satisfaction o Are there convenient bill pay options? o Does Customer Service have a good or bad reputation? (How hard is it to get in touch with a real person?) o Free text/ alerts/notifications. 4. Customer Rewards o Examples: Cash back, airline miles, points to redeem on various items o What s the Return-of-Investment (ROI)? (For example, is the minimum requirement for the rewards so high that it makes the rewards out-ofreach? (Reminder: Prize system at festivals, carnivals, etc.) o Do rewards or points expire? (If so, how long do you have to use them?) o Can reward points change in value? Will you be notified of the value change in time to cash out beforehand? o Are the rewards something you can take advantage of? (Airline or gas station rewards for someone who does not fly or drive would not be useful.) o Are rewards transferable? (Can you purchase extra points to build up your account for a major redemption?) IV. Money Traps Example: Cash Advances or Payday Lending loans This money trap lures you with quick access to funds/convenience while it gouges you with a high interest rate (APR). 4

5 Typically an unsecured small, short-term high interest loan ($50-$500) with a very high interest (APR). Payday lending is legal and regulated in 37 states. In 13 states it is either illegal or not feasible, given state law. Customers write a post-dated check (check with a future date) that the Payday Loan store will not cash until the designated date. Payday loans are renewable or extendable. This process is called rollover and if you do it too many times, it could end up costing you a lot of money. Example: Borrow $100 for 14 days (until your next payday). You write a check to the lender for $115 (includes your $15 fee). If you can t pay back the $115 on the due date, you can rollover the loan for an additional two weeks. If you rollover the loan three times, the finances charge would reach $60 ($15 * 4) for a $100 loan. Example: $0 Down the lure of Free Financing This money trap lures you into buying something immediately for little or nothing up front. For instance, if you buy a $1,000 TV on credit with $0 down, 0% interest for 6 months (with 20% APR if unpaid). Scenario #1: (Best case ) Make monthly payment of $ ($1,000/6 months) for 6 months to pay balance in full by the end of 6 months. No charges incurred. Total paid = $1,000. Scenario #2: ( and far too often ) Balance is not paid off by the end of 6 months, interest will be owed on entire balance, and interest accrues from day 1 of loan. Calculations on 20% APR (1.67% periodic) of original $1000 purchase: Month Bill 1 $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, Concept of Compounding Interest (or in other words, Interest on top of interest. ) A fairly financially disciplined person can certainly take advantage of this and may come off the better for it as it may improve credit if the obligation is repaid in good time. However, even the most well-intentioned person could run into a negative financial situation while in repayment which could result in that person unable to repay the obligation and would negatively impact credit as well as repossessed goods. 5

6 ***ALWAYS consider when taking ANY loan Credit Card Repayment Calculator: *** V. Fixed vs. Flexible Expenses Fixed expenses typically stay the same month-to-month and are defined as necessary. Example: Phone service Flexible expenses typically fluctuate based discretionary choice. Example: Food selection(s) at a restaurant. Needs vs. Wants When budgeting, it is essential to determine fixed expenses to know how much you will have left over toward flexible expenses: Example: Balanced Money Approach o 50% - Fixed ( Needs ) o 30% - Flexible ( Wants ) o 20% - Emergency or Rainy Day savings ACTIVITY: Envelope Budgeting HISTORY: This budgeting style helped many Americans manage what little finances they had to persevere through the Great Depression. Each group member will develop a minimum: ( fit to your personal situation) o 3 envelopes for FIXED expense categories o 3 envelopes for FLEXIBLE expenses Try to determine how much spend will take place per category. Practice self-discipline by NOT borrowing from other envelopes! VI. Online Personal Financial Management MyFICO.com (ScoreWatch) credit monitoring will show you where you are now, and how far you need to go to meet your credit goals. receive up-to-date alerts of important changes to your credit score. Added security against identity theft, unknown late payments, etc. HelloWallet.com Mint.com DoughHound.com PennyMinder.com ideal for families with multiple spenders because it allows users to see other family members' spending and jointly manage a household budget. You eedabudget.com aimed at people living close to their budget and trying to pay off debt. Pocketsmith.com focuses on calendar-based planning, which means it allows you to see how your monthly and annual expenses compare with what you bring in. 6

7 References: How to Select a Checking Account: FDIC Insurance Coverage Basics: FDIC Bank Failure Statistics: HelloWallet Launches to Consumers to Grow Personal Wealth: Scorecard for Savings Accounts: 10 Places Not To Use Your Debit Card: places-not-to-use-debit-card-1271.php Seven Psychological Money Traps and How to Avoid Them: Credit Card Repayment Calculator: 20 Avoidable Job Search Mistakes: pt=sbin 7