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? Maximizing interest earnings Minimizing fees on all funds kept readily available for living expenses, recurring household expenses, emergencies, and saving and investment opportunities THE TASK OF:

What is Cash Management? Cash equivalents Liquidity Safety

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.

Electronic Funds Transfer Debit cards ATMs Point-of-sale terminals Smart card and stored-value cards Pre-authorized deposits and payments 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. PAY YOURSELF FIRST!

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

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

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: 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%

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 CHARGES, FEES, AND PENALTIES:

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. 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.

Reconciling Your Checking Account