4-1 Copyright  2002 by Harcourt, Inc. All rights reserved. CHAPTER 4: MANAGING YOUR CASH AND SAVINGS Clip Art  2001 Microsoft Corporation. All rights reserved.

4-2 Copyright  2002 by Harcourt, Inc. All rights reserved. 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.

4-3 Copyright  2002 by Harcourt, Inc. All rights reserved. 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)

4-4 Copyright  2002 by Harcourt, Inc. All rights reserved. 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.

4-5 Copyright  2002 by Harcourt, Inc. All rights reserved. The Financial Marketplace  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 services industry markets:

4-6 Copyright  2002 by Harcourt, Inc. All rights reserved. Types of Financial Institutions –Only type of financial institution that can offer noninterest-paying checking accounts. Clip Art  2001 Microsoft Corporation. All rights reserved.  Commercial Banks –Largest type of traditional financial institution. –Offer full array of financial services.

4-7 Copyright  2002 by Harcourt, Inc. All rights reserved.  Savings and Loan Associations –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.

4-8 Copyright  2002 by Harcourt, Inc. All rights reserved.  Savings Banks –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.

4-9 Copyright  2002 by Harcourt, Inc. All rights reserved.  Credit Unions –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.

4-10 Copyright  2002 by Harcourt, Inc. All rights reserved.  Nondepository Financial Institutions –Life insurance companies –Finance companies –Mutual funds –Stockbrokerage firms — offer cash management accounts, money market mutual funds, wrap accounts, credit cards

4-11 Copyright  2002 by Harcourt, Inc. All rights reserved. How Safe is Your Money? 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 per account (some limits).

4-12 Copyright  2002 by Harcourt, Inc. All rights reserved. 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.

4-13 Copyright  2002 by Harcourt, Inc. All rights reserved. Types of Accounts With sufficient funds, banks must immediately pay the amount of your check or ATM withdrawal. Clip Art  2001 Microsoft Corporation. All rights reserved. 1. Checking Accounts = Demand Deposits

4-14 Copyright  2002 by Harcourt, Inc. All rights reserved. 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

4-15 Copyright  2002 by Harcourt, Inc. All rights reserved. –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  Money Market Mutual Funds

4-16 Copyright  2002 by Harcourt, Inc. All rights reserved.  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. 2. Savings Accounts = Clip Art  2001 Microsoft Corporation. All rights reserved. Time Deposits

4-17 Copyright  2002 by Harcourt, Inc. All rights reserved. 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

4-18 Copyright  2002 by Harcourt, Inc. All rights reserved. Other services include:  Safe Deposit Boxes  Trust Services  Brokerage and Investment Services  Financial and Estate Planning

4-19 Copyright  2002 by Harcourt, Inc. All rights reserved. –Regulates EFTS Services. –States that errors must be reported within 60 days.  Electronic Funds Transfer Act of 1978: Clip Art  2001 Microsoft Corporation. All rights reserved. Limit your losses by immediately reporting theft, loss, or unauthorized use of your card or account!

4-20 Copyright  2002 by Harcourt, Inc. All rights reserved. Starting a 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.

4-21 Copyright  2002 by Harcourt, Inc. All rights reserved. Finding the Interest Earned 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.

4-22 Copyright  2002 by Harcourt, Inc. All rights reserved.  Simple Interest—interest paid only on initial amount of deposit.  Compound Interest—interest paid at set intervals and added back to principal. How is the interest calculated?

4-23 Copyright  2002 by Harcourt, Inc. All rights reserved.  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.  Effective rate—the annual rate of return actually earned.

4-24 Copyright  2002 by Harcourt, Inc. All rights reserved. Effective rate = Annual amount of interest earned Amount of money invested Example: Invest $1000 at 5% for 1 year.

4-25 Copyright  2002 by Harcourt, Inc. All rights reserved.  If simple interest is used, there is no compounding: Interest = Principal x Rate x Time = $1000 x.05 x 1 = $50

4-26 Copyright  2002 by Harcourt, Inc. All rights reserved.  If compound interest is 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

4-27 Copyright  2002 by Harcourt, Inc. All rights reserved.  The nominal rate is 5%, the stated rate of interest. Effective Rate = $50.63  $1000 = = 5.063%  The effective rate is 5.063%.

4-28 Copyright  2002 by Harcourt, Inc. All rights reserved. Amount of interest earned depends on:  Frequency of compounding  Balance on which interest is paid  Interest rate paid How much interest will you earn?

4-29 Copyright  2002 by Harcourt, Inc. All rights reserved. Other Savings Instruments  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.

4-30 Copyright  2002 by Harcourt, Inc. All rights reserved.  Series EE Bonds (Savings Bonds) –Purchased at 1/2 face value. –Interest paid when bonds redeemed. –Must be held at least 6 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).

4-31 Copyright  2002 by Harcourt, Inc. All rights reserved. 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.

4-32 Copyright  2002 by Harcourt, Inc. All rights reserved. Special Types of Checks: When personal checks are not accepted, special checks can be used to guarantee payment.  Cashier’s—drawn on the bank  Traveler’s—used for making purchases worldwide  Certified—drawn on your account but guaranteed by the bank

4-33 Copyright  2002 by Harcourt, Inc. All rights reserved. THE END!