Personal Finance Chapter 4: The Banking Services of Financial Institutions PDF

Chapter 4: The Banking Services of Financial Institutions Ted Stephenson, MBA, CFA, CFP George Brown College © 2024 McGraw Hill Limited Chapter 4: Learning Outcomes Learning Objectives: LO1 Analyze factors that affect selection and use of financial services. LO2 Compare the types of f...

Chapter 4: The Banking Services of Financial Institutions Ted Stephenson, MBA, CFA, CFP George Brown College © 2024 McGraw Hill Limited Chapter 4: Learning Outcomes Learning Objectives: LO1 Analyze factors that affect selection and use of financial services. LO2 Compare the types of financial institutions. LO3 Compare the costs and benefits of various savings plans. LO4 Identify the factors used to evaluate different savings plans. LO5 Compare the costs and benefits of different types of chequing accounts. 2 © 2024 McGraw Hill Limited A Strategy for Managing Cash (1) Meeting Daily Money Needs ▪ Cash, cheque, credit card, or debit card (ATM), e-transfers, and mobile apps are the most common payment choices. ▪ Common mistakes in managing cash include: ▪ Overspending as a result of impulse buying and using credit cards. ▪ Not having enough liquid assets to pay current bills. ▪ Using savings or borrowing to pay for current expenses. ▪ Failing to put unneeded funds in an interest-earning savings account or investment plan. 3 © 2024 McGraw Hill Limited A Strategy for Managing Cash (2) 4 © 2024 McGraw Hill Limited  A Strategy for Managing Cash (3) Types of Financial Services 1. Savings 2. Payment Services 3. Borrowing 4. Other Financial Services 5 © 2024 McGraw Hill Limited A Strategy for Managing Cash (4) Electronic Banking Services 1. Direct deposit of pay and other regular income 2. Automatic payments 3. Automated Teller Machines Methods of Payment 1. Point-of-sale transactions 2. Stored-value cards 3. Smart cards, digital wallets 4. Software-based payment systems 6 © 2024 McGraw Hill Limited A Strategy for Managing Cash (5) 7 © 2024 McGraw Hill Limited A Strategy for Managing Cash (6) Opportunity Costs of Financial Services ▪ Higher rate of return may be obtained at the cost of lower liquidity ▪ Convenience of a 24-hour ATM must be weighed against service fees ▪ The “no fee” chequing account that requires a $4,000 non-interest-bearing minimum balance means lost interest of nearly $1,375 at 3 per cent compounded over 10 years. 8 © 2024 McGraw Hill Limited A Strategy for Managing Cash (7) Financial Services and Economic Conditions  When interest rates are rising... ▪ Long-term loans take advantage of current low rates. ▪ Short-term savings take advantage of higher rates when they mature.  When interest rates are falling... ▪ If you refinance loans, use short-term loans. ▪ Long-term savings “lock in” earnings at current high rates. 9 © 2024 McGraw Hill Limited A Strategy for Managing Cash (8) 10 © 2024 McGraw Hill Limited Types of Financial Institutions (1) Deposit-Type Institutions ▪ Chartered Banks offer a full range of financial services to individuals, businesses and government agencies ▪ Schedule I Banks – full domestic service banks ▪ Schedule II Banks – subsidiaries of foreign banks in Canada ▪ Schedule III Banks – branches of foreign institutions ▪ Trust Companies ▪ Credit Unions and Caisses Populaires 11 © 2024 McGraw Hill Limited Types of Financial Institutions (2) 12 © 2024 McGraw Hill Limited Types of Financial Institutions (3) Non-Deposit Institutions ▪ Life Insurance Companies ▪ Investment Companies ▪ Mortgage and Loan Companies ▪ Pawn Shops ▪ Cheque-Cashing Outlets 13 © 2024 McGraw Hill Limited Types of Financial Institutions (4) Online Banking ▪ Electronic Bill Presentment and Payment (EBPP) ▪ Pre-authorized Debits and Recurring Transfers ▪ Stop-Payments ▪ Cheque Services ▪ Email Money Transfer ▪ Downloadable Statements ▪ Synchronization with Quicken or Money ▪ Phone App Photo Deposits 14 © 2024 McGraw Hill Limited  Types of Financial Institutions (5) Online Banking Online Banking Benefits Online Banking Concerns Potential privacy, security violations Time and money savings ATM fees can become costly Convenience for transactions, comparing rates Difficulty depositing cash No paper trail for identity thieves Overspending due to ease of access Transfer access for loans, investments Online scams, “phishing,” and email Email notices of due dates spam 15 © 2024 McGraw Hill Limited Types of Financial Institutions (6) Comparing Financial Institutions ▪ Services offered ▪ Rates ▪ Fees and Charges ▪ Financial advice ▪ Safety (deposit insurance) ▪ Convenience and location ▪ Online services and special programs ▪ Paying bills online ▪ Virtual banks 16 © 2024 McGraw Hill Limited Types of Financial Institutions (7) 17 © 2024 McGraw Hill Limited Types of Savings Plans (1) Savings Alternatives 1. Regular savings accounts 2. Term Deposits and Guaranteed Investment Certificates (GICs) 3. Interest earning chequing accounts 4. Money market accounts 5. Money market funds 6. High Interest Savings Accounts 18 © 2024 McGraw Hill Limited Types of Savings Plans (2) Type of Alternative Benefits Drawbacks Low minimum balance Regular savings Ease of withdrawal Low rate of return accounts/passbook accounts Insured to $100,000 per financial institution Guaranteed rate of return Possible penalty for early Guaranteed Investment for the length of time of the withdrawal Certificates (GICs) GIC Insured Minimum deposit Possible service charge for going below minimum Chequing privileges balance Interest-earning chequing Interest earned Very low if any rate of accounts Insured to $100,000 return Cost for printing cheques; other fees may apply 19 © 2024 McGraw Hill Limited Types of Savings Plans (3) Type of Alternative Benefits Drawbacks Higher minimum balance than Favourable rate of return Money market regular savings accounts (based on current interest rates) accounts No interest or service charge, if Allows some cheque writing below a certain balance Minimum balance Favourable rate of return Money market funds Not guaranteed and fees (based on current interest rates) Not insured Online daily interest savings Watch out for transaction High Interest Savings account that offer accessible fees Not designed for daily Accounts money at a favourable rate activities 20 © 2024 McGraw Hill Limited Evaluating Savings Plans (1) Your selection of a savings plan will be influenced by: 1. Rate of Return 2. Inflation 3. Taxes 4. Liquidity 5. Safety 6. Restrictions, and fees 21 © 2024 McGraw Hill Limited Evaluating Savings Plans (2) 22 © 2024 McGraw Hill Limited Evaluating Savings Plans (3) 1. Rate of return (or yield) ▪ Percentage increase in value due to interest ▪ Compounding - interest on interest ▪ Effective Annual Rate (EAR) calculates the effective return taking compounding into effect EAR = (1 + k/m)m – 1 m = number of compounding periods in year k = rate of return for one year 23 © 2024 McGraw Hill Limited Evaluating Savings Plans (4) Compounding Method End of Year Daily Monthly Quarterly Annually 1 $10,408.08 $10,407.42 $10,406.04 $10,400.00 2 10,832.82 10,831.43 10,828.57 10,816.00 3 11,274.89 11,272.72 11,268.25 11,248.64 4 11,735.01 11,731.99 11,725.79 11,698.59 5 12,213.89 12,209.97 12,201.90 12,166.53 Effective rate 4.08% 4.07% 4.06% 4.00% 24 © 2024 McGraw Hill Limited Evaluating Savings Plans (5) 2. Inflation ▪ Compare return with inflation rate 3. Tax considerations ▪ Taxes reduce interest earned 4. Liquidity ▪ Ease with which you can convert to cash with a minimal loss of principal 25 © 2024 McGraw Hill Limited Evaluating Savings Plans (6) 5. Safety ▪ Canadian Deposit Insurance Corporation (CDIC) insures up to a maximum $100,000 per person per financial institution (http://www.cdic.ca) 6. Restrictions and Fees ▪ Delay between when interest earned and added to your account ▪ Transaction fees for each deposit or withdrawal ▪ Interest paid only with minimum balance 26 © 2024 McGraw Hill Limited Selecting Payment Methods (1) Types of Chequing Accounts ▪ Regular chequing accounts ▪ Usually have a monthly service charge that you can avoid with a minimum balance. ▪ Activity accounts ▪ Charge a fee for each cheque written. ▪ Interest-earning chequing accounts ▪ Require minimum balance. 27 © 2024 McGraw Hill Limited Selecting Payment Methods (2) 28 © 2024 McGraw Hill Limited Selecting Payment Methods (3) Chequing Account Selection Factors ▪ Restrictions, such as a minimum balance ▪ Fees and Charges ▪ Interest ▪ Special Services ▪ Overdraft protection 29 © 2024 McGraw Hill Limited Selecting Payment Methods (4) Comparing Chequing Account Costs 30 © 2024 McGraw Hill Limited Selecting Payment Methods (5) Other Payment Methods ▪ Certified cheque ▪ Cashier’s cheque ▪ Money order ▪ Traveler’s cheque ▪ Prepaid travel card with local currency ATM ▪ Credit and Debit card 31 © 2024 McGraw Hill Limited Summary (1) LO 1 Analyze factors that affect selection and use of financial services ▪ Financial products (savings plans, chequing accounts, loans and trust services) are used for managing daily financial activities ▪ Technology, opportunity costs and economic conditions affect the selection and use of financial services 32 © 2024 McGraw Hill Limited Summary (2) LO2 Compare the types of financial institutions ▪ Chartered banks, trust companies, credit unions, and caisses populaires ▪ Life insurance companies, investment companies, mortgage and loan companies ▪ Pawnshops and cash chequing outlets ▪ Should be compared on the basis of: ▪ Services offered ▪ Rates and fees ▪ Safety ▪ Convenience ▪ Special programs available to consumers 33 © 2024 McGraw Hill Limited Summary (3) LO3 Compare the costs and benefits of various savings plans ▪ Regular savings accounts ▪ Terms deposits ▪ Guaranteed Investment Certificates (GIC) ▪ Interest earning chequing account ▪ Canada Savings Bonds 34 © 2024 McGraw Hill Limited Summary (4) LO4 Identify the factors used to evaluate different savings plans ▪ Rate of return ▪ Inflation ▪ Tax considerations ▪ Liquidity ▪ Safety ▪ Restrictions and fees 35 © 2024 McGraw Hill Limited Summary (5) LO5 Compare the costs and benefits of different types of chequing accounts ▪ Regular chequing accounts, activity accounts and interest-earning chequing accounts ▪ Compared with regard to ▪ Restrictions (such as minimum balances) ▪ Fees and charges ▪ Interest ▪ Special services 36 © 2024 McGraw Hill Limited