Managing Cash & Savings

Managing Cash & Savings

  • Focus on routine management of cash and liquid assets.

  • Liquid Assets include:

    • Cash

    • Checking & Savings Accounts

    • Money Market Accounts

    • Short Term Investment Vehicles

Key Elements of Cash Management

  • Controlled Checking Account

    • Write checks at specific times during the week.

    • Avoid carrying checkbook or debit card to control spending.

    • Set maximum spending amounts before shopping.

  • Pay Yourself First

    • Prioritize employer-provided retirement savings.

    • Automate transfers to investment accounts.

    • Establish ongoing savings program.

Low Interest Rate Environment - Implications for Investors

  • Loss of Interest Income

    • Affects retirees and pension funds.

  • Economic Signals

    • Indicates sluggish economic growth and risk of deflation.

  • Reduced Financing Costs

    • Extremely low rates beneficial for borrowers; limits incentive to save.

  • Economic Distortions

    • Discourages savings and debt reduction.

    • Increases demand for riskier assets.

    • Low opportunity costs encourage holding unproductive assets.

    • Growth in commodities demand and potential asset bubbles.

Investors Responding to Low Interest Rates

  • Shift to Longer Term Bonds

    • Increases price risk exposure.

  • Shift to Dividend Yielding Stocks

    • Exposure to market risks.

Financial Services Industry Overview

  • Institutions Marketing Financial Products

    • Offer checking, savings accounts, credit cards, loans, and mortgages.

    • Services include financial planning, brokerage, tax preparation, estate planning, real estate, trusts, and retirement.

Types of Financial Institutions

Depository Institutions

  • Commercial Banks

    • Provide a full range of financial products.

  • Savings & Loan Associations (S&Ls)

    • Focus on savings and mortgages.

  • Savings Banks

    • Mutual associations, owned by depositors.

  • Credit Unions

    • Non-profit member-owned cooperatives; membership tied to commonalities.

Non-Depository Institutions

  • Credit Card Issuers

  • Stock Brokerage Firms

  • Mutual Funds

  • Life Insurance Companies

  • Finance Companies

Deposit Insurance - FDIC

  • Protects against bank runs; covers deposits, not securities.

  • Maximum Deposit Protection:

    • $250,000 per depositor.

    • Married couples can qualify for up to $1,500,000 across accounts.

    • Treats each depositor as a separate legal entity.

  • CDARS

    • Certificate Deposit Registry Account Service; allows full FDIC coverage on CDs up to $50 million.

Cash Management Product Regulation

  • Governed by the Federal Truth-in-Savings Act (1993):

    • Clear disclosure of fees, interest rates, and terms required.

    • Must utilize APR (annual percentage yield).

    • “Free” accounts should not require minimum balance or per-check charges.

    • Must pay interest on full average deposit balances.

    • Notification required 30 days in advance for rate reductions on deposit accounts.

Types of Cash Management Accounts

  • Checking & NOW Accounts

    • Demand deposits, typically with no interest.

  • Savings Accounts

    • Time deposits.

Types of Interest Paying Demand Deposits

  • NOW Accounts (Negotiable Order of Withdrawal)

  • Money Market Accounts (MMDA)

    • Federally insured; often require minimum balance; access via check or ATM.

  • Money Market Mutual Funds (MMMF)

    • Invest in high-return short-term securities; check-writing access subject to minimum draw amount.

  • Asset Management Accounts (AMA)

    • Combine checking, investing, and borrowing; fees may apply; SIPC coverage possible.

Electronic Banking Services

  • Services Include:

    • ATM & Debit Cards

    • Pre-authorized deposits & payments

    • Online and mobile banking.

  • EFTS Trends

    • Debit card use exceeded credit card use in 2008.

    • Federal Electronic Fund Transfer Act regulates these services:

      • Limits on stopping payments for defective purchases.

      • Timeframes for notifying banks about errors/losses.

Other Bank Services

  • Safe Deposit Boxes

    • Requires two keys for access.

  • Trust Services

    • For investment and estate planning.

Choosing Your Depository Institution

  • Look for no monthly fees.

  • No limitations on transactions.

  • No ATM access fees.

  • Ensure mobile and online access is available.

  • Consider overdraft protection options.

Maintaining a Checking Account

  • Choose accounts with minimal fees.

  • Use checkbook registers (paper/electronic).

  • Be cautious of deposit holds and avoid overdrafts (average fee $35).

  • Utilize overdraft protection/automatic transfer programs.

  • Stop Payment Fees can range from $25 to $35.

Reconciling Your Checking Account

  • Balance checkbook regularly.

  • Address discrepancies caused by errors, outstanding checks, service charges, or credited interest.

Special Types of Checks

  • Cashier’s Check: Purchased from a bank.

  • Traveler’s Check: Rarely used now.

  • Certified Check: Personal checks certified for guaranteed funds.

Establishing a Savings Program

Principles of Saving

  • Prioritize savings in budget; pay yourself first.

  • Set monthly savings targets.

  • Manage price and interest rate risks in savings.

Typical Savings Objectives

  • Emergency Fund

  • Debt Retirement

  • Specific Purchases (Home/Car)

  • Retirement Savings

  • Education Fund

  • Legacy Planning

Emergency Fund Guidelines

  • Aim for 6 months of expenditures as a rule of thumb.

  • Use savings accounts, money market funds, or ultra-short-term bond funds for liquidity.

Planning for Purchases

  • Determine needed amounts and saving dates; make these budget items.

Long-Term Financial Independence

  • Aim to save at least 10% of compensation throughout your career for retirement and financial security.

Earning Interest on Savings

  • Understand Simple Interest vs. Compound Interest:

    • Benjamin Franklin quote: "Money makes money, and the money money makes makes more money."

  • More frequent compounding equals greater effective rates.

Low-Risk Savings Vehicles

  • Certificates of Deposit (CDs): Fixed terms, penalties for early withdrawal.

  • US Treasury Bills: Offered in short maturities, active secondary markets.

Series EE and I Savings Bonds

  • Series EE Bonds: Issued at 50% face value, earn fixed interest for 30 years, tax benefits for education.

  • I Bonds: Inflation-indexed, sold at face value with adjustable rates.