Transcript of Gj11e ch04
- 1. CHAPTER 4 MANAGING YOUR CASH AND SAVINGS
- 2. Role of Cash Management in Personal Financial Planning
- Cash management deals with the routine, day-to-day use of
liquid assets .
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- Liquid assets consist of cash and other assets that can be
converted easily to cash with little or no loss in value.
- 3. Examples of Liquid Assets
- Money Market Deposit Accounts
- Money Market Mutual Funds
- Certificates of Deposit (shorter-term)
- 4. The Financial Services Marketplace
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- checking and savings accounts
The financial services industry markets:
- 5. Types of Financial Institutions
- 6. Types of Depository Financial Institutions
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- Largest type of traditional financial institution.
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- Offer full array of financial services.
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- Only type of financial institution that can offer
noninterest-paying checking accounts.
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- Savings and Loan Associations
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- Offer many of the same services as commercial banks.
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- Typically pay slightly more on savings deposits.
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- Channel depositors savings into mortgage loans for purchasing
and improving homes.
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- Some are mutual associations.
- 8.
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- Similar to savings and loan associations.
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- Located primarily in New England states.
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- Offer interest-paying checking accounts.
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- Typically offer savings rates similar to those of savings and
loan associations.
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- Most are mutual associations.
- 9.
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- Provide financial products and services to specific groups of
people who have a common tie.
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- Qualified persons become members by purchasing a share of
ownership.
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- All are mutual associations; owned and sometimes operated by
members.
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- Typically pay interest rates higher than those of other
financial institutions.
- 10.
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- Offer online banking services.
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- Feature lower fees and higher yields than brick-and-mortar
banks.
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- Suitable for people who do not need to physically go to a
bank.
- 11.
- Types of Nondepository Financial Institutions
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- Stockbrokerage firmsoffer cash management accounts, money
market mutual funds, wrap accounts, credit cards
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- Mutual fundsoffer money market mutual funds
- 12.
- 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
- 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
- With sufficient funds, banks must immediately pay the amount of
your check or ATM withdrawal.
1. Checking Accounts = Demand Deposits
- 15.
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- Funds are expected to remain on deposit for a longer time
period than are demand deposits.
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- Generally pay higher interest rates than demand deposits.
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- At many institutions, the larger the balance, the higher the
interest rate offered.
2. Savings Accounts = Time Deposits
- 16. Types of Checking Accounts
- Regular checking accounts
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- Offered by commercial banks
- Interest-bearing checking accounts
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- Examples include NOW, share draft, and money market deposit
accounts
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- Offered by banks, savings banks, S&Ls, and credit
unions
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- Offered by investment (mutual fund) companies
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- Not federally insured; trade on open market
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- Interest bearing; limited checks
Money Market Mutual Funds
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- Primarily offered by brokerage firms; consolidate financial
activities
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- Not covered by deposit insurance (protected by SIPC); open
market
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- Interest bearing; check writing privileges
Asset Management Accounts
- 19. Other Money Management Services
- Electronic Banking Services
- Electronic Funds Transfer Systems (EFTS) make possible
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- Debit cardslinked to your checking account
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- Pre-authorized deposits and payments
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- Online banking and bill payment services
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- States that errors must be reported within 60 days.
Electronic Funds Transfer Act of 1978
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- Limit your losses by immediately reporting theft, loss, or
unauthorized use of your card or account!
- 21.
- Trust Services provide investment and estate planning advice
and management for trust accounts.
- 22. Maintaining a Checking Account
- Determine services needed.
- Keep track of checks written, automatic deposits, and ATM
withdrawals.
- Dont write checks for more than you have in the account.
- Arrange for overdraft protection.
- Know how to stop a payment.
- Reconcile your account monthly.
- 23. Special Types of Checks
- When personal checks are not accepted, special checks can be
used to guarantee payment.
- Cashiersdrawn on the bank.
- Travelersused for making purchases worldwide.
- Certifieddrawn on your account but guaranteed by the bank.
- 24. Establishing A Savings Program
- PAY YOURSELF FIRST : On payday, write yourself a check and
deposit it into a savings account, or transfer a set amount to
savings through your debit card.
- 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.
- 25.
- Simple Interest interest paid only on initial amount of
deposit.
- Compound Interest interest paid at set intervals and added back
to principal.
Earning Interest on Your Money
- 26.
- Nominal rate the named or stated rate of interest.
- Effective rate the annual rate of return actually earned.
Earning Interest on Your Money If interest is compounded more
frequently than once a year, the effective rate will be greater
than the nominal rate of interest.
- 27. Effective rate = Annual amount of interest earned Amount of
money invested
- Invest $1000 at 5% for 1 year.
How Is Interest Calculated?
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- If simple interest is used, there is no compounding:
How Is Interest Calculated?
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- Interest = Principal x rate x time
- 29.
- If compound interest is used and the compounding occurs
semiannually
How Is Interest Calculated?
- 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
- 30.
- The nominal rate is 5%, the stated rate of interest.
How Is Interest Calculated? Effective Rate = $50.63 $1000 = 0.05063
= 5.063%
- The effective rate is 5.063%.
- 31.
- Amount of interest earned depends on
- Balance on which interest is paid
How Much Interest Will You Earn? Time value of money concepts are
used in compounding to find interest earned.
- 32. A Variety of Ways to Save
- Certificates of Deposit (CDs)
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- Funds are to remain on account for a given time period.
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- Early withdrawals incur an interest penalty.
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- Debt securities issued by the U.S. Treasury.
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- Sold at a discount; $1000 minimum.
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- Mature in 1 year or less.
- 33.
- A Variety of Ways to Save
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- Purchased at 1/2 face value.
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- Interest paid when bonds redeemed.
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- Newly purchased bonds must be held at least 12 months; actual
maturity date unspecified.
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- Taxes not paid until bonds redeemed.
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- Exempt from state and local taxes.
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- If redeemed for educational purposes, income taxes may be
avoided.