Chapter 4 Money Management Managing Checking and Savings Accounts –Checking and savings accounts are the foundation of financial asset management –Cash balances Are maintained for convenience Have an opportunity cost because of the loss of potential interest

Chapter 4 Money Management Selecting a Financial Institution Distinctions blur as financial institutions become increasingly competitive. Major types of financial institutions  Commercial banks  Savings banks (Savings & Loan)  Credit unions  Brokerage firms

Chapter 4 Money Management Factors to Consider in the Selection Process –Convenience –Fees Charged –Services Offered

Chapter 4 Money Management Checking Accounts –Regular checking accounts Require minimum balance OR a monthly service charge is assessed –Special checking accounts Require no minimum balance Charge monthly maintenance fee –NOW (Negotiated Order of Withdrawal) accounts –Share-draft accounts (S&L NOW acct.)

Chapter 4 Money Management Electronic Banking Services –Automated teller machines –PC, Internet, & telephone Banking –Preauthorized payments and transfers (Direct Deposit and Drafts) –Debit cards and point-of-sale transfers

Chapter 4 Money Management Automated Teller Machines (ATM’s) –Use is now common place –Simple, fast and convenient –A PIN (personal identification number) is required –National ATM networks allow access of money anywhere in country

Chapter 4 Money Management Debit Cards –Look and act like ordinary MasterCard –A type of “electronic check” –Big difference between debit and credit card  Credit cards allows financing of purchases  Debit cards allow amounts to be automatically deducted from checking account

Chapter 4 Money Management Point-of-Sale Transfers (ATM payment) –Transfers money for retail purchase from bank to retailer’s account –Retailers assured that the consumer has enough funds to pay for purchase –Customer does not have to carry any cash

Chapter 4 Money Management Preauthorized Payments and Transfers Automatic payments or withdrawals made from customer’s account Advantages Eliminates worry about check being lost or stolen Money received more quickly by payee Examples Deposit of pay check or Social Security check Monthly payment of mortgage

Chapter 4 Money Management Home Banking –Banking at home utilizes personal computer and phone lines –Used for bill paying, transfer of money, and checking account balances –Charges for service average between $0 and $15 monthly

Chapter 4 Money Management Using a Checking Account Steps involved in using a checking account include:  Opening an account  Maintaining an account  Depositing checks  Endorsing checks  Balancing a checkbook

Chapter 4 Money Management Keys to Maintaining an Account Accurate record keeping –Record every check –Record every ATM transaction –Record every deposit –Balance checkbook MONTHLY –On-line banking makes this easier

Chapter 4 Money Management Endorsing a Check –Three types of endorsements Blank endorsement -- person merely signs his or her name on back. (Negotiable) Restrictive endorsement -- limits further negotiation of check. (For Deposit Only) Special endorsement -- names a third party who can cash the check. (Assigned)

Chapter 4 Money Management Guaranteed Checks –Certified check A personal check presented to the bank for certification –Cashier’s check A check purchased by customer drawn on bank’s general funds –Traveler’s check A check used by business and vacation travelers; replaceable if lost

Chapter 4 Money Management Savings Options –Fixed time deposits or certificates of deposit (CD’s) –Non-fixed time deposits Passbook savings accounts (Traditional) Money market deposit accounts (Variable Rate)

Chapter 4 Money Management Drawbacks of Fixed Time Deposits –Penalty if holder withdraws money before maturity date (1-2%) –Holder locked into interest rate; if interest rate rises, loses opportunity of investing elsewhere

Chapter 4 Money Management Other Ways to Save –Money Market Mutual Funds Brokerage Accounts which invest in short term debt instruments –U.S. Treasury Bills and Notes T-Bills - 3, 6, 12 mo. Min. $10,000 –Bought at a Discount Grows at given rate –If 6% per year $10,000 grows to $10,600 in a yr. T-Notes – 2, 3, 5, 10 yr. Min. $1,000 –Bought at face value & interest paid semi-annually –Face Value is returned at the end

Chapter 4 Money Management US Savings Bonds –Backed by the US government –Purchase price is half of bond’s face value –Interest earned is difference between purchase price and face value

Chapter 4 Money Management Choosing the Best Savings Option –Minimum Investment? –Liquidity –Yield (what are the fees?) –Safety (government vs. private) –Taxation (tax free bonds)