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Report
Chapter 5:
Managing Your Cash
Objectives
•
Explain the importance of effective cash management and list the four
tools of cash management.
•
Compare and contrast the primary providers of cash management
opportunities in today’s financial services industry.
•
Understand the uses of electronic funds transfer and the legal
protections available for it.
•
Understand the criteria for choosing and using various types of
checking accounts and the importance of having an interest-earning
checking account.
Objectives
•
Identify the potential benefits of opening a savings account as well as
key factors to consider when comparing savings account.
•
Explain the importance of placing excess funds in a money market
account.
•
List the potential benefits of putting money into low-risk, longer-term
savings instruments.
What is Cash Management?
THE TASK OF:
• Maximizing interest earnings
• Minimizing fees on all funds kept readily
available for living expenses, recurring
household expenses, emergencies, and
saving and investment opportunities
What is Cash Management?
• Cash equivalents
• Liquidity
• Safety
Types of Financial Services
1. Savings-time deposits
2. Payment Services-demand deposits
3. Borrowing
4. Other Financial Services-insurance protection,
investments, trusts. Asset management account or
cash management account.
Electronic Funds Transfer
• Debit cards
• Smart card and storedvalue cards
• ATMs
• Pre-authorized
deposits and payments
• Point-of-sale
terminals
• Electronic benefits
transfer
Cash Management Tools
• Interest-earning checking accounts
• Savings accounts
• Money market accounts
• Low-risk, long-term savings instruments
Savings
PAY YOURSELF FIRST!
Current income that is not spent on
consumption; provides source of emergency
funds and/or temporary place for funds in
excess of daily living expenses.
Money Market Accounts
Any of a variety of interest-earning accounts
that pay relatively high interest rates and
offer some limited check-writing privileges.
Low-Risk, Long-Term Savings Instruments
Allow even higher returns in exchange for
less liquidity (accumulate and transfer from
MMA).
Low-Risk, Long-Term Savings Instruments
• Certificates of Deposit (CDs)
• U.S. Government Savings Bonds
• EE (Patriot Bonds)
I Bonds
• College Savings Trust Funds
Financial Services and Economic
Conditions
Who Provides Financial Services?
• Banks and depository institutions
• Mutual funds
• Stock brokerage firms
• Financial services companies
Federal deposit
insurance coverage
Types of Financial Institutions
Commercial Bank
Savings and Loan, Mutual Savings
Credit Union
Saving
Services
Payment
Services
Borrowing
Other:
Insurance,
Investments, etc.
No Federal deposit
insurance coverage
Life Insurance Companies
Investment Company, Brokerage Firm
Credit Card, Finance Company
Mortgage Company
ONLINE FINANCIAL INSTITUTIONS . . .Web-based financial services through:
•Established banks and other financial institutions offering online services
•Financial businesses operating on the internet-no physical locations other than ATM
access
•Internet payment services that transfer funds between buyers and sellers
High Cost Financial Services
•Pawnshops
•Check-Cashing Outlets
•Payday Loans
•Rent-To-Own Centers
•Refund Anticipation Loans
•Auto Title Loans
EE and Patriot Bonds
(see SavingsBonds.com)
10 Things You Should Know About the "Patriot Bond"
1.
Purchased over-the-counter and via internet
2.
Series EE bonds will be inscribed with "Patriot Bond" title - making them no different from actual EE bonds
3.
Electronic purchases are purchased for face value. Paper purchases are purchased for half its face value - Increase in value monthly and interest is
compounded semi-annually
4.
EE/E Bonds purchased between May 1997 and April 30, 2006, earn a variable market based rate of return. Series EE Bonds issue dated May 2005 and after
will earn a fixed rate of interest. Current yield is .60 %- effective until April 30, 2011
5.
Available in denominations: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000
6.
Maximum annual purchase limit is $15,000 ($30,000 face value) per person
7.
Guaranteed to reach initial maturity (face value) in 17 years - however - there is a 3-month interest penalty if the bond is redeemed before 5 years
8.
Will reach final maturity (completely stop earning interest) in 30 years
9.
There is no state or local income tax on the interest earned
10.
Interest earned could be tax exempt if used for education purposes
Evaluating Savings Plans
•Rate of Return
•Compounding
•Truth in Savings
•APY
•Inflation
•Tax Considerations
•After Tax Savings Rate of Return
•Liquidity
•Safety
•Restrictions and Fees
After-Tax Savings Rate of Return
To calculate your after-tax savings rate:
1.
2.
3.
4.
Determine your marginal tax rate
Subtract your marginal tax rate from 1.0
Multiply the result by the yield on your savings account
This is your after-tax rate of return
Example:
1. You are in the 28% tax bracket
2. 1.0 - .28 = .72
3. (Assume your savings account pays 6.25%)
.0625 x .72 = .045
4. Your after-tax rate of return is 4.5%
Checking Accounts
Allows transfer of deposited funds to
merchants and service providers, as well as
to accounts at other financial institutions.
Checking Accounts
CHARGES, FEES, AND PENALTIES:
• Service fees
• Per-check charges
• Transaction charges
• Account exception fees
You Can Bank
From Home
• Bank-based programs
• Bill-paying programs
• Computer based programs
Checks for
Special Needs
• Traveler’s Check
• Money Orders
• Certified Checks
• Cashier’s Checks
Overdraft
Protection
• Good faith agreement
• Insufficient funds
• Automatic funds transfer
• Automatic overdraft loan
5 - 26
Reconcile Your
Checking Account
1.
2.
3.
4.
5.
6.
7.
Retrieve previous month’s statement.
Place checks in order by check number/date of issue.
Compare canceled checks with transaction register.
Subtract any charges from transaction register.
Compare with deposit slips.
List all outstanding checks.
Compare register and statement balances.
Reconciling Your Checking Account
Reconciling Your Checking Account
The Bank Statement
Your Checkbook
Balance on current
bank statement
Step 1.
$
Date
Add up outstanding checks
Subtract the total
Adjusted bank balance
70.00
10-6
130.00
10-7
111.62
Current balance in
your checkbook
$
295.91
other charges listed on
bank statement
$
215.75
Subtract ATM withdrawal
$
– 100.00
Add interest earned
$
+ 2.18
Add direct deposits
$
+ 300.00
$
482.34
Step 3.
Subtract total of fees or
– 311.62
Date
Add up deposits in transit
Amount
10-4
$
Step 2.
Add the total
643.96
Amount
10-2
60.00
10-5
90.00
$
+ 150.00
$
482.34
Step 4.
Adjusted checkbook balance

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