CH 4 1 Cash management process a Cash management routine daily administration of cast and near cash to take car of an individual s or families need b Three steps of cash management process i Awareness realize money needs to be managed spending ii Analysis What do I need to spend money on Should I save w out a plan doesn t work What s important to me iii Action take action do something open savings account change banks talk w financial advisors c Spending less than earned i Difficult ii Ease of getting cash makes it harder to keep track of how much money one has iii Checking and savings accounts have advantage of being liquid speed and ease w which an asset can be converted into cast 1 Atm automated teller machine d Interest cost of using money i Expressed as a percentage and as an annual fee ii rate of interest determined by supply and demand 1 supply amount of money lenders are willing to lend 2 demand amount of money borrowers are willing to lend iii Certificate of deposit CD fixed time deposit 1 Money is lent to a bank for a pretdetermined number of months years and bank provides the lender a fixed rate of return 1 Savings account investment If you have a savings iv Receiver of interest account or CD v Payer of interest 1 Borrowed money credit cards vi When one part of the market adjusts interest rates the other parts respond vii Tiered rate interest rate structure tied to balance level e Savings i Amount kept in it is a matter of preference ii Cash management includes keeping abreast of your expenditures through maintaining a balanced checkbook paying bills promptly and establishing an ongoing savings program iii Your attitude about maintaining a minimum balance has to do w your risk of tolerance iv Watch for FEES they can be expensive v Large balances in low interest or non interest accounts don t earn interest vi Cash is useful for small immediate needs and checks are useful for monthly bills or larger purchases vii Savings are an important resource in times of trouble and crisis 1 viii Savings rates If you lose a job or faced with hard circumstances savings can help tide you over 1 Americans save on average less than 5 of their incomes each year 2 Experts recommend a saving rate of 10 15 do maintain current living standards during retirement 3 The more money put aside today the more money there f Emergency fund will be in the future i Three to six months of after tax income 1 Enough money to help you get through a crisis ii Basic liquidity ratio monetary assets over monthly expenses 1 Best way to reach your target is to take a regular amount of each paycheck and put it into savings a If earning 5 interest compounded daily saving 100 a month will produce a nest egg of 2523 in two years and 6634 in five years 2 Another way is asking your bank to transfer a fixed amount each month from your checking to emergency fund and depositing bonuses tax refunds or unexpected income into your fund a Average tax refund is 1 750 This could go towards paying off bills b The trend is towards depositing income tax refunds directly into bank or savings accounts Interest rate i Based on amount put in ii iii Frequency interest is compounded iv Policies regarding deposit and withdrawals how account balances are determined v Compound interest is the frequency that earned interest is added to the principal so that interest is earned on that amount as well as on the principal vi Nominal rate of interest stated annual rate of interest vii Effective rate actual rate of interest including compounding g Making savings grow 1 If 100 is deposited in an account at 5 the depositor will be credited w 105 at the end of the first year and 110 25 at the end of the second year 2 Extra 25 cents signifies the earned interest on the 5 in the first year viii Continuous compounding compounding of interest ix continuously during the day Interest can be compounded quarterly half yearly or on another time basis x Since the more frequently interest is compounded the more quickly money grows continuous compounding is a benefit to the saver xi Annual percentage yield APY amount of interest earned on a yearly basis expressed as a percentage xii Truth in savings act federal law requires financial institutions tell customers the important terms of their accounts including APY interest rate fees charged and info about other features xiii Another factor is how deposits and withdrawals are handled 1 Most financial institutions use the day of deposit to day of withdrawal method of commuting interest a This is based on the exact number of days bw when money is deposited and withdrawn 2 New financial marketplace a Before 1970 ppl had a checking account from a bank and kept their savings in a savings and loan institution This is what happened i Deregulation fewer controls opening up of competition ii Depository institutions Deregulation and monetary control act of 1980 which caused Many savings and loans closed 1 2 more competition bw remaining institutions 3 mergers occurred 4 Development of non banks iii The crossover amoung services offered is one of the most defining aspects of the financial marketplace iv Consumers benefit from the increased competition v Time deposits accounts such as CDs w a maturity of at least seven days which you are not allow to withdrawal funds unless you pay a fee 3 Electronic banking electronic funds transfer a E banking defining aspect of the new financial marketplace that allows access to cash 24 hours a day b Direct deposit paychecks or benefit checks into savings checking electronically c Electronic funds transfer EFT means the use of computers and electronic signals to move money i Online banking can have bank pay recurring bills such as mortgage payments ii Can signal to move money to different acounts d Supermarket banking is the trend of one stop shopping banking e A provision in the Debt collection improvement act of 1996 mandated all federal payments be made by EFT instead of paper checks due to the convince and security 4 Smartcards plastic cards embedded w a computer chip that has a prepaid amount of money a Come in three varieties i Prepaid disposable single purpose card such as telephone library copy cards After it runs out you throw it out ii Prepaid disposable card you buy at a bank and can use at a retail outlet that has a terminal iii Reloadable card you can load up again from a bank 5 Debit cards cash cards plastic access cards that deduct purchase amounts from checking or savings
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