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Chapter 5: Managing Your Cash

Chapter 5: Managing Your Cash. 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.

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Chapter 5: Managing Your Cash

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  1. Chapter 5: Managing Your Cash

  2. 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

  3. 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. Objectives

  4. 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? THE TASK OF:

  5. What is Cash Management? • Cash equivalents • Liquidity • Safety

  6. Types of Financial Services Savings-time deposits Payment Services-demand deposits Borrowing Other Financial Services-insurance protection, investments, trusts. Asset management account or cash management account.

  7. Electronic Funds Transfer • Debit cards • ATMs • Point-of-sale terminals • Smart card and stored-value cards • Pre-authorized deposits and payments • Electronic benefits transfer

  8. Cash Management Tools • Interest-earning checking accounts • Savings accounts • Money market accounts • Low-risk, long-term savings instruments

  9. 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. Savings PAY YOURSELF FIRST!

  10. Any of a variety of interest-earning accounts that pay relatively high interest rates and offer some limited check-writing privileges. Money Market Accounts

  11. Low-Risk, Long-Term Savings Instruments Allow even higher returns in exchange for less liquidity (accumulate and transfer from MMA).

  12. Low-Risk, Long-Term Savings Instruments • Certificates of Deposit (CDs) • U.S. Government Savings Bonds • EE (Patriot Bonds)I Bonds • College Savings Trust Funds

  13. Financial Services and Economic Conditions

  14. Who Provides Financial Services? • Banks and depository institutions • Mutual funds • Stock brokerage firms • Financial services companies

  15. Types of Financial Institutions Commercial Bank Federal deposit insurance coverage Savings and Loan, Mutual Savings Credit Union Other: Insurance, Investments, etc. Saving Services Payment Services Borrowing Life Insurance Companies Investment Company, Brokerage Firm No Federal deposit insurance coverage 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

  16. High Cost Financial Services • Pawnshops • Check-Cashing Outlets • Payday Loans • Rent-To-Own Centers • Refund Anticipation Loans • Auto Title Loans

  17. EE and Patriot Bonds(see SavingsBonds.com) 10 Things You Should Know About the "Patriot Bond"

  18. 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

  19. After-Tax Savings Rate of Return To calculate your after-tax savings rate: 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: You are in the 28% tax bracket 1.0 - .28 = .72 (Assume your savings account pays 6.25%) .0625 x .72 = .045 4. Your after-tax rate of return is 4.5%

  20. Checking Accounts • Allows transfer of deposited funds to merchants and service providers, as well as to accounts at other financial institutions.

  21. Service fees Per-check charges Transaction charges Account exception fees Checking Accounts CHARGES, FEES, AND PENALTIES:

  22. You Can BankFrom Home • Bank-based programs • Bill-paying programs • Computer based programs

  23. Checks forSpecial Needs • Traveler’s Check • Money Orders • Certified Checks • Cashier’s Checks

  24. OverdraftProtection • Good faith agreement • Insufficient funds • Automatic funds transfer • Automatic overdraft loan 5 - 26

  25. Reconcile YourChecking Account 1. Retrieve previous month’s statement. 2. Place checks in order by check number/date of issue. 3. Compare canceled checks with transaction register. 4. Subtract any charges from transaction register. 5. Compare with deposit slips. 6. List all outstanding checks. 7. Compare register and statement balances.

  26. Reconciling Your Checking Account

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