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Cash Management
The management of cash and near cash (liquid) assets
Deciding how much to keep in liquid assets and where to keep it
Liquid Assets
Cash and investments that can easily be converted into cash, such as checking accounts, money market funds, and CD’s
Deposit-type financial institutions
Financial institutions that provide traditional checking and savings accounts. Commonly referred to as “banks”
Nondeposit-type financial institutions
Financial institutions, such as mutual funds and stock brokerage firms, don't provide checking and savings accounts.
Banks or Deposit Type Financial Institutions
Commercial Banks
Savings and Loan Associations
Savings Banks
Credit Unions
Non Deposit Financial Institutions
Mutual Funds
Stockbrokerage Firms
What to look for in a Financial Institution
Which financial institution offers the kind of services you want and need
Is your investment safe? Is your investment insured? Is this financial institution sound?
Where are all the costs and returns associated with the services you want
Checking account
A federally protected account in which you deposit your liquid funds so you can withdrawal them quickly and easily by a check or debit car
Demand Deposit Account
A type of checking account that pays no interest on your balance
NOW Account
(Negotiable order of withdrawal) A checking account that pays interest on your balance
Savings account
A time deposit account that pays interest
Allows you to keep your money in a safe, federally insured financial institution while it earns a guaranteed fixed return or interest.
Money Market Deposit Account (MMDA)
A bank account that pays a rate of interest that varies with the current market rate of interest
Certificate of deposit (CD)
Is a savings alternative paying a fixed rate of interest while keeping your funds on deposit for a set period of time, which can range from 30 days to several years
Money Market Mutual Funds (MMMF)
A mutual fund that invests in short-term (generally with a maturity of less than 90 days) notes of relatively high denomination
Draws together the savings of many individuals and invest those funds in very large, creditworthy debt issued by the government or by large corporations
Asset Management Accounts
A comprehensive financial service package offered by a brokerage firm, which can include a checking account, credit and debit cards, MMMF, loans, automatic payment or fixed payments such a mortgages, brokerage services, and a system for the direct payment of interest, dividends, and proceeds from security sales into the MMMF
U.S Treasury Bills, T-Bills
A short term note of debt issued by the federal government, with a maturity ranging from a few days to 12 months
Denomination
The face value or amount that's returned to the debtholder at maturity. AKA debts per value.
U.S Savings Bonds
A type of security that’s actually a loan on which you receive interest, generally every 6 months for the life of the bond. When the bond matures, or comes due, you get back your investment, or “loan”. What you get back at maturity is usually the face value of the loan, although the amount you get could be more or less than what you paid for the bond originally.
Issued by the US Treasury
Annual Percentage Yield (APY) or Effective Annual Rate
Also referred to as the EAR, is the amount you earn on an investment in one year, expressed as a percentage. The APY formula converts interest rates compounded for different periods into comparable annual rates, allowing you to easily compare interest rates
Truth in Savings Act of 1993
requires financial institutions to report the rate of interest using the APY so that it’s easier for the consumer to make comparisons
Federal Deposit Insurance Corporation
The federal agency that insures deposits at commercial banks and S&Ls
National Credit Union Association
The federal agency that insures accounts at credit unions
What are the 3 C’s of choosing a financial institution?
Cost
Convenience
Consideration
Safety (Final consideration)
Direct Deposit
The depositing of payments, such as payroll checks, directly into your checkings account. This is done electronically
Safe Deposit Boxes
A storage unit at a bank or other financial institution in which valuables and important documents are stored for safekeeping
Overdraft protection
The provision of an automatic loan to your checking account whenever sufficient funds are not available to cover checks that have been written against the account
Stop payment
An order you can give your financial institution to stop payments on a check you've written
Cashier Check
A check drawn on a banks or financial institution account
Certified Check
A personal check that’s been certified as being good by the financial institution on which its drawn
Money order
A variation of the cashiers check except that it is generally issued by the US postal service or some other non banking institutions
Travelers Check
Checks issued by large financial institutions, such at Citibank, Visa, and American Express, that are sold through local banking institutions and are similar to cashier checks except that they don’t specify payee and they come in specific denominations (20, 50, and 100)
Electronic funds transfer
Any financial transaction that takes place electronically
Take palace fast and customer doesn't have to carry cash or write a check
Automated teller machine or cash machine (ATM)
A machine found at most financial institutions that can be used to make withdrawals, deposits, transfers, and account inquiries
Personal Identification Number (PIN)
A four to seven digit personal identification number assigned to your account.
Debit card
A card that allows you to access the money in your accounts electronically
Smart Cards
Similar to a debit card, but this card actually magnetically stores its own accounts. Funds are transferred into the card, which is then used the same way you’d use a debit card. When the funds run out, the card is useless until more funds are magnetically transferred in.
Chapter 6
Credit
Receiving cash, goods, or services with an obligation to pay later
Consumer credit
Credit purchases for personal needs other than for home mortgages, this can include anything from an auto loan to credit card debt
Open Credit or Revolving Credit
A line of credit that you can use and then pay back at whatever pace you like so long as you pay a minimum amount each month, paying interest on the unpaid balance
Annual Percentage Rate (APR)
The true simple interest rate paid over the life of the loan. It's a reasonable approximation of the true cost of borrowing, and the Truth in Lending Act requires that all consumer loan agreements disclose the APR in bold point
Method of determining the balance (balance calculation method)
The method by which a credit card balance is determined. The finance charges are then based on the level of this balance
Average Daily Balance Method
A method of calculating the balance on which interest is paid by summing the outstanding balances owed each day during the billing period and dividing by the number of day in the period
Previous balance method
Interest payments are charged against what you owed at the end of the previous billing period. There is no credit given for current month’s payments. This method is relatively simple, but it’s also expensive.
Adjusted balance method
Interest is charged against the previous month’s balance only after any payments have been subtracted. Because interest isn’t charged on payments, this method results in lower interest charges than the previous balance method
Grace period
The length of time given to make a payment before interest is charged against the outstanding balance on a credit card
Annual Fee
A fixed annual charge imposed by a credit card issuer
Merchant Discount Fee
The percentage of the sales that the merchant pays to the credit card issuer
Cash Advance Fee
A charge for making a cash advance, paid as either a fixed amount or a percentage of the cash advance
2009 CARD Act
credit card late fees are capped at 25 for occasional late payments
Over-the-limit
A fee imposed wherever you go over your limit
Penalty Rates
The rate you pay if you don't make your minimum payment on time
What the CARD Act Means for You
Notification of rate increase
Notification of schedule for payoff
No interest rate increases for the first year
Increased rates apply only to new charges
Restrictions on over-the-limit transactions
Caps on high fee cards
Protections for underage consumers
Standard payment dates and times
Payments directed to highest interest balances first
Fee limits
No inactivity fee
Bank Credit Card
A credit card issued by a bank or large corporation, generally as visor Mastercard
Premium or prestige credit cards
A bank credit that offers credit limits as high as $100,000 or more in addition to numerous added perks, including emergency medical and legal services, travel services, rebates, and insurance on new purchases
Affinity Card
A credit card issued in conjunction with a specific charity or organization. It carries the sponsoring group’s name and/or picture on the credit card itself and sends a portion of the annual fee or a percentage of the purchases back to the sponsoring organization
Secured credit card
A credit card backed by the pledge of some collateralized asset
Travel and Entertainment Cards
A credit card initially meant for business customers to allow them to pay for travel and entertainment expenses, keeping them separate from their other expenditures
Single purpose credit card
A credit card that can be used only at a specific company
Traditional Charge Account
Can be used to make purchases only at the issuing company
What are the 5 C’s of Credit
Character
Capacity
Capital
Collateral
Conditions
Credit Bureau
A company that gathers information on consumers' financial history, including how quickly they have paid bills and whether they have been delinquent on paying bills in the past. The company summarizes this information and sells it to customers
Credit Scoring
The numerical evaluation of “scoring” of credit applicants based on their credit history
What’s in your credit report?
Identifying information
Trade Lines or Credit Accounts
Inquiries
Public Record and Collection Items
Factors that determine your credit score
Payment History (35% of your score)
Amount you owe (30% of your score)
Length of credit history (15% of your score)
Types of Credit Used (10% of your score)
New Credit (10% of your score)
The Fair and Accurate Credit Transactions (FACT) (2003)
Act allows you to request one free copy of your credit report each year from the three major credit bureaus: Experian, Equifax, and TransUnion.
Fair Credit Billing Act (FCBA)
provides a procedure for correcting billing errors.
The Consumer Financial Protection Bureau (CFPB
provides a single location for financial protection and oversight—and its job is to help consumers make better decisions.
How do you know you have become a victim of identity theft?
You receive a credit card that you didn't apply for
You are denied , or you are offered less-than-favorable credit terms, such as a high interest rate, for no apparent reason.
You receive calls or letters from debt collectors or businesses about merchandise or services you didn’t buy.
You fail to receive bills or other mail.
Steps for identity fraud
Contact the fraud department of any one of the three major credit bureaus to place a fraud alert on your credit file.
Close the accounts that you know or that you believe have been tampered with or opened fraudulently.
File a police report. Or, if you aren’t receiving bills or other mail, go to your local post office to make sure a “Change of Address” has not been submitted under your name and address.
File a complaint with the Federal Trade Commission at the government’s consumer information Web site (http://www.consumer.gov).
Chapter 7
Decisions
Single Payment Vs. Installment Loans
Secured Vs. Unsecured Loans
Variable Rate Vs. Fixed Rate
The Loans Maturity Shorter Vs. Longer Term Loans
Consumer Loans
A loan involving a formal contract that details exactly how much you’re borrowing and when and how you’re going to pay it back.
Single Payment or balloon loan
A loan that is paid back in a single lump-sum payment at maturity, or the due date of the loan, which is usually specified in the loan contract. At that date you pay back the amount borrowed.
Bridge or Interim Loans
A short-term loan that provides funding until a longer-term source can be secured or until additional financing is found
Installment Loan
A loan that calls for repayment of both the interest and the principal at regular intervals, with the payment levels set in such a way that the loan expires at a present date
Loan amortization
The repayment of a loan using equal monthly payments that cover a portion of the principal and the interest on the declining balance. The amount of the monthly payment going toward the interest starts off large and steadily declines. While the amount going toward the principal starts off small and steadily increases.
Secured loan
A loan that’s guaranteed by a specific asset (collateral)
Unsecured loan
A loan that’s not guaranteed by a specific asset
Fixed Interest Rate Loan
A loan within an interest rate that stays fixed for the duration of the loan
Variable or adjustable interest rate loan
A loan in which the interest rate does not stay fixed but varies based on the market interest rate
Prime Rate
The interest rate bank charge to their most creditworthy or prime customers
Periodic cap
limits the maximum the interest rate can jump during one adjustment.
Lifetime cap
limits the amount that the interest rate can jump over the life of the loan.
Convertible Loan
A variable-rate loan that can be converted into a fixed-rate loan at the borrowers option at specified dates in the future
Security Statement
An agreement that identifies whether the lender or borrower retains control over the item being purchased
Default
The failure of a borrower to make a scheduled interest or principal payment
Note
The formal document that outlines the legal obligations of both the lender and the borrower
Insurance Agreement Clause
A loan requirement that a borrower purchase credit life insurance that will pay off the loan in the event of the borrowers death
Acceleration Cost
A loan requirement stating that if the borrower misses one payment, the entire loan comes due immediately
Deficiency Payments Clause
States that if you default on a secured loan, not only can the lender repossess whatever is secured, but also if the sale of that asset doesn’t cover what is owed, you can be billed for the difference
Recourse Clause
A clause in a loan contract defining what actions a lender can take to claim money from a borrower in the case of default
Home Equity/Second Mortgage
A loan that uses a borrowers build up equity in his or her home as collateral against the loan
Automobile loan
A loan made specifically for the purchase of an automobile, which uses the automobile as collateral against the loan
Loan Disclosure Statement
A statement that provides the APR and interest charges associated with a loan
N-Ratio Method
A method of approximating the APR
Rule of 78s or sum of the year’s digits
A rule to determine what proportion of each loan payment goes toward paying the interest and what proportion goes toward paying the principal
28/36 rule
That is, if your total projected monthly mortgage payment (including insurance and real estate taxes) falls below 28 percent of your gross monthly income and your total monthly debt payments—including this mortgage payment plus any consumer credit payments—fall below 36 percent, you’re considered a good credit risk.
The debt resolution rule
used by financial planners to help control debt obligations, excluding borrowing associated with education and home financing, by forcing you to repay all your outstanding debt obligations every four years.
Credit or debt counselor
A trained professional specializing in developing personal budgets and debt repayment programs