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.

• 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:

• Cash equivalents

• Liquidity

• Safety

What is Cash Management?

Types of Financial Services

1. Savings-time deposits

2. Payment Services-demand deposits

3. Borrowing

4. Other Financial Services-insurance protection, investments, trusts. Asset management account or cash management account.

• Debit cards

• ATMs

• Point-of-sale terminals

• Smart card and stored-value cards

• Pre-authorized deposits and payments

• Electronic benefits transfer

Electronic Funds Transfer

• Interest-earning checking accounts

• Savings accounts

• Money market accounts

• Low-risk, long-term savings instruments

Cash Management Tools

Savings

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.

Allow even higher returns in exchange for

less liquidity (accumulate and transfer from

MMA).

Low-Risk, Long-Term Savings Instruments

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

Savings and Loan, Mutual Savings

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Saving Services

Payment Services Borrowing

Other: Insurance, Investments, etc.

Life Insurance Companies

Investment Company, Brokerage Firm

Credit Card, Finance Company

Mortgage CompanyNo

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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:

1.Determine your marginal tax rate2.Subtract your marginal tax rate from 1.03.Multiply the result by the yield on your savings account4.This is your after-tax rate of return

Example:1.You are in the 28% tax bracket2.1.0 - .28 = .723.(Assume your savings account pays 6.25%)

.0625 x .72 = .0454. 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

• Service fees

• Per-check charges

• Transaction charges

• Account exception fees

CHARGES, FEES, AND PENALTIES:

You Can BankFrom Home

• Bank-based programs

• Bill-paying programs

• Computer based programs

Checks forSpecial Needs

• Traveler’s Check

• Money Orders

• Certified Checks

• Cashier’s Checks

OverdraftProtection

• Good faith agreement

• Insufficient funds

• Automatic funds transfer

• Automatic overdraft loan

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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.

Reconciling Your Checking AccountReconciling Your Checking Account

The Bank Statement Your Checkbook

Balance on current

bank statement $ 643.96 Current balance in your checkbook $ 295.91

Step 1. Date Amount Step 3. Add up outstanding checks 10-4 70.00

10-6 130.00 10-7 111.62

Subtract total of fees or

other charges listed on bank statement $ 215.75

Subtract ATM withdrawal $ – 100.00 Subtract the total $ – 311.62

Step 2. Date Amount Step 4. Add up deposits in transit 10-2 60.00 Add interest earned $ + 2.18 10-5 90.00 Add direct deposits $ + 300.00 Add the total $ + 150.00 Adjusted bank balance $ 482.34 Adjusted checkbook balance $ 482.34