June Xuâ€™s Savings and Banking Plans
June Xu is a registered nurse who earns 3,250 per month after taxes. She has been reviewing her savings strategies and current banking arrangements to determine if she should make any changes. June has a regular checking account that charges her a flat fee per month, writes an average of 18 checks a month, and carries an average balance of 795 (although it has fallen below 750 during 3 months of the past year). Her only other account is a money market deposit account with a balance of 4,250. She tries to make regular monthly deposits of50â€“100 into her money market account but has done so only about every other month. Of the many checking accounts Juneâ€™s bank offers, here are the three that best suit her needs.
â€¢ Regular checking, per-item plan: Service charge of 3 per month plus 35 cents per check.
â€¢ Regular checking, flat-fee plan (the one June currently has): Monthly fee of 7 regardless of how many checks written. With either of these regular checking accounts, she can avoid any charges by keeping a minimum daily balance of 750.
â€¢ Interest checking: Monthly service charge of 7; interest of 3 percent, compounded daily (refer to Exhibit 4.8). With a minimum balance of 1,500, the monthly charge is waived.
Juneâ€™s bank also offers CDs for a minimum deposit of 500; the current annual interest rates are 3.5 percent for 6 months, 3.75 percent for 1 year, and 4 percent for 2 years.
Critical Thinking Questions
1. Calculate the annual cost of each of the three accounts, assuming that Juneâ€™s banking habits remain the same. Which plan would you recommend and why?
2. Should June consider opening the interest checking account and increasing her minimum balance to at least 1,500 to avoid service charges? Explain your answer.
3. What other advice would you give June about her checking account and savings strategy?