Finance Ch. 4 Managing Your Cash and Savings

cash management the routine day-to-day administration of cash and near-cash resources, also know as liquid assets, by an individual or family
liquid assets are considered liquid because they are either held in cash or can be readily converted into cash with little or no loss in value
examples of liquid assets cash, checking accounts, savings accounts, money market deposit accounts, money market mutual funds, and other short term investment vehicles
near-term needs are met using cash on hand
unplanned and future needs are met using savings or short-term investment vehicles
Low interest rates reflect the Federal Reserve’s policy goal of keeping rates low to help stimulate the economy during the fragile period following the global financial crisis of 2008-2009
financial services industry comprises all institutions that marker financial products such as checking and savings accounts, credit cards, loans and mortgages, insurance, and mutual funds and financial services (such as financial planning, tax filing, estate planning, rusts, and retirement)
Financial institutions can be classified into two broad groups depository and non-depository, based on whether or not they accept deposits as traditional banks do
The vast majority of financial transactions take place at depository financial institutions (commercial banks, savings and loan associations, savings banks, and credit unions)
depository financial institutions differ from nonbank counterparts, such as stick brokerages and mutual funds, in their ability to accept deposits. Most consumers use these institutions to meet their checking and savings account needs.
Depository financial institution: commercial bank offers checking and savings accounts and a full range of financial products and services; the only institution that can offer non-interest-paying checking accounts (demand deposits). The most popular of the depository financial institutions. Most are traditional brick-and-mortar banks, but internet banks-online commercial banks- are growing in popularity because of their convenience, lower service fees, and higher interest paid on account balances.
Depository financial institution: savings and loan association (S&L) channels the savings of depositors primarily into mortgage loans for purchasing and improving homes. Also offers many of the same checking, saving, and lending products as commercial banks. Often pays slightly higher interest on savings than do commercial banks.
Depository financial institution: savings bank similar to S&Ls (savings and loans) but located primarily in New England states. Most are mutual associations -their depositors are their owners and thus receive a portion of the profits in the form interest on their savings.
Depository financial institution: credit union a nonprofit member-owned financial cooperative that provides a full range of financial products and services to its members, who must belong to a common occupation, religious or fraternal order, or residential area. Generally small institutions when compared with commercial banks and S&Ls. Offer interest paying checking accounts-called share draft accounts, and a variety of savings and lending programs . Because they are run to benefit their members, they pay higher interest on savings and charge lower rates on loans than do other depository financial institutions.
share draft account an account offered by credit unions that is similar to interest-paying checking accounts offered by other financial institutions
nondepository financial institutions financial institutions that offer banking services, but don’t accept deposits like traditional banks (today you can hold a credit card issued by a stock brokerage firm or have an account with a mutual fund that allows you to write a limited number of checks)
Nondepository financial institution: Stock brokerage firms offer several cash management options, including money market mutual funds that invest in short-term securities and earn a higher rate of interest than bank accounts, special “wrap” accounts, and credit cards
Nondepository financial institution: Mutual funds provide another alternative to bank savings accounts, like stockbrokers, mutual fund companies offer money market mutual funds
Other nondepository financial institutions include life insurance and finance companies
The main reason that a bank goes out of business is its purchase by another bank
Almost all commercial banks, savings and loans, savings banks, and credit unions are federally insured by U.S government agencies
The few depository financial institutions that are not federally insured usually obtain insurance through either a state-chartered or private insurance agency
Most experts believe that these privately insured institutions have less protection against loss than those that are federally insured
If your checking and savings accounts are at a federally insured institution, you are covered up to $250,000
Deposit insurance protects the funds you have on a deposit at banks and other depository institutions against institutional failure, the insuring agency stands behind the financial institution and guarantees the safety of your deposits up to a specific maximum amount
Deposit insurance a type of insurance that protects funds on deposit against failure of the institution; can be insured by the FDIC (Federal Deposit Insurance Corporation) and the NCUA (National Credit Union Administration)
Deposit insurance is provided to the depositor rather than a deposit account, thus checking and savings accounts of each depositor are insured and, as long as the maximum insurable amount is not exceeded, the depositor can have any number of accounts and still be protected.
people mistakenly believe that the maximum insurance applies to each of their accounts
deposits in other banks which also provide the $250,000 of deposit insurance would fully protect the depositors funds under $250,000
only deposit accounts are covered by deposit insurance
Securities purchased through your bank are not protected by any form of deposit insurance
As a depositor, it’s possible to increase your $250,000 of deposit insurance if necessary by opening accounts in different depositor names at the same institution
people hold cash and other forms of liquid assets, such as checking and savings accounts, for the convenience they offer in making purchases, transactions, meeting normal living expenses, and providing a safety net, or cushion, to meet unexpected expenses or take advantage of unanticipated opportunities
financial institutions compete to offer a wide array of products meeting every liquid-asset need
demand deposit an account held at a financial institution from which funds can be withdrawn on demand by the account holder; same as a checking account
A checking account held at a financial institution is a demand deposit, meaning that the bank must permit these funds to be withdrawn whenever the account holder demands
You put money into your checking account by depositing funds
You withdraw money from your checking account by writing a check, using a debit card, or making a cash withdrawal
As long as you have sufficient funds in your account, the bank, when presented with a valid check or electronic debit, must immediately pay the amount indicated by deducting it from your account
regular checking is the most common type pf checking account, it pays no interest, and any service charges can be waived if you maintain a minimum balance
negotiable order of withdrawal (NOW) account a checking account on which the financial institution pays interest, NOW accounts have no legal minimum balance
time deposit a savings deposit at a financial institution ; remains on deposit for a longer time than a demand deposit
a savings account is another type of liquid asset available at commercial banks, Sand Ls, credit unions
Savings deposits are referred to as time deposits, because they are expected to to remain on deposit for longer periods of time than demand deposits
because savings deposits earn higher rates of interest savings accounts are typically preferable to checking accounts when the depositor’s goal is to accumulate money for future expenditures
most banks pay higher interest rates on larger savings account balances
Although financial institutions generally have the right to require a savings account holder to wait a certain number of days before receiving payment of a withdrawal most are willing to pay withdrawals immediately
Negotiable order of withdrawal accounts (NOW) (Interest-Paying Checking Account) checking accounts on which the financial institution pays interest, there is no legal minimum balance for NOW, but many institutions impose their own requirement, often $500 or $1000. Some pay interest on any balance in the account, but most institutions pay a higher rate of interest for balances above a specified amount.
Money Market Deposit account (MMDA) a federally insured savings account, offered by banks and other depository institutions, that competes with money market mutual funds.
Money Market Deposit Accoundts (MMDA) are popular with savers because of their convenience and safety because deposits in MMDA are federally insured
Most depositors view MMDA as savings rather than convenience accounts
MMDA pay the highest interest rate on which checks can be written
A major problem with the growing popularity of interest-paying checking accounts has been a rise in monthly bank charges, which can easily amount to more than the interest earned on all but the highest account balance, so the their rates of interest offered by MMDAs can be misleading
Money Market mutual fund (MMMF) a mutual fund that pools the fund of many small investors and purchases high-return, short-term marketable securities
Money market mutual funds have historically paid interest rates of 1% to 3% above those paid on regular savings accounts
asset management account (AMA) a comprehensive deposit account that combines checking, investing, and borrowing activities, offered primarily by brokerage houses and mutual funds
AMA (asset management account) appears to investors because they can consolidate most of their financial transactions at one institution and on one account statement
AMA (asset management accounts) have increased in popularity as more institutions have lowered minimum balance requirements to $5000 and they pay higher interest rates on checking account deposits than banks do
AMA (asset management accounts) distinguishing feature is they automatically “sweep” excess balances into a higher-return MMMF (money market mutual fund) daily or weekly
Drawbacks of AMAs (asset management accounts) there are fewer branch locations
AMAs are not covered by deposit insurance, although these deposits are protected by the Securities Investor Protection Corporation and the firm’s private insurance
The fastest changing area in cash management is electronic banking services
electronic funds transfer system (EFTSs) systems using the latest telecommunications and computer technology to electronically transfer funds into and out of customers’ accounts
debit cards specially coded plastic cards used to transfer funds from a customer’s bank account to pay for goods or services
ATM (automated teller machine) a remote computer terminal that customers of depository institutions can use to make basic transactions 24 hours a day 7 days a week
Banks charge an average per-transaction fee of _______ for using the ATM of another bank $2.40
Debit card use is increasing because they are convenient for retailers, who don’t have to write checks and for retailers, who don’t have to worry about bounced checks, and for consumers who don’t have to write checks, and can often get cash back when they make a purchase
The convenience of debit card may be their biggest drawback, it can be easy to overspend
EFT service, preauthorized deposits and payments allow you to receive automatic deposits or make payments that occur regularly
Sometimes there are charges for preauthorized payments
Electronic Fund Transfer Act describes your rights and responsibilities as an EFTS user
Safe-deposit box ( other bank services) rented drawer in a bank’s vault, you receive one key to it and the bank keeps another key, the box can only be opened when both keys are used, items stored ex. jewelry, contracts, titles
Keeping valuables in a safe-deposit box may also reduce homeowner’s insurance by eliminating the “riders” that are often needed to cover such items
Trust services (other bank services) bank trust departments provide investment and estate planning advice, they manage and administer the investments in a trust account or from an estate
A checking account is one of the most useful cash management tools you can have, it’s a safe and convenient way to hold money and streamline point-of-sales purchases, debt payments, and other basic transactions
Don’t keep anything in a safe-deposit box that you might need in an emergency when your bank is closed
Factors that typically influence the choice of where to maintain a checking account are convenience, services, and cost (and rates)
Today few, if any, banks and other depository institutions allow unlimited free check-writing priviledges
Although some banks use the average monthly balance in an account to determine whether to levy a service charge, most use the daily balance procedure
Service charges take two forms a base service charge every month and additional charges for each check you write or each ATM transaction
two people wishing to open a checking account may do so in one of three ways they can each open individual checking accounts on which the other cannot write checks, they can open a joint account that requires both signatures on all checks, or they can open a joint account that allows either one to write checks (the most common type of joint account)
one advantage of the joint account over two individual accounts is lower service charges
checkbook ledger a booklet, provided with a supply of checks, used to maintain accurate records of all checking account transactions
In a checkbook ledger you subtract the amount of each check, debit card purchase, ATM cash withdrawal, or payment, and add the amount of each deposit to the previous balance to keep track of your current account balance
good transaction records on an account balance prevent overdrawing the account
overdraft the result of writing a check for an amount greater than the current account balance
overdraft protection an arrangement between the account holder and the depository institution when the institution automatically pays a check the overdraws the account(this also helps not damage your credit worthiness)
stop payment an order made by an account holder instructing the depository institution to refuse payment on an already issued check
Occasionally, it’s necessary to stop payment on a check that has been issued because a good or service paid for by check is found to be faulty or on a check issued as part of a contract that is not carried out
account reconciliation/balancing the checkbook 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
account reconciliation can help you avoid overdrafts by forcing you to verify your account balance monthly
cashier’s check a check payable to a third party that is drawn by a bank on itself in exchange for the amount specified
traveler’s check a check sold by many large financial institutions typically in denominations ranging from $20-$100 dollars, that can be used for making purchases and exchanged for local currencies in most parts of the world
cashier’s checks are often used by people who don’t have checking accounts,
because they are insured against loss or theft by the issuing agency traveler’s checks provide a safe and convenient and popular form of money for travel
certified checks a personal check that the bank certifies to guarantee that the funds are available , the bank immediately deducts the amount of the check from your account
The act of saving is a deliberate well thought-out activity designed to preserve the value of money, ensure liquidity, and earn a competitive rate of return
What we normally think of as “savings” is really a form of investment-a short-term , highly liquid investment, that’s subject to minimal risk
Careful finance planning dictates that you hold a portion of you assets to meet liquidity needs and accumulate wealth
How much money should you keep in liquid reserves (savings?) 6-9 months of after-tax income
Savings should be a priority item in your budget not something that occurs only when income happens to exceed expenditures
The key to success is to establish a regular pattern of saving
Short term interest rates generally fluctuate more than long-term rates, so it pays to monitor interest rate movements, shop around for the best rates, and place your funds in savings vehicles consistent with your needs
Interest earned is the reward for putting your money in a savings account of short-term investment vehicle
interest can be earned in two ways discount basis, direct payment
Some short-term investments are sold on a discount basis, this means the security is sold for a price that is lower than its redemption value; the difference is the amount of interest earned
another way to earn interest on a short-term investment is by direct payment which occurs when interest is applied to a regular savings account
compound interest when interest earned is 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
effective rate of interest the annual rate of return that is actually earned (or charged) during the period the funds are held (or borrowed)
effective rate of interest = amount of interest earned during the year/amount of money invested or deposited
The more frequently interest is compounded the greater the effective rate for any given nominal rate
compound interest generates future value
future value= amount deposited x future value factor
future value of an annuity= amount deposited yearly x future value annuity factor
Certificate of deposit (CD) a type of savings instrument issued by certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has a maturity ranging from 7 days to as long as 7 or more years
Certificates of deposit (CD) differ from other savings instruments in that CD funds must remain on deposit for a specified period
CDs are convenient to buy and hold because they offer attractive and highly competitive yields plus federal deposit insurance protection
U.S Treasury Bill (T-bill) a short term (3 or 6 month maturity) debt instrument issued at a discount by the U.S. treasury in the ongoing process of funding the national debt
U.S. treasury bill is considered the ultimate safe haven for investments
T-bills are issued by the U.S. treasury as part of its ongoing process of funding the national debt
Backed by the full faith and credit of the U.S. government, T-bills pay an attractive and safe return that is free from state and local income taxes
T-bills have interest on a discount basis, their interest is equal to the difference between the purchase price paid and their stated value at maturity
Series EE bonds a savings bond issued in various denominations by the U.S. treasury
Savings bonds are accrual type securities, which means that interest is paid when they are cashed in or before maturity rather than periodically during their lives,
The higher the rate of interest on a savings bond, the shorter the time it takes for the bond to accrue from its discounted purchase price to its matiruity value
series EE bonds give their holders an appealing tax twist savers need not report interest earned on their federal tax returns until the bonds are redeemed,

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