BUYING AND FINANCING YOUR NEW CAR

BUYING AND FINANCING YOUR NEW CAR By the InCharge Education Foundation, Inc. 2101 Park Center Drive, Suite 310 Orlando, FL 32835 www.mindyourfinances.com All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information or storage system, without the written permission from the author, except for the inclusion of brief quotations in a review. 2004 InCharge Education Foundation, Inc.

00 LEARNING OBJECTIVES The Learning Objectives for this booklet in the Mind Your Finances series are: 1. Distinguish among financial institutions. 2. Choose the best checking account for you. 3. Create a saving plan. 4. Learn about your longer-term savings options. PAGE.01

01 DISTINGUISH AMONG FINANCIAL INSTITUTIONS In order to make the best-informed decision about where you are going to put your money, you should know that the reason we say financial institution rather than bank, is that banks are not your only option. In fact, you might find that a bank isn t the best place for you to keep your money. So what are your choices? There are four types of financial institutions that you can choose from: 1. Banks 2. Credit Unions 3. Savings and Loans 4. Investment Companies and Brokerage Firms The one thing they have in common is that they all offer some sort of savings vehicle. But what they might not have in common are the details: services, fees & penalties, check-clearing time, the ease with which you can access your money, online banking, hours, and free checking (or any checking, for that matter). As always, it s a good idea to be aware of your options before you make a decision. Though there may be a bank on the corner of your street, it s not necessarily the best bank for you. Let s begin with some definitions: Banks are for-profit companies whose objective is to make money for their shareholders. One of the ways they make money is by charging you fees. Lots of fees. And by not paying a lot of interest on savings or checking accounts. On the upside, the money you put in a legitimate bank is insured, up to $100,000 by Federal Deposit Insurance Corporation (FDIC). This means that no matter what happens, you will be able to recover at least the first $100,000 of your money. Make sure the bank you choose is insured by the FDIC. You can buy just about any of the savings products at your bank. The question is: How much are they going to charge you? You just might find that your local bank has so many fees, and such high fees, that you are better off putting your money elsewhere. Credit Unions are non-profit associations of individuals and their families who share a common bond. The credit union PAGE.02

pools the deposits of member-owners that are then used to invest or lend to other member-owners. Since they are not trying to maximize profits for shareholders (like banks are) and do not pay lavish salaries and bonuses to their executives (like banks do), credit unions pay high interest rates, have low loan costs and assess small fees. And they even pay dividends, like interest, to their members once a year. Most credit unions are insured up to $100,000, just like banks, but by the National Credit Union Share Insurance Fund. Credit unions have all of the same services and products that your bank has, and their fees are usually lower. They are the best, low-cost alternative to banks. If your employer doesn t have a credit union, it s worth a call to the Credit Union National Association to get the contact information for credit unions in your state. You never know, you might be able to join one. Call 1-800-358-5710 or write to them at P.O. Box 431 Madison, WI 53701. Savings and Loans (S&Ls) are for-profit institutions that have many of the savings products that your local bank has, and many of the services. The Federal Savings and Loan Insurance Corporation will insure your S&L deposit account up to $100,000. The downside is that your neighborhood probably isn t swarming with branches. Investment Companies and Brokerage Firms are forprofit companies that offer some banking services, but they are usually only available in conjunction with investment products such as stocks, bonds, and mutual funds. For instance, if you have your retirement account with one of these institutions, you will probably be able to have checking privileges as well. And the interest will be higher than you would get from a bank. The Securities Investors Protection Corporation insures up to $100,000 in cash and $400,000 in securities against the failure of your brokerage company (not the failure of your investments). Although it might seem like we are bank-bashing, not all banks charge huge fees and lots of them. Small, community banks (the ones with only one or two branches, as they are owned by their local community) tend PAGE.03

to act very much like credit unions, and are a great alternative if you aren t eligible to join a credit union. In fact, according to research by the U.S. Public Interest Research Group, consumers could save at least $75 per year by banking at a small bank or credit union instead of a big bank. The average annual fees for maintaining a regular checking account at 300 large banks amounted to $266! However, the costs were only $191 at small community banks and just $101 at credit unions. Banks hide fee increases by charging a la carte for services that once were standard with checking accounts. And they profit handsomely by paying less than half of a percent in interest on checking accounts, which is equal to the tiny sum of $9 a year on a $2,500 balance. Which institution you choose to do business with depends on what you want from your financial institution. For example, I want my financial institution to have... 1. Few and low fees. 2. A lot of ATMs close to where I work and play. 3. Free checking. Truly free checking. 4. Free online banking. 5. Friendly people who know my name. Now you try. What are your priorities for a financial institution? 1. 2. 3. 4. 5. Once you know what you are looking for in a financial institution, you can go to a handful of them in your local area, get their brochures, and talk to an account representative. PAGE.04

If you plan to do a lot of banking in person, take particular note of the environment and how the staff treats you. If you are a relationship kind of person, and the feeling you get from your financial institution is important take notes about the feeling you get on the form provided on pages 9. Here s a snapshot of the advantages and disadvantages of using the different financial institutions (from the Wall Street Journal s Guide to Understanding Personal Finance). TYPE BANK ADVANTAGES Bank serve individuals and businesses. Usually have multiple, welllocated branches. Offer a full range of banking services DISADVANTAGES Fees are generally highest. Service is often impersonal. CREDIT UNION Fees and loan rates are usually lowest because they are non-profit. Earnings are paid out to members at year s end. About 10% are not federally insured. Checks are not returned to you. SAVINGS & LOAN Savings & Loan fees may be lower than at a bank. May be open evenings and Saturdays. Most have only a few branches. Service may be impersonal. INVESTMENT COMPANY Low-cost or free savings and checking when coordinated with investing. Checking usually earns high, even taxfree interest. Limited number of banking services. Larger minimum balances required. Not FDIC insured, but may be privately insured. BROKERAGE FIRM Low-cost or free checking when coordinated with investing. Checking usually earns high, even taxfree interest. Limited number of banking services. Larger minimum balances required. Not FDIC insured, but may be privately insured. A word on searching for high rates and safety... If you are someone who wants the highest interest, go to www.bankrate.com for a free list of banks that are currently paying the most (and be aware that many of those institutions will be located outof-state). And if you want to find out just how safe your money is in a bank, call Veribanc of Wakefield, Massachusetts at 800-442-2657. For $10 they will rate the financial stability of your bank or savings and loan. PAGE.05

SELF-CHECK 1. Which of the four types of financial institutions is best for you and why? 2. Which financial institution generally offers the highest interest rates and the lowest fees? 3. Is there a credit union that you could be eligible for? If your answer is no, have you checked to make sure? PAGE.06

02 CHOOSE THE BEST CHECKING CHECKING ACCOUNT FOR YOU One of the goals for your take-home pay will always be the ability to manage those funds in a way that most efficiently pays your monthly expenses, while minimizing your costs and maximizing your interest earnings. This is what is known as cash management. And one of the most popular, convenient, and safe ways of accessing the money in a bank is the checking account or demand deposit account. In other words, when you write a check, you demand the financial institution to pay a specific amount to anyone you choose. The checking account and the money market deposit account give you the kind of access to your funds you ll need for everyday use. THE NOW CHECKING ACCOUNT Most people will open some kind of interest-earning checking account, which is also called a NOW (negotiable order of withdrawal) checking account, or a share draft checking account at a credit union. This account earns interest or dividends as long as you satisfy their minimum-balance requirement. But the minimum-balance requirement can be structured one of two ways, so make sure you are clear about which is being offered when you shop around. The two ways the minimum balance can be structured work like this: 1. For the straight minimum balance, each and every time you dip below the minimum (perhaps $400-$500), you are charged a service fee, perhaps $10 to $15. 2. Then there s the average-balance account, which charges a service fee, perhaps $10 to $15, only if the average daily balance in the account drops below the minimum (perhaps $500) during the time period (usually a month or a quarter). PAGE.07

SPECIAL CHECKING ACCOUNTS In addition to the NOW account, there are also special checking accounts that require no minimum balance to open, but do have a monthly service charge (perhaps $5-$10) or charge fees for each check or transaction (perhaps 50 cents per check) AND have a maximum number of transactions allowed each month without triggering more fees. If you write only a couple of checks each month, and you don t usually have enough money to meet a minimum balance requirement, this could be the type of account for you. LIFELINE CHECKING ACCOUNT A lifeline checking account (or basic checking account) is available at some financial institutions and is for people with very low incomes. The cost of a lifeline checking account is extremely low, often about $3 per month. And you can only write a limited amount of checks each month. 21ST CENTURY EFT If you have your paycheck deposited directly into your account, if you have loan payments taken directly from your account, or if you use a personal computer or phone to conduct financial transactions, you are using electronic fund transfer (EFT) systems. These systems eliminate the hassle of check writing (and using envelopes and stamps), are accessible in locations other than a financial institution, and can be used at times other than traditional business hours. Forms of EFT include: Automatic Teller Machine (ATM) Cards, and Debit Cards. If this feature is important for you, make sure you pay close attention to the fees you might have to pay. Now let s shop around and find you a checking account... PAGE.08

COMPARE ACCOUNT TYPES NOW ACCOUNT SPECIAL ACCOUNTS LIFELINE ACCOUNT Is checking free? If yes, is there a minimum balance required? Is it a minimum-balance or averagebalance account? If no, what is the monthly fee? Is interest paid? What is the rate? Is there a minimum balance required? What are the charges for: - Overdrawn account? - Checks/check printing? - Cashier s check? - Deposited check returned for insufficient funds? - Inactive account (and what s their definition?) - Account information request in person from a human teller? - Account information request by phone? - Transferring funds by phone? Other considerations Is there a branch nearby? Are checks returned with the statement? How many days before deposited funds are available? What savings plans are available? Is overdraft protection available? What interest rate is charged? Are ATM or Debit Card services available with the account? What is the cost of each transaction? Do they have online banking? Is there a fee for online banking? If you have other products from the financial institution, such as a car loan, home mortgage, or CD will they give you a better deal on your checking or savings account? Non-financial factors such as: the people or the environment in the building PAGE.09

Ask your prospective financial institutions if there are other charges and requirements, as well. Think about what your pattern will be for using a checking account, and then choose the financial institution with the best package for you according to your list of priorities. Remember that there are different ways to define minimum balance, and there are different minimums, maximums, and other limitations for each type of account. And it s those details that are important because they are what trigger fees. Regardless of which checking account you end up with, you ll probably need some tips on how to minimize your banking fees. AVOIDING NASTY FEES ATM FEES Most financial institutions impose ATM surcharges that average $155 a year per household. Consumers are paying fees just to use their own money! And ATM charges have been rising 10 to 20 percent every year. There are three possible types of ATM fees: 1. A charge by your own financial institution to use its machines typically 50 cents to $1; 2. A fee if you access your financial institution from an ATM owned by another financial institution $1 to $2; and 3. A special surcharge for non-customers often $2 or $3. In other words, when using a financial institution other than your normal one, you pay twice for the same transaction! The fee may be as much as $10 on a cruise ship or in a casino. Some states have banned or restricted charging another financial institution s customers to use an ATM. Here are some tips on minimizing those pesky ATM fees: 1. If you have one, use your Visa or MasterCard check card so you can use it to make purchases and have the option to get cash back at the store. PAGE.10

2. If there is an ATM available that does not charge a fee, use it! 3. Plan ahead. If you will be going on a trip, and aren t sure if there will be a no-fee ATM where you re going, withdraw some money from a no-fee ATM before you leave. 4. Choose a financial institution that does not charge you ATM transaction fees for using any ATM (this alone eliminates half of the ATM fees that you could be charged for a transaction). 5 If you must use an ATM with fees, withdraw the amount you ll need until you can go to an ATM that won t charge you fees. It s cheaper to get $100 in one withdrawal and pay a $3 fee than it is to go to an ATM four times to withdraw $20 and pay $12 in fees. 6. Make fewer larger withdrawals rather than more frequent small withdrawals. CHECKING FEES The typical financial institution charge for a bounced check is $25 to $35, while the real cost the financial institution incurs is about $3. Bankrate.com (www.bankrate.com) reports that the minimum balance requirement to avoid high fees is $2,600. If your balance slips below that amount, you are subject to a monthly charge that averages $11. Financial institutions also charge inactivity fees on accounts with little or no transactions, and the fees are so high (sometimes $10 a month) that they could wipe out a small balance in an account within one or two years. For a $2 mathematics mistake in a checking account that results in a consumer writing a bad check (also called a bounced check), or one written with non-sufficient funds (NSF) in the account, the banking industry puts you on a blacklist. Almost all banks in the United States consult Chex-Systems, which provides a list of seven million people deemed guilty of account abuse, such as writing bad checks and deliberate fraud. It does not matter to Chex-Systems if later the overdraft was paid. Most banks and credit unions will not open a new account for five years for people on the blacklist. Indeed, the cost of forgetting to PAGE.11

subtract items from your check register can be brutal. You can get a copy of your Chex-Systems report at www.chexhelp.com. AVOID BOUNCING CHECKS! It s easy to bounce checks if you don t know how much you have in your checking account. To make sure you have the money you need to cover the checks you ve written, you have to know what your current checking account balance is. Here s an important tip: Don t just call the financial institution to find out your current balance it may not have an accurate current balance! For instance, it may not have received a check you ve written yet, or have recorded an ATM withdrawal you made last night. To make sure you know your current account balance: Record your transactions immediately! If you forget to record a transaction, you ll think you have more in your checking account than you really do. Keep a current balance in your checking account register. This is the best way to keep track of your current account balance. Subtract each and every check to maintain an accurate balance. Reconcile your check register with your checking account statement. You should do this each month to make sure you or your financial institution hasn t made any errors in recording your transactions (and yes, sometimes financial institutions DO make errors.) WARNING! You might find that some banks offer something called bounce protection that sounds an awful lot like overdraft protection. Bounce protection assigns you an amount, from $100-$1,000, that is actually added to your checking account balance. It basically lets you avoid paying bounced-check fees (or going over your balance when using your debit PAGE.12

card or an ATM) for a flat fee of up to $35 for each overdraft. BUT, the bank is not obligated by law to pay your overdrawn check, AND if it does, you have to restore your balance to positive every 30 to 45 days. In other words, bounce protection is no better than a payday loan, so stay away. SELF-CHECK 1. Which type of checking account is most appropriate for you? Why? 2. What events will trigger a fee from your checking account? 3. What is your plan for minimizing fees associated with your checking account? PAGE.13

03 CREATE A SAVINGS PLAN No matter how old you are, and no matter what your financial situation is, one of your financial priorities should always be to save money. And the best way to save money is to pay yourself first, meaning you put money into savings before you even pay one bill or make one purchase. After all, if you rely on saving after you have paid all of your bills and made whatever purchases you thought were necessary, you might not save at all. Whether you re buying a house, putting your children through school, or saving for retirement, saving will always be a major part of your financial life. If you don t currently have a savings plan, now s the time to make one. And if you do, now s the time to review it. Saving helps you keep money available for emergencies or large purchases without having to borrow, and allows you to plan for priority spending. So what are your financial priorities? In 1-5 years, I ll need by (date) for (purpose) 1. 2. 3. In 1-5 years, I ll need by (date) for (purpose) 1. 2. 3. For financial goals that you need to reach this year, such as a wedding or funding your 3-6 month emergency fund, you ll be using your checking account. You may not be earning much interest, but at least your money PAGE.14

will be safe. And hopefully your account has as few and as low fees as possible, and pays as much interest as possible. For your longer-term goals you ll be using products that pay you some interest so your money will outpace inflation. If you want to calculate just how long it will take you to save for your goals, go to http://education.incharge.org/calculators/. Finally, don t forget to pay off higher-interest credit accounts before lower ones, and aim to save enough to cover 3-6 months of normal living expenses in case of an emergency. SELF-CHECK 1. If you have credit-card debt, is getting out of debt on your list of short-term goals? 2. If you don t have enough money saved to cover 3-6 months of living expenses, is accumulating that money one of your shortterm goals? PAGE.15

04 LEARN ABOUT YOUR LONGER-TERM SAVING OPTIONS For your longer-term goals, such as the down payment on a new house or your teenager s upcoming college tuition, you ll want to put your money someplace safe, and you ll also want the return to at least keep up with inflation. Ideally, you want to make some money from saving. Your options are: 1. Savings accounts, which allow you to accumulate funds and earn interest on your deposits. An example of a savings account is the traditional passbook savings account. 2. Time deposit accounts, which are best for longer-term savings because you can t withdraw funds without prior notice, or within a specified period of time. An example of a time deposit account is a certificate of deposit (CD). SAVINGS ACCOUNT Your savings accounts won t pay much interest, regardless of which institution you have your account with. It will probably yield 1-2%, if you re lucky. There is usually a small minimum initial deposit of $25-$100, and you will probably have a fee assessed if you don t maintain it. Your access to your money is immediate, and you can make deposits through a teller, an ATM, or electronically. Your money is safe (if the institution s accounts are government insured, so ask to be certain). Financial experts always suggest that people save money through an automatic transfer from checking to savings. Almost all financial institutions will, on request, automatically transfer funds monthly from your checking account to a savings account or even a U.S. Savings Bond. What you don t see coming out of your paycheck or from your checking account, you probably won t miss. PAGE.16

MONEY MARKET DEPOSIT ACCOUNT This account is like a hybrid checking and savings account. It pays interest, though the rate varies (and is always low, but a little more than a checking or savings account). You must maintain a minimum balance. Your access is immediate, but your withdrawals might be subject to a minimum. There is a limitation to the number of checks you can write (perhaps 6 checks every quarter). MONEY MARKET FUND Requires a minimum initial deposit that can be as low as $250. Can be purchased by mailing a check or by wiring funds from another account. Deposits are done the same way. The yield is not high (just over 1%). You have immediate access to your funds and some funds have check-writing privileges (but you re limited to just a couple of checks). Writing a check for less than $100 is prohibited. These investments are not government-insured, but no consumer has ever lost a penny in these accounts because the institutions all have private insurance against loss. TIME DEPOSIT ACCOUNTS CERTIFICATE OF DEPOSIT (CD) Certificates of Deposit are purchased through your financial institution and are for a specific period of time (6 months to 10 years) and a specific rate of interest (the yield may be 2-4%, and the longer the term, the higher the interest). The minimum for purchasing CDs is usually $500. PAGE.17

Though you can access your money at any time, there is a penalty for early withdrawals (that is, taking money out before the CD s maturity date). Your money is safe (again, it s government-insured). U.S. SAVINGS BOND, SERIES EE U.S. Can be purchased at your financial institution or from the U.S. Treasury. You buy them for half of their face value, so a $100 bond will cost $50. They are your opportunity to invest in the U.S. government. Their interest and maturity dates are set (they yield about 3%), and the interest is exempt from state and local taxes. The minimum investment is as low as $25, and you can make deposits periodically through payroll or checking account deductions. You have access to funds after the first 6 months (immediate access, but loss of 3 month s interest). You must cash in after 30 years or no more interest earned. SELF-CHECK 1. What kind of account are you going to use for the money you are saving for your short-term goals? Why? 2. What kind of account are you going to use for the money you are saving for your long-term goals? Why? PAGE.18

05 SUMMARY There are four types of financial institutions you can choose from: 1. Banks 2. Credit Unions 3. Savings and Loans (S&Ls) 4. Investment Companies and Brokerage Firms Credit Unions are your best bet as they pay high interest rates, have low loan costs and assess small fees. And they even pay dividends, like interest, to their members once a year. If you aren t eligible to join one, your next best option is a small community bank. Large Banks, S&Ls, and Investment Companies and Brokerage Firms charge lots of fees and have lists of requirements in order to avoid fees (e.g., minimum balance requirements and the purchase of other products through them). Everyone needs a checking account (also known as a demand deposit ) account to help them manage their take-home pay in a way that most efficiently pays their monthly expenses, while minimizing costs and maximizing interest earnings. This is what is known as cash management. When comparing potential places to house your checking account, you will need to consider: if there is a minimum balance requirement, what events trigger fees, how much the fees are (and pay special attention to rules about ATM fees), whether they have online banking, and whether their account is truly free (if they say it is). One of your financial priorities should always be to save money. And the best way to save money is to pay yourself first, meaning you put money into savings before you even pay one bill or make one purchase. Another way to maximize your paycheck is to pay off high interest credit card debt as soon as you can, as it s like a guaranteed return on your money. Saving helps you keep money available for emergencies or large purchases without having to borrow, and allows you to plan for priority spending. PAGE.19

For financial goals that you need to reach this year, such as a wedding or funding your 3-6 month emergency fund, you ll be using your checking account. For your longer-term goals you ll be using products that pay you some interest so your money will outpace inflation. Your options are: 1. Savings accounts (e.g., traditional passbook savings accounts, Money Market Deposit Accounts, and Money Market Funds), which allow you to accumulate funds and earn interest on your deposits. 2. Time deposit accounts (e.g., certificates of deposit and U.S. Savings Bonds, Series EE), which are best for longer-term savings because you can t withdraw funds without prior notice, or within a specified period of time. A great way to save is through an automatic transfer from checking to savings. What you don t see coming out of your paycheck or from your checking account, you probably won t miss. LET S RECAP In this booklet you learned that there s a lot involved in finding the right financial institution for you. You also learned how your needs and wants affect what institution and what products you ll choose for your banking. Specifically, you learned: 1. How to distinguish among financial institutions. 2. How to choose the best checking account for you. 3. How to create a saving plan. 4. What your longer-term savings options are. PAGE.20