2. 4-2
Role of Cash Management in
Personal Financial Planning
Cash management deals with the
routine, day-to-day use of liquid
assets.
–Liquid assets consist of cash and
other assets that can be converted
easily to cash with little or no loss in
value.
3. 4-3
Examples of Liquid Assets
Cash
Checking Accounts
Savings Accounts
Money Market Deposit Accounts
Money Market Mutual Funds
U.S. Treasury Bills
EE Savings Bonds
Certificates of Deposit (shorter-
term)
4. 4-4
The Financial Services
Marketplace
Financial products
– checking and
savings accounts
– credit cards
– loans and
mortgages
– insurance
– mutual funds
Financial services
– financial planning
– tax preparation
– brokerage services
– real estate
– trusts
– retirement
– estate planning
The financial services industry markets:
6. 4-6
Types of Depository
Financial Institutions
Commercial Banks
–Largest type of traditional
financial institution.
–Offer full array of financial
services.
–Only type of financial institution
that can offer noninterest-paying
checking accounts.
7. 4-7
Savings and Loan Associations
–Offer many of the same services as
commercial banks.
–Typically pay slightly more on savings
deposits.
–Channel depositors’ savings into mortgage
loans for purchasing and improving homes.
–Some are mutual associations.
8. 4-8
Savings Banks
–Similar to savings and loan associations.
–Located primarily in New England states.
–Offer interest-paying checking accounts.
–Typically offer savings rates similar to those of
savings and loan associations.
–Most are mutual associations.
9. 4-9
Credit Unions
– Provide financial products and services to specific groups of people who have a common tie.
– Qualified persons become members by purchasing a share of ownership.
– All are mutual associations; owned and sometimes operated by members.
– Typically pay interest rates higher than those of other financial institutions.
10. 4-10
Internet Banks
–Offer online banking services.
–Feature lower fees and higher yields
than “brick-and-mortar banks.”
–Suitable for people who do not need
to physically go to a bank.
12. 4-12
How Safe is Your Money?
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. 4-13
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. 4-14
Cash Management Products
With sufficient funds,
banks must immediately
pay the amount of your
check or ATM withdrawal.
1. Checking Accounts =
Demand Deposits
15. 4-15
Funds are expected to remain on deposit
for a longer time period than are demand
deposits.
Generally pay higher interest rates than
demand deposits.
At many institutions, the larger the
balance, the higher the interest rate
offered.
2. Savings Accounts =
Time Deposits
16. 4-16
Types of Checking
Accounts
Regular checking accounts
– Offered by commercial banks
– Pay no interest
Interest-bearing checking accounts
– Examples include NOW, share draft,
and money market deposit accounts
– Offered by banks, savings banks,
S&Ls, and credit unions
17. 4-17
– Offered by investment (mutual
fund) companies
– Not federally insured; trade on
open market
– Interest bearing; limited checks
Money Market Mutual Funds
18. 4-18
– Primarily offered by brokerage
firms; consolidate financial
activities
– Not covered by deposit insurance
(protected by SIPC); open market
– Interest bearing; check writing
privileges
Asset Management Accounts
19. 4-19
Other Money
Management Services
Electronic Banking Services
Electronic Funds Transfer Systems (EFTS)
make possible
– ATM service
– Debit cards—linked to your checking account
– Pre-authorized deposits and payments
– Banking by phone
– Online banking and bill payment services
20. 4-20
–Regulates EFTS Services.
–States that errors must be
reported within 60 days.
Electronic Funds Transfer
Act of 1978
Limit your losses by immediately
reporting theft, loss, or unauthorized
use of your card or account!
21. 4-21
Other Bank Services
Safe Deposit Boxes
Trust Services—provide
investment and estate planning
advice and management for trust
accounts.
22. 4-22
Maintaining a Checking
Account
Determine services needed.
Consider costs involved.
Keep track of checks written, automatic
deposits, and ATM withdrawals.
Don’t 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. 4-23
Special Types of
Checks
When personal checks are not accepted,
special checks can be used to guarantee
payment.
Cashier’s—drawn on the bank.
Traveler’s—used for making
purchases worldwide.
Certified—drawn on your account but
guaranteed by the bank.
24. 4-24
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. 4-25
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. 4-26
Nominal rate—the named or stated
rate of interest.
Effective rate—the annual rate of
return actually earned.
If interest is compounded more
frequently than once a year, the
effective rate will be greater than
the nominal rate of interest.
Earning Interest on Your
Money
27. 4-27
Effective rate =
Annual amount of interest earned
Amount of money invested
Example:
Invest $1000 at 5% for 1 year.
How Is Interest
Calculated?
28. 4-28
If simple interest is used, there is no
compounding:
Interest = Principal x rate x time
= $1000 x .05 x 1
= $50
How Is Interest
Calculated?
29. 4-29
If compound interest is used and the
compounding occurs semiannually—
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
How Is Interest
Calculated?
30. 4-30
The nominal rate is 5%, the
stated rate of interest.
Effective Rate = $50.63 ÷ $1000
= 0.05063
= 5.063%
The effective rate is 5.063%.
How Is Interest
Calculated?
31. 4-31
Amount of interest earned depends
on
Frequency of compounding
Balance on which interest is paid
Interest rate applied
How Much Interest Will
You Earn?
Time value of money concepts
are used in compounding to
find interest earned.
32. 4-32
A Variety of Ways to Save
Certificates of Deposit (CDs)
– Funds are to remain on account for a given
time period.
– Early withdrawals incur an interest penalty.
U.S. Treasury Bills
– Debt securities issued by the U.S. Treasury.
– Sold at a discount; $1000 minimum.
– Mature in 1 year or less.
33. 4-33
A Variety of Ways to
Save
Series EE Bonds
– Purchased at 1/2 face value.
– Interest paid when bonds redeemed.
– Newly purchased bonds must be held at least
12 months; actual maturity date unspecified.
– Taxes not paid until bonds redeemed.
– Exempt from state and local taxes.
– If redeemed for educational purposes, income
taxes may be avoided.