The chapter under consideration is the Chapter 5, Financial Services: Savings Plans and Payment Accounts. The chapter gives to the reader five important aspects that contribute to the understanding of the personal finances.
1. The first aspect is the selection and use of the available financial services in the market and the factors that influence the decision to select a specific financial service. The selection of the financial service depends on of the needs of the client and the convenience of fees and conditions.
One of the financial services is the availability of cash. The cash is the most liquid asset in the form of notes and coins in a currency with general acceptance in the country. In the case of the United States of America, the cash is the bills and coins of United States Dollar. The advantage of the cash is the general acceptance in the general trade and commerce inside the country. But, there are cases when the customer needs support in the management of the cash. The storage of the cash, the transference of money to other individuals or organizations and the exchange of US dollars to other currencies of the world as European Euro, Japanese yen or British sterling pound.
The services of cash support the small and large businesses for the payroll management. The businesses need the service to attend the payroll on a weekly or monthly basis. The financial institutions give that solution (Kapoor, Dlabay y Hughes).
The financial institution offer payment services for individuals and organizations. The most important solutions in payment services are checking account, online payments, cashier checks and money orders. The checking account is instruments with a low or zero interests that offer both cash service and a payment tool. The checking accounts have monthly cycles where the banks and financial institutions impose conditions, fees and tariffs for the payment services. The check is the main instrument of the checking account which is an instrument similar to a bill note, but with the difference that the check has a unique receiver and once the check is cashed, it cannot be used again. The cash, has the characteristic that it has not expiry date and it can be used infinite times. The other main difference is that, the check is supported by a checking account of an individual or organization in a specific bank; the cash is supported by the Federal Reserve Bank. The online payments are available by several banks and other online providers outside the banking regulators. The online payment took importance with the electronic commerce, giving the advantage to the user to not use a credit card protecting the financial data of the user against all the electronic commerce stores of the world. The money orders are other payment service offered by specialized financial institutions and several postal service institutions in the world. The money orders have their background in the nineteen century where the cash was sent in the past in secure envelopes to the final receiver. Today, those traditional institution offers the service but using online and electronic platforms avoiding the physical transport of the money using a similar operation than banks.
The service savings are other financial service available for individuals and organizations. According to several authors that agree with the argument "savers are losers" (KIYOSAKY), the saving services are not a good alternative for individuals and organizations that are looking for financial success. The saving services are designed for the financial institutions to retain the cash excess of the public to finance the operations of the financial system. The return of the savings services offered by the financial institutions is always lower to any other investment in the market; those are "financial instruments" created by people with low financial education. The most important saving services are regular saving account, money market account, certificate of deposit and U.S. saving bonds. The saving account is a financial instrument where the client stores the money with more difficult conditions than the checking account to move the cash, besides higher fees and costs; the saving account has no expiry date and the client has the ability to dispose the money at any time with a fixed cost. The certificate of deposit, the client puts the money in a financial institution with a specific date and interest rate; the certificate may pay to the client interest rates per month or at the end of the certificate. The US saving bond is similar to the saving account, but instead to store US dollars, the client stores sovereign bonds of the United States of America as T-Bills.
The credit services are offered by financial institutions to individuals and organizations to supply cash that the client did not own, acquiring the client a liability and the financial institution a new asset. The credit service is the most important service offered by the financial institutions and is the key to the creation of the most important fortunes in the world. The financial institutions are, by law, enabled to create money from nothing, that is, a relation Client-Liability and Bank-Asset. In United States of America and all the countries that are governed by Central Banks, the banks can create until nine units of money from one "physical" units of money. With the previous money strategy, the bank gives a credit to the client requesting collateral and demanding an interest payment by the borrowed money. The most important credit services are: credit cards, cash advances, car loans, education loans, mortgages and home equity loans. The credit card is the most popular credit instrument, where the bank gives to the client a physical or "virtual" card with a 13-number or 16-number, a franchise brand and an expiry date, accepted widely in stores. The credit cards pay instantly to the merchant and then, the client acquires a liability with the bank with the compromise to pay the liability in a specific time with interests. The auto loans are loans given to an individual or organization with the automobile as the collateral of the credit; the auto loans may have maturity times from one to five years. The education loans are given to university and college students that require a credit to pay tuition of the educative institution; the financial institution support the student to pay the studies in two or four years period and then, the student has until fifteen years to pay the liability. The mortgages are a credit instrument used to support the clients to buy a home residence. The mortgage offers the lowest interest rates and the longest maturity times with current values of 6% of interest rates and 30 years of maturity.
Another type of financial service is the investment service. The investment service "in theory" gives the client a more profitable and risky alternative to putting his cash instead the saving services. The most important investment services are individual retirement accounts, brokerage services, investment advice and mutual funds. The individual retirement accounts are used togueter between the employee and employer to save money for the retirement. The trick of the retirement account is that the revenues that the retirement account gets do not pay individual taxes, a benefit compared with the saving account, but once the customer takes money from the retirement account, the Internal Revenue Service applies the taxes. The brokerage service consists of an instrument to buy paper assets in the financial markets as stocks, derivatives, and others. The broker works as an agent, where the broker gets a fee per transaction no matters the performance of the investment. It is not possible to the individual or organization to buy an asset in the financial market because the brokers have special permission and certifications given by the financial authorities as the Security Exchange Commission.
Other services offered by the financial institutions are the insurances, tax preparation, safe deposit boxes, budget concealing and estate planning. The insurance is a derivative product where the client perceives a benefit if there is an occurrence of an incident predicted in the conditions of the insurance. For example, the insurance company pays a life insurance contract to the client's wife if the client dies. The deposit boxes are a traditional service of the banks that has reduced its importance due to the use of electronic payments and virtual money, but it may work to protect physical assets that are not convenient to safe in the house or the warehouse.
2. The second learning in chapter 5 is the knowledge about the different types of financial institution and how each of this institution may cover necessities for individuals and organizations. There are four types of financial institutions: deposit institutions, non-deposit institutions, non-bank financial service provider and high-cost financial service providers.
The deposit institutions work as intermediaries between users and suppliers of the money. The most important deposit institutions are commercial banks, saving and loans associations and mutual saving banks. The commercial bank, for example, offers to the client's checking accounts and saving accounts and credit services. They are governed by the Federal Deposit Insurance Corporation of the United States of America giving a guarantee to the client that the government will respond in the case the bank fails. The current amount covered by the FDIC is 250,000 USD.
The non-deposit institutions do not require a cash deposit to offer services to its clients. One example of non-deposit institutions are the Credit Unions that have a non-profit objective and are related to unions, churches, and community affiliations, where the Union gives loans at low rates to its members.
The non-bank financial service provider and high-cost financial service providers are considered the "unbanked" category that is outside the traditional financial system due to the "nominal" costs of the financial system. The non-bank financial services not necessarily have lower rates and fees than the traditional financial sector, but require fewer requisites to apply for a bank account or a credit. Near 20% of the population of the United States of America are "unbanked" and uses other services. One of the most popular services outside the banking sector is the pawnshops. The pawnshops give cash to the client in an "over-the-counter" operation with the client giving as collateral a physical asset to negotiate. The pawnshops have the option to buy or pawn an asset with interest rates higher than the traditional banking system. The advantage, to the client is the ease of the operation without special requisites and delays. The Car Title Loans offers to the client the possibility to obtain a loan with annual interest rates near 200% giving as collateral a car. All the "unbanked" services have annual rates from the 100%, but they take approach of the bad reputation of the clients with the banks to offer financial services with a high return and high risk.
3. The third learning of the chapter 5 is the benefits and costs of the different saving plans offered by the commercial banks. The different types of services depend on two factors, liquidity and interest rates. Factors are inverse, that is, a higher liquidity will result in lower interest rates and higher interest rates will result in lower liquidity. The use of one or saving instrument will depend on the saving strategy of the customer. It is important to remember, that the main goal of a saving service it not to create wealth but to maintain the value of the money against inflation and offer other value-added solutions to clients.
The basic solution of saving for the clients offered by commercial banks are the regular saving accounts. According to the bank, the required balance is lower to other saving instruments but give a low rate of return. The advantage of the regular saving account is that it allows the client to execute withdrawals with low costs.
Once the client has a regular saving account as a basic saving instrument, he may take the decision to acquire a saving instrument with more or less liquidity with the goal to receive a lower or higher interest rate. If the client requires an instrument with more liquidity, it is necessary to use a Money Market Account with the benefits of a higher interest rate, higher number of operations and withdrawals and higher insured money. The disadvantages of the Money Market Account are a higher minimum balance.
If the client requires an instrument with less liquidity, the most convenient instrument is the Certificate of Deposit (CD). The advantage of the CD is a guaranteed rate of return at the end of the CD, but the disadvantage is penalties that overpass the total return of the CD if the withdrawal is before the contract.
The fourth saving instrument is the US Saving Bond. The bond is supported by Federal Reserve Bonds with maturities from 10 to 30 years. The Saving Bond has the advantage that the minimum deposit is low; the deposit is guaranteed directly by the government and offers tax exemptions from local, state and national level.
4. The fourth learning of the chapter 5 is the criteria of a saving plan. The selection of a saving plan, as its name says "plan"; it must have a beginning, a result and a time. The saving plan for a 20-years-old single man it is very different to a married man of 55-years. The first consideration in the saving plan is the rate of return of the saving plan. The rate of the return is the perceptual increase of the investment money in a time t=0 to a time t=t. The rate of return is considered in a perceptual and yearly basis. With the rate of return it is possible to compare to different saving plans, for example a saving plan A with a rate of return of 25% is better than a saving plan B with a rate of return of 9%.
The second aspect considered in the saving plan is the inflation. The inflation is the speed in the price increase of goods and services. The inflation reduces the purchasing power of the available money. For example, if today with 100 USD it is possible to buy ten products; one year later with an inflation of 10%, it is necessary to use 110 USD to buy the same ten products. For simplicity, the inflation subtracts the rate of return of the saving plan.
The third aspect considered in the saving plan is taxes. The taxes are a stake of the total revenue of the individual that it must pay to the government. Depending on the savings instrument, the taxes may be higher or lower affecting the overall result of the saving plan. The individual taxes in the United States of America are over the 35%.
The fourth aspect considered evaluating a savings plan is a liquidity that is the ease the client can withdraw funds from the saving plan without the increase of costs or penalties. It is necessary to consider that the liquidity is inverse to the rate of return on the investment.
The fifth aspect considered to evaluate a savings plan is the safety that is the guarantee of the saving plan against a financial crisis of a failure of the institution. The existence of external organizations as the FDIC and the SEC gives support to the client.
The sixth aspect considered to evaluate a savings plan are the fees and restrictions, those are the conditions of the savings contract between the financial institution and the client. The fees and restriction are commonly related to the rate of return and liquidity. The fees have two components, a fixed and variable component. The fixed fees do not depend on the amount of money but of the number of operations; the variable fees depends on the amount of money. The fees subtracts to the rate of return of the savings plan.
5. The payment methods are the fifth learning of the chapter 5. The payment methods are divided into three: electronic payments, checking accounts and other payment methods. The electronic payments are the most common payment method available on the market with the lowest fee due to the speed of the operations, the low paperwork and personnel requirement. The most important electronic payment examples are: debit card, mobile transfers, prepaid cards and smart cards. The checking accounts offer the traditional payment method of the check, despite of the use of special paper and personnel for transport and verification; the check is the cheapest payment method for the client, due to the zero commission to the client and receiver for the use of checks. Since 2004, the banks in the United States of America started to use digital verification of checks to avoid the client to go to the physical office of the bank. Other payment methods that have minor importance in the financial institutions are: certified checks, cashier check, money order and travelers check.
Works Cited
Kapoor, Jack, Les Dlabay y Robert J. Hughes. Personal Finance. Hoboken: McGraw-Hill, 2014.
