CHAPTER 4: MANAGING YOUR CASH AND SAVINGS

1. CHAPTER 4:MANAGING YOUR CASH AND SAVINGS

2. Role of Cash Management in Personal Financial Planning • Cash management deals with the routine, day-to-day use of liquid assets. • Liquid assets consist of cash and other assets which can be readily converted to cash with little or no loss in value.

3. Examples of Liquid Assets: • Cash • Checking Accounts • Savings Accounts • Money Market Deposit Accounts • Money Market Mutual Funds • U.S. Treasury Bills • EE Savings Bonds • Certificates of Deposit (shorter-term)

4. Purpose of Liquid Assets: • Make purchases. • Meet recurring living expenses. • Provide reserve for unexpected expenses or opportunities. • Used temporarily to accumulate funds for longer-term financial goals.

5. Financial products checking and savings accounts credit cards loans and mortgages insurance mutual funds Financial services financial planning tax preparation brokerage services real estate trusts retirement estate planning The Financial Marketplace The financial services industry markets:

6. Types of Financial Institutions • Commercial Banks • Largest type of traditional financial institution. • Offer full array of financial services. • Only type of financial institution that can offer noninterest-paying checking accounts.

7. Offer many of the same services as commercial banks. • Typically pay slightly more on savings deposits. • Channel depositors’ savings into mortgage loans for purchasing and improving homes. • Some are mutual associations. • Savings and Loan Associations

8. Similar to savings and loan associations. • Located primarily in New England states. • Offer interest-paying checking accounts. • Typically offer savings rates similar to those of savings and loan associations. • Most are mutual associations. • Savings Banks

9. Provide financial products and services to specific groups of people who have a common tie. • Qualified persons become members by purchasing a share of ownership. • All are mutual associations; owned and sometimes operated by members. • Typically pay interest rates higher than those of other financial institutions. • Credit Unions

10. Offer online banking services. • Feature lower fees and higher yields than “brick-and-mortar banks.” • Suitable for people who do not need to physically go to a bank. • Internet Banks

11. Stockbrokerage firms—offer cash management accounts, money market mutual funds, wrap accounts, credit cards • Mutual funds—offer money market mutual funds • Life insurance companies • Finance companies • Nondepository Financial Institutions

12. Almost all financial institutions are federally insured by either: • Federal Deposit Insurance Corporation (FDIC) insures accounts at banks, savings banks, and S&Ls. • National Credit Union Administration (NCUA) insures accounts at credit unions. • Both provide government insurance up to $100,000 per depositor. How Safe is Your Money?

13. Truth-in-Savings Act of 1993 • Helps consumers evaluate terms and costs of banking products. • Fees, interest rates, and terms of both checking and savings accounts must be fully and clearly disclosed. • Places strict controls on advertising and what constitutes a free account. • Standard formula for annual percentage yield (APY) must used.

14. Cash Management Products With sufficient funds, banks must immediately pay the amount of your check or ATM withdrawal. 1. Checking Accounts = Demand Deposits

15. Types of Checking Accounts: • Regular checking accounts • Offered by commercial banks • Pay no interest • Interest-bearing checking accounts • Examples include NOW, share draft, and money market deposit accounts • Offered by banks, savings banks, S&Ls, and credit unions

16. Money Market Mutual Funds • Offered by investment (mutual fund) companies • Not federally insured; trade on open market • Interest bearing; limited checks • Asset Management Accounts • Primarily offered by brokerage firms; consolidate financial activities • Insured by SIPC; open market • Interest bearing; check writing privileges

17. 2. Savings Accounts= Time Deposits • Funds are expected to remain on deposit for a longer time period than are demand deposits. • Generally pay higher interest rates than demand deposits. • At many institutions, the larger the balance, the higher the interest rate offered.

18. Other Money Management Services • Electronic Banking Services Electronic Funds Transfer Systems (EFTS) make possible • ATM service • Debit cards—linked to your checking account • Pre-authorized deposits and payments • Banking by phone • Online banking and bill payment services

19. Electronic Funds Transfer Act of 1978: • Regulates EFTS Services. • States that errors must be reported within 60 days. • Limit your losses by immediately reporting theft, loss, or unauthorized use of your card or account!

20. Safe Deposit Boxes • Trust Services—provide investment and estate planning advice and management for trust accounts. • Mutual Fund Sales—along with other brokerage and investment services. Other Bank Services:

21. Starting Your Savings Program • PAY YOURSELF FIRST!!!! • Establish an emergency fund. • Regularly set aside funds for financial goals. • Utilize direct deposits and automatic transfers. • Choose instruments best suited to your goals and time horizon.

22. Earning Interest on Your Money Interest can be earned in two ways: 1. Some investments are sold on a Discount Basis. • Security sold for a price lower than redemption value. • Difference between sales price and redemption value is the amount of interest earned. 2. Other investments offer Direct Payment.

23. How is the interest calculated? • Simple Interest—interest paid only on initial amount of deposit. • Compound Interest—interest paid at set intervals and added back to principal.

24. Effective rate—the annual rate of return actually earned. • Nominal rate—the named or stated rate of interest. If interest is compounded more frequently than once a year, the effective rate will be greater than the nominal rate of interest.

25. Effective rate =Annual amount of interest earned Amount of money invested Example: Invest $1000 at 5% for 1 year.

26. If simple interestis used, there is no compounding: Interest = Principal x rate x time = $1000 x .05 x 1 = $50

27. If compound interestis used and the compounding occurs semiannually— First 6 months' interest: $1000 x .05 x 6/12 = $25.00 Second 6 months' interest: + $1025 x .05 x 6/12 = $25.63 Total annual interest = $50.63

28. The effective rate is 5.063%. • The nominal rate is 5%, the stated rate of interest. Effective Rate = $50.63  $1000 = 0.05063 = 5.063%

29. How much interest will you earn? Amount of interest earned depends on: • Frequency of compounding • Balance on which interest is paid • Interest rate applied Time value of money concepts are used in compounding to find interest earned.

30. A Variety of Ways to Save • Certificates of Deposit (CDs) • Funds are to remain on account for a given time period. • Early withdrawals incur an interest penalty. • U.S. Treasury Bills • Debt securities issued by the U.S. Treasury. • Sold at a discount; $1000 minimum. • Mature in 1 year or less.

31. Purchased at 1/2 face value. • Interest paid when bonds redeemed. • Newly purchased bonds must be held at least 12 months; actual maturity date unspecified. • Taxes not paid until bonds redeemed. • Exempt from state and local taxes. • If redeemed for educational purposes, income taxes may be avoided (subject to certain qualifications and limits). • Series EE Bonds (Savings Bonds)

32. Maintaining a Checking Account • Determine services needed. • Consider costs involved. • Keep track of checks written, automatic deposits, and ATM withdrawals. • Don’t write checks for more than you have in the account (i.e., don’t bounce checks!). • Arrange for overdraft protection. • Know how to stop a payment. • Periodically reconcile your account.

33. Special Types of Checks: • Cashier’s—drawn on the bank. • Traveler’s—used for making purchases worldwide. • Certified—drawn on your account but guaranteed by the bank. When personal checks are not accepted, special checks can be used to guarantee payment.

34. THE END!