Chapter 4 1 Cash management routine daily administration of cash and near cash to take care of an individual s or family s needs a 3 steps i Awareness realize that money needs to be managed in a consistent way that spending without plan doesn t work ii Analysis ask questions such as what do I spend money on Is it too much Should I save more iii Action do something Open a checking or savings account talk with financial advisors or change banks 2 Spending less is the most difficult a due to ease of getting cash i 24 7 ATM ii Debit cards 3 Foreign currency a U S Dollar b Canada Dollar c British Pound d Europe Euro e Brazil Real Japan Yen f g China RMB 4 Interest cost of using money a Interest rate is determined by supply and demand i Supply amount of money lenders are willing to lend ii Demand amount of money borrowers are willing to pay iii don t ever borrow as much as a lender is willing to give you b Receiver of interest savings account or investments c Payer of interest borrowed money for a purchase credit cards d Expressed as percentage and as an annual fee e f Rates move together g When one part of the market adjusts interest rates the other parts respond inflation Interest rates vary Set or change with inflation increase interest rates bank change their rates h Tiered rate interest rate structure tied to a balance lever i Banks will have variety of accounts services and bonuses depending on the age group ii Older groups leave their money in for a long time iii Younger groups build accounts and take out loans 5 Savings a Amount kept in is a matter of reference risk of tolerance Large balances in low interest or non interest accounts don t earn interest b Watch for FEES c d Cash management i Maintain a balanced checkbook ii Paying bills promptly iii Establish an ongoing saving program e Saving rates i American save on average less than 5 of their income each year ii Recommended savings rate 10 15 iii Generation X and Baby Boomer generation save above average 16 f Emergency fund 3 6 months of after tax income Readily available in the event of a financial crisis g Basic liquidity ratio length of time an individual or household can meet expenses based on liquid assets i Basicliquidity ratio monetary assets monthly expenses h Hard to maintain an emergency fund and savings fund i Best way to do so is to take a regular amount out of each paycheck to put into savings i Making savings grow i Amount put in ii iii Frequency that interest is compounded the more the interest is compounded the Interest rate higher the future value iv Policies regarding deposit withdrawals v Nominal rate or interest stated annual rate of interest vi Effective rate actual rate of interest including compounding vii Continuous compounding compounding of interest continuously during the day viii Annual percentage yield APY amount of interest earned on a yearly basis expressed as a percentage ix Truth in savings Act federal law requiring lenders to tell customers APY and other information such as interest rate fees charged or required minimum balanced 6 Deregulation fewer controls opening up of competition a Depository institutions deregulation and monetary control act of 1980 i Many savings and loans closed ii More competition between remaining institutions Consumers benefit from the increased competition iii Mergers occurred iv Development of nonbanks banks without main offices or branchless banks 7 Electronic banking E banking electronic access to cash and accounts 8 Electronic funds transfer EFT Making withdrawals paying bills depositing money or in some other way moving money electronically a ATM s automated teller machines computerized automated banking b Direct deposit paycheck directly deposited into account c Online payments d Smartcards cards embedded with computer chips for a prepaid amount of money 9 Debit cards cards that deduct purchase amounts from checking or savings accounts a Differ from smartcards with a prepaid amount and from credit cards for which you receive a monthly statement and have the option of paying all or part of the balance 10 Future trends a One card for all functions b Voice commands c Codes scanning hands eyes fingers 11 Financial institutions multi purpose institutions offering banking and other financial services a Safety protected from theft loss and fire b Convenience cash can be accessed quickly c Cost savings cheaper ways to cash checks and buy money orders d Security money is protected by federal government up to 100 000 for each depositor 12 FDIC Federal Deposit Insurance Corporation government insurance of banks and savings loan companies 13 National credit union administration government insurance of credit unions 14 Commercial banks a largest b provide full service c noninterest paying checking accounts 15 Saving and Loans Associations S L a deregulation is getting increasingly difficult to differentiate S L from commercial banks b Don t offer noninterest paying checking accounts c Higher interest rates on savings accounts 16 Credit unions a nonprofit cooperatives owned by their members b Savings accounts are called shared accounts c d Pay higher interest rates than banks or S L Low share account charges and loan rates 17 Brokerage firms Stocks bonds mutual funds a newcomers to banking b Customer can easily shift money from one account to another c d Estate plans financial planning cash management accounts e Credit and debit cards f 401 k IRA s and mortgages 18 Checking accounts a Demand deposit accounts b No interest c NOW Negotiable Order of Withdrawal type of checking account that pays interest d Check for fees e Money market deposit accounts i Type of accounts that offers higher rate of interest than most checking savings or NOW accounts ii Higher balances required iii Allows to write checks f Saving accounts can make limited withdrawals but no checks i Passbook savings accounts savings book record of deposits and withdrawals in an accounts higher interest rate than statement savings ii Statement savings accounts statement of withdrawals and deposits in an account g Time deposits certificate of deposits or CDs i From several days to several years they offer guaranteed rate of interest rate higher than checking and savings accounts safe way to save money federally insured ii iii maturity keep money in CD until the agreed upon amount of time h Joint vs Separate i ii 19 Saving bonds or either person can empty account and both signatures are needed a 1 in 4
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