PFIN Chapter 4 Managing your Cash and Savings

Cash management

the routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family

-liquid assets include:

*cash

*checking and savings accounts

*money market mutual funds

*money market deposit accounts

-efficient cash management ensures:

*effective savings program

*adequate funds for household use

The problem with low interest rates

-tend to signal sluggish economic growth and risk of deflation

-reduce income to retirees and pension funds

-discourage savings

Financial services industry

comprises of all institutions that market various kinds of financial products and financial services

2 types of financial institutions

1) Depository financial institutions

*commercial banks

*savings and loan association

*savings bank

*credit union

2) Non depository financial institutions

Depository financial institutions

accept deposits and most people use them for their checking and savings account needs

Commercial banks

offers checking and savings accounts and a full range of financial products and services

-it is the only institution that can offer demand deposits

-also include Internet banks: online commercial banks

Demand deposits

non-interest bearing checking accounts

Savings and loan associations (S & L)

channels the savings of depositors primarily into mortgage loans for purchasing and improving homes

-offer same checking, savings, and lending products

-often offer HIGHER INTEREST rates on savings

Savings bank

Similar to S&Ls, but located primarily in the New England states.

-Most are mutual associations—their depositors are their owners and thus receive a portion of the profits in the form of interest on their savings.

Credit union (aka mutual association)

non profit, member owned financial cooperative that provides a full range of financial products and services to its members (who before had to belong to a common occupation, religious or fraternal order, or a residential area)

-they offer share draft accounts

Share draft accounts

an account offered by credit unions that is similar to interest-paying checking accounts offered by other financial institutions

Non depository financial institutions

they don't accept deposits like traditional banks do

Deposit insurance

a type of insurance that protects funds on deposit against failure of the institution, issued by the FDIC

-$250,000 is the max deposit insurance amount

*many people believe that the max insurance applies to EVERY one of their accounts, when it applies to all of them combined

Types of checking and savings accounts

-checking accounts

*interest paying checking accounts

~NOW accounts

~money market deposit accounts

~money market mutual funds

-savings accounts

-asset management accounts

Checking accounts (aka demand deposit)

account held at a financial institution from which funds can be withdrawn on demand by the account holder

-you put money into by depositing funds and you withdraw from it by writing a check, using a debit card, or making a cash withdrawal

Negotiable order of withdrawal accounts (NOW)

a checking account on which the financial institution pays interest, and has NO legal minimum balance

Money market deposit accounts (MMDAs)

a FEDERALLY INSURED savings account, offered by banks and other depository institutions

-that competes with money market mutual funds

-ones that allow you to pay directly from your savings accounts

*however you still have a limit of how may actions you can make

-have low interest rates

-usually used for higher payments

Money market mutual funds (MMMFs)

mutual fund that pools the funds of many small investors and purchases high return, short term marketable securities

-have low interest rates

-DO NOT operate under a bank

-are NOT insured

Savings account (aka time deposits)

savings deposit @ a financial institution, remains on deposit for a longer period of time

Asset management account (AMA) (aka central asset account)

a comprehensive deposit account, offered primarily by brokerage houses and mutual funds

-typical AMA account includes an MMDA with unlimited free checking, a VISA or MasterCard debit card, use of ATMS, and brokerage and loan accounts

Types of electronic banking services

-electronic funds transfer systems (EFTS)

*debit cards

*ATMS

Electronic funds transfer systems (EFTS)

system using latest telecommunications and computer technology to electronically transfer funds in and out of customers' accounts

-2 related services of EFTS are preauthorized deposits and payments

*these allow you to receive automatic deposits or make payments that occur regularly

Debit cards

specially coded plastic cards used to transfer funds from a customer's bank account to the recipient's account to pay for goods or services

Swipe fees

fees charged to the business that you swipe your card at from the bank

-credit card swipe fees are HIGH

Automated teller machines (ATMS)

a remote computer terminal that customers of depository institutions can use to make basic transactions 24/7

Truth in Savings Act (1991)

requires that the actual return on savings be disclosed to consumers

-usually regarding compound interest

-show the annual percentage yield (APY) after compounding

Electronic Fund Transfer Act of 1978

-if there's an error in your account, you must notify your bank within 60 days, otherwise under federal law, the bank can no longer investigate it

-you are not responsible for FORGED CHECKS, the bank is responsible for it

*however you are responsible to contact the bank for fraudulent activity

-sometimes the bank will contact you about 'weird activity' such as different transactions occurring in different states

Safe deposit box

a rented drawer in a banks's vault

-protects items in the box from theft and service as excellent storage place for jewelry, important documents, contracts, titles, and stock certificates

-they are NOT insured by the bank b/c they have no idea what's in it

-usually not fire proof nor water resistant

Trust services

bank management of an individual's investments, payment, or estate

Factors that influence choice of where to open a checking account

-cost

*some checking accounts charge you for checking or if it drops below a required minimum, etc

*ATM fees

*overdraft fee

*online pay bill fee

*copies of statements fees

*copies of checks fees

-convenience

-services

2 people wanting to open a checking account may

1) each open individual checking accts

2) open a joint acct that requires BOTH signatures on all checks

3) open a joint acct that allows either one to write a check

Checkbook ledger

a booklet, provided with a supply of checks, used to maintain accurate records of all checking account transactions

Overdraft

the result of writing a check for an amount greater than the current account balance

-many times when this happens, the bank returns it to the party whom it was written and it is labelled as a 'bounced check'

Reordering transactions

banks and credit unions processing the transactions from the consumer's checking account in an order that may be different from the order in which the transactions were made

-this is an example of banks trying to maximize fees

Overdraft protection

an arrangement between the account holder and the depository institution wherein the institution automatically pays a check that overdraws the account

Stop payment

an order made by an account holder instructing the depository institution to refuse payment on an already issued check

Account reconciliation

verifying the accuracy of your checking account balance in relation to the bank's records as reflected in the bank statement, which is an itemized listing of all transactions in the checking account

Types of special checks

-cashier's check

-traveler's check

-certified check

Cashier's check

A check payable to a third party that is drawn by a bank on itself in exchange for the amount specified plus, in most cases, a service fee (of about $5).

Traveler's check

a check sold (for a fee of about 1.5%) by many large financial institutions, typically in denominations ranging from $20 to $100, that can be used for making purchases and exchanged for local currencies in most parts of the world

Certified check

a personal check that is guaranteed (for a fee of $10 to $15 or more) by the bank on which it is drawn

Compound interest

when interest earned in each subsequent period is determined by applying the nominal (stated) rate of interest to the sum of the initial deposit and the interest earned in each prior period

Simple interest

interest that is paid only on the initial amount of the deposit

Nominal (stated) rate of interest

the promised rate of interest paid on a savings deposit or charged on a loan

Effective rate of interest

the annual rate of return that is actually earned (or charged) during the period the funds are held (or borrowed)

Other mechanisms of saving

-certificate of deposit (CD)

-U.S. treasury bill (T-bill)

-Series EE bonds

-I savings bond

Certificate of deposit (CD)

types of savings instrument issued by certain financial institutions in exchange for a deposit

-you tell them how much money you and how long you want to leave it in there

-typically requires a minimum deposit and has a maturity ranging from 7 days to 7+ years

-longer time = higher interest rates

-when the contract is up, the person who has the CD has to take action or else the CD might go into another contract automatically

-people used to use these when interest rates were higher!

U.S. treasury bill (T-bill)

a short-term (3-, 6-, or 12-month maturity) debt instrument issued at a discount by the U.S. Treasury in its ongoing process of funding the national debt

Series EE bonds

a savings bond issued in various denominations by the U.S. Treasury

-earn interest at a FIXED RATE for 30 years

-have accrual type securities: that interest is paid when they're cashed in or before maturity

I savings bond

savings bond issued by the U.S. treasury

*I bond returns are adjusted for inflation

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