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Effective Monetary Asset Management Strategies

Learn how to manage your cash and low-risk assets effectively, including checking and savings accounts, interest-earning tools, and electronic money management. Discover the importance of financial institutions in daily money management.

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Effective Monetary Asset Management Strategies

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  1. Learning Objectives Chapter 5: Checking & Savings Accounts • List the tools of monetary asset management and identify the types of financial services firms that provide those tools. • Earn interest and pay no or low fees on your checking accounts. • Make use of the benefits of savings accounts. • Explain the importance of placing excess funds in a money market account. • Describe electronic money management.

  2. Monetary Asset Management How you handle your most liquid assets (Cash and low-risk, near-cash items that can be readily converted to cash with little or no loss in value) What financial institutions help us manage our money needs on a daily basis? • GOALS: • maximize interest earned • minimize fees paid • keep funds safe • keep funds readily available

  3. The Three Tools of Monetary Asset Management • Low-cost, interest-earning checking accounts • Interest-earning savings accounts • Money market accounts SEE PAGE 142 for accurate rates

  4. Depository Institutions: • Organizations licensed to take deposits and make loans • Commercial Banks and Savings Banks • Government regulated • Deposits are insured by the FDIC • Credit Unions • Not-for-profit; owned by members • Deposits are insured by the NCUA Other Services Providers: • Mutual Funds • Stock Brokerage Firms • Insurance Companies Maximum insurance = $250,000 per account holder per institution CONSIDERABLE OVERLAP among services provided! See pg. 142 Difference between these and above?

  5. Tool #1: Interest-Earning Checking Accounts • Interest-Earning Checking Account(NOW Account): to pay monthly living expenses • Tiered Interest • Can be accessed using debit card • At ATMs or POS terminals • Balance Requirements • Be careful of monthly fees! • 3 Types of Overdraft protection: pg. 152 • Automatic transfer from savings • Automatic overdraft loan from bank • Opt-in: bank charges $20-$30 for bounce protection Beware of penalties and other fees! Pg 147

  6. Tool #2: Savings Accounts Time Deposits rather than Demand Deposits • Used for emergency funds • Passbook / Statement savings account Some Time Deposits are Fixed-Time Deposits: CDs • $100 to $100,000 • 7 days to 8 years • Insured by FDIC or NCUA • Fixed interest rate for entire term (usually) • Longer term CD => higher interest rates • Variable –rate,Bump-up, and Callable CDs • Not restricted to local institutions • Penalties if withdrawn before maturity • Is there risk with CDs? CD Laddering, pg149

  7. Page 149 How to save: • How do Americans rate as savers? • “Pay Yourself First”: build savings into your budget

  8. What are the 4 most important factors that affect your savings? • Principle • Rate • Time • Frequency of Compounding Institutions must use the APY as its interest rate in advertising http://www.moneycentral.msn.com/Investor/calcs/n_savapp/main.asp

  9. Years 4.0% 6.0% 8.0% 10.0% Years 4.0% 6.0% 8.0% 10.0% 1 $1,040 $1,060 $1,080 $1,100 1 $1,041 $1,061 $1,082 $1,104 3 $1,125 $1,191 $1,260 $1,331 3 $1,127 $1,196 $1,268 $1,345 5 $1,217 $1,338 $1,469 $1,611 5 $1,220 $1,347 $1,486 $1,639 10 $1,480 $1,791 $2,159 $2,594 10 $1,489 $1,814 $2,208 $2,685 This $1,000 investment earns interest that is compounded on an annual basis (once per year): • Comparing frequency of compounding: This $1,000 investment earns interest that is compounded on a quarterly basis (4x per a year): APR vs. APY: http://www.investopedia.com/articles/basics/04/102904.asp?&viewed=1

  10. Tool #3: Money Market Accounts • Use when you have substantial excess funds • Interest-earning accounts with higher rates • A savings and checking (limited) tool • Money market deposit accounts (MMDA) • From depository institutions • Government insured • Min balance requirements; tiered interest rates • Money market mutual funds (MMMF) • From investment companies not depository institutions • Check-writing privileges; Highest rate of return for liquid assets • Funds buy mostly government securities: safe but not insured • Funds cannot be drawn from ATMs

  11. Electronic Money Management • How we manage our money: Paper, Plastic, or Neither? • Electronic Money Management • Transactions without paper • Funds are transferred electronically ( EFT ) • Debit Cards vs. Credit Cards? • Easy, but not always FREE! Beware of fees! • ATM fees • Overdraft fees • Hit debit button => PIN number = online transaction = fee • Hit credit button => signature = offline transaction = avoid fee

  12. Electronic Banking and Safety Concerns • Fixing errors • Protections for lost/stolen cards • Within 2 days: $50 • Over 2, less than 60 days: $500 • Over 60 days: unlimited • The Psychology of Money Management • Decision-making • Opposites Attract!

  13. How To DevelopMoney Sense in Children • Give an Allowance • Encourage Work • Talk About Family Finances with Children • Be a Role Model

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