www.cfefund.org © january 23, 2013 cities for financial empowerment fund all rights reserved

www.cfefund.org

© January 23, 2013Cities for Financial Empowerment Fund All rights reserved.

www.cfefund.org

Financial Empowerment Center Counselor Training Curriculum

Topic 2: Banking and Basic Financial Transactions

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Questions to Think About

• What are the different types of depository financial institutions?

• What are the different accounts offered? How do you know which one is the right fit for your clients?

• What are fringe financial services and how do these differ from financial institutions?

• What are the necessary steps to maintain an account?

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1. Banks• For profit• Insured by the FDIC • Owned by investors/shareholders• Profits paid to the investors

2. Credit Unions• Not for profit• Owned by members • Insured by the National Credit Union Share

Insurance Fund (NCUSIF) • Profits normally go to reduce fees, interest rates

3. To choose wisely, compare fees, rates of return, services offered

Choosing An Institution


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Basic Bank Services and Products

Opening an Account

US Patriot Act – Know your customer rules Banks are required to verify accountholder identity How this is done varies from institution to institution

Documentation needed Government issued identification

(US Government-issued or Foreign Government-issued;varies by financial institution)

Tax identification number – SSN or ITIN Proof of address


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Questions to Ask When Choosing an Account

1. What fees are charged for maintenance and use of the account?

2. How many transactions are allowed each month? What is the cost per additional transaction?

3. Is there a required minimum balance?

4. Are deposits insured and up to what amount?

5. Does this account earn interest?

6. Are there additional charges (e.g., printing checks, stop payment on checks, use of ATM, getting assistance in person or on the phone)?

7. Are there hidden fees? BEWARE of fee-based overdraft services!

8. How do these fees compare with what your client currently pays for banking/check-cashing services?


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• Basic Starter Accounts

• Checking Account

• Savings Account

• Investments

• Certificates of Deposit

• Money Market Accounts

Types of Accounts


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A partnership of banks, credit unions, and community organizations to connect people to affordable checking and savings accounts and high quality financial education.

Checking and savings accounts with these features: Low opening deposit requirement No monthly minimum balance No (or low) monthly fee Free ATM or debit card Savings account Direct deposit Online banking, if available Accept Mexican Matricula card as primary form of ID

$50 - $100 incentives for completing financial education requirements (at 3 participating institutions)

Outreach and financial education brochures translated into 12 languages Affordable small dollars loans offered by 2 participating financial institutions Find a bank or credit union at www.everyoneiswelcome.org or call 2-1-1


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Chex Systems, Inc. provides account verification services to its financial institution members to aid them in identifying account applicants who may have a history of account mishandling (for example, people whose accounts were overdrawn and then closed by them or their bank).

Each report submitted to ChexSystems remains on file for five years.

Clients can order a report to learn what information, if any, is listed in their consumer file at ChexSystems. If they have been denied an account from a bank or credit union, and ChexSystems was used in the decision process, this information will help them understand what may have contributed to that decision. You are entitled to a free copy of your consumer report, at your request, once every 12 months

ChexSystems

Barriers to Bank Accounts

www.consumerdebit.com


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Seattle-King County Financial Education Providers Network with 20+ member organizations improving quality and access.

Online at www.EveryoneIsWelcome.org: Directory of non-profit agencies Calendar of free classes Helpful Links and Resources (financial education curricula) Search for classes, workshops, and one-on-one help on

bankruptcy, basic banking, budgeting, credit counseling, foreclosure prevention, homeownership, ID theft, loans, starting a new business and tax assistance

Help Bank on Seattle-King County customers choose tools and features to avoid overdraft and insufficient fund fees.

$50 - $100 savings incentives for Bank on Seattle-King County customers who complete financial education requirements (offered by 3 financial institutions).

Financial Education




Checking Account

Checking Account – Transactional accounts facilitate regular payments through paper checks, internet banking and bill payment. Payments are drawn against amounts on deposit:

Making Deposits Direct Deposit – Regular, electronically transmitted, funds available immediately

Signing back of the check for deposit

Writing Checks Written words prevail over numbers

Cancelled Checks – Checks which have been paid by drawer’s bank are returned

to drawer (now in electronic form)

Check Register – Record of all deposits, withdrawals, fees deducted, and checks

issued

Balancing check book – Adding all deposits and deducting all checks issued, withdrawals and fees to know what is available to be drawn against




Checking Account Statement – Institution’s report of all transactions

issued on a periodic basis (usually monthly)

Reconciliation with Bank Statement – Comparing check register and

statement to account for all outstanding checks

Bill Payment

Automatic arrangement to pay regular bills from account

Online payments made each time bill becomes due

ATM Card – An Automated Teller Machine Card may be issued in connection to

a checking or savings account to allow consumer to transact business (i.e. deposits, withdrawals, transfers & check balances)

May be fees associated with it

Point of Sale vs. Signature-Based Transaction

Costs and benefits of having a checking account

Checking Account




ATM Card - Automated Teller Machine Card

• Issued by account holder’s bank• Allows account holder to conduct business

transactions (withdraw, deposit, transfer between accounts) using an ATM (of issuing financial institution or other)

• May be a fee for transactions conducted using ATMs of non-issuer financial institution

• May be a charge imposed by issuer if ATM transactions exceed stated limit each month

• May be the same card as the consumer’s debit card• No credit card logo (Master Card/Visa) if dedicated

ATM card, cannot be used at point of sale




Debit Cards

• Debit Cards may be linked to existing accounts or purchased as pre-paid.

• Fees: Point of Sale - using debit card and a PIN number; monthly fees; annual fees; or charge if exceed set number of uses (Account linked card combines ATM and Debit features where there is a Visa/Master Card logo)

• Trap: Some institutions hold a multiple of the debited amount – making less of balance available until transaction clears




Reloadable Prepaid Debit Cards

• Structured to not only spend but also add money as if adding to a checking account

• Most cards charge higher fees than the basic checking accounts offered at mainstream financial institutions

• Difficult to identify all the fees included such as: Adding money Calling customer service Getting a paper statement

• Make sure the card is fully FDIC insured and offers Regulation E protections.

• Opting for a checking account over a prepaid card may still be a better deal




Paying Through Debit vs. Credit

• Debit Card – Money is withdrawn directly from account holder’s own funds, e.g. savings or checking: no balance, no access

• Credit Card – Payment is made by issuer on consumer’s behalf, to be paid by consumer as invoiced




• Overdraft – When a checking account goes below a zero balance.

Overdraft Protection Plans – Banks cover transactions when the account has a negative balance with fees possibly exceeding the payment itself!This is extended not only to checks but also ATM and debit

card transactions

The median overdraft fee is $27 (APRs of 1,000 – 3,500%)

Consumers may be unaware they have overdrawn their accounts.

BEWARE OF FEE-BASED OVERDRAFT PROTECTION PLANS! There are other options to explore.

Checking Account




Alternatives to Fee-Based Overdraft

• Overdraft line of credit

Consumers can apply for an overdraft line of credit and pay interest on the money used to cover overdraft just like any other type of loan.

Banks may also charge annual fees.

• Linked savings account

When the checking account is overdrawn, banks will automatically take funds from savings account to cover the transaction.

Banks may also include transfer fees.

• Linked credit card

Any overdraft amount becomes a cash advance on the credit card.

Consumers will probably be charged a cash-advance fee, and interest charges on the advance will start immediately.




Overdraft Regulations

• Financial institutions can not automatically enroll customers into their overdraft protection services for ATM and one-time debit transactions

• They need to ask consumers for permission, or to “opt in.”

• Some banks have discontinued the practice, others are aggressively marketing the services to consumers.

• The message is simple: “It’s best not to opt in” It’s important to know the consequences.




Recommendations to Consider

• If you already have a checking account, find out through the financial institution if you are enrolled in overdraft protection.

• If you have already opted in to overdraft protection, figure out if this is something worthwhile to retain.

• Consider more affordable options for covering overdrafts from checks or ongoing debit transactions.

• When opening a checking account, it’s best not to opt in to overdraft protection.




Tips for Avoiding Overdrafts

• Keep track of all transactions, including ATM withdrawals, electronic payments and debit transactions.

• Don’t forget to subtract any transaction fees.

• Monitor the account balance and stay up to date on which transactions have cleared.

Check by calling the bank or by looking online or at an ATM

• Beware of debit holdsUsing a debit card at a restaurant, gas station, hotel

or car rental agency may cause a “hold” to be placed on the account at an amount greater than the purchase (holding a multiple of the debited amount).




Savings vs. Investments

Savings• Funds set aside for short term needs (usually

defined as one year or less)

Investments are long term• Assets acquired for future income or benefit• Increase by generating income (interest or

dividends) • Grow by appreciating in value• Income earned and appreciation in value

increases wealth




• Liquid savings readily available as cash and not intended for long-term investment

• Illiquid savings – “forced savings,” e.g. over withholding income tax in order to get a big refund

Strategy often employed by poor

May stunt ability to build wealth or manage funds

Savings vs. Investments




1. Calculating Interest Earned:

Principal (P) x Rate (R) x Time (T) = Simple Interest (I)

a) Generally on an annual basis – apportion if period is less than one year

b) Example:P = $100R = 2%T = 1 yr.

Watch Your Money Grow

$100 X .02 X 1 = $2.00Interest = $2.00

To calculate 1 month of interest, divide $2.00 by 12 months.$2.00 / 12 = $.16 for one month




2. Compound Interest:

a) Interest earned on principal over time, plus interest earned on the interest.

Example: In 2011, Maria kept a $100 deposit (P) for the full year (T) and earned a 2% interest (R).

P x T x R = Interest at the end of the year($100) x (1yr.) x (.02) = $2.00

On January 1, 2012, she would have $102. Assuming she left $102 on deposit for the entire 2012 year, on January 1, 2013 she would have a yield of $104.04.





3. Rule of 72:

a) Calculation of time it takes for money to double at a given rate of return

b) Assumes compounded interest annually

c) Divide 72 by rate of return = time it takes for money to double

d) For example if Client X earns 10% on her money, it would double in 7.2 years (72 divided by 10 = 7.2 year)





Time – The Advantage of Starting NOW

STARTING TO SAVE EARLY – Assume a 3% Return

• The following example shows you what a difference starting to save early can make.In this case, we have student “A” beginning to save $1,000 per year beginning at the age of 16. By the time that “A” is 25 years old, she has saved $10,000. If she never puts any more of her own money into the account, at the rate of 3% per year, Student “A” will have $38,517.33in her account by the time she is 50 years old. In other words, for her input of $10,000, she has gotten a return of $28,517.33.

• Compare what happens to student “B” who does not start to save until he is 26 years old.Assuming “B” saves $1,000 per year for 25 years, at the rate of 3%, by the time “B” is 50 years old, he will have input $25,000 to have $36,323.01 in the account. His return on his input of $25,000 is only $11,323.01. In other words, Student “B” put in two and half times the money that Student “A” did and yielded less half of the money that Student “A” yielded.




TimeThe

Advantage of Starting

NOW




Savings Account

• Generally interest bearing

• Saving with Automated Transfers from checking, or payroll

• Automated Teller Machine (ATM) card to electronically transact business (withdrawals, deposits, transfer funds among accounts)

• Debit Card – Can be used to make purchases - funds directly withdrawn from account (also applies to checking accounts)– usually combined with an ATM card and will carry a Master Card or Visa logo




Certificate of Deposit

Certificates of Deposit or “Time Deposits”

• Certificate evidencing a deposit for an agreed fixed term (date of maturity) at an agreed fixed rate of return or interest

• Short or medium term (generally 3 months to 6 years)

• Generally higher rates of return

• Money removed before maturity date is subject to penalty




Money Market Accounts or Money Market Mutual Funds

• Saving account with some characteristics of money market fund

• Federally insured

• May offer same services as checking account with limitations

• Higher interest rates than savings accounts, with higher minimum balance

Money Market Accounts




Choosing the Right Account Based on Needs

• Checking Accounts – Necessary to transact daily business of paying bills, and centrally gathering funds before allocating for expenses, savings and expenses

• Savings Accounts – Putting aside funds for short term goals with some interest yield




• Certificates of Deposit – Short term goals, do not need immediate access to funds, low tolerance for risk (as compared to stock market) looking for predictable higher return than regular savings account

• Money Market Accounts – May need access to funds through a checking facility, short terms goals, collect low amount of interest

Choosing the Right Account Based on Needs




How Does Banking Help Take Control of Finances?

• Banks are for-profit financial institutions• Credit Unions are non-profit financial

institutions• Checking Accounts – Interest rates, overdraft

fees, etc. • Savings vs. Investments• Money Market Accounts & CDs• Comparing accounts, fees, earnings, etc. • Consumer Needs


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Documents

financial services

savings accounts

different accounts

basic starter accounts

account us patriot act

basic bank services

hidden fees

itin proof of address