1. CHAPTER 4: MANAGING YOUR CASH AND SAVINGS

2. Role of Cash Management in Personal Financial Planning
Chapter 4
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:
Chapter 4
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:
Chapter 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. The Financial Marketplace
The financial services industry markets:
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

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. 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.

8. 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.

9. 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.

10. Internet Banks 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.

11. Nondepository Financial Institutions
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

12. 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.

13. Truth-in-Savings Act of 1993
Chapter 4
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
1. Checking Accounts =
Demand Deposits
With sufficient funds, banks must immediately pay the amount of your check or ATM withdrawal.

15. Types of Checking Accounts:
Chapter 4
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. Other Bank Services:
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.

21. Starting Your Savings Program
Chapter 4
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
Chapter 4
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?
Chapter 4
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. Nominal rate—the named or stated rate of interest.
Effective rate—the annual rate of return actually earned.
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 interest is used, there is no compounding:
Interest = Principal x rate x time
= $1000 x .05 x 1
= $50

27. 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

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

29. How much interest will you earn?
Chapter 4
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. Series EE Bonds (Savings Bonds)
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).

32. Maintaining a Checking Account
Chapter 4
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:
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.