ppt_ch05.ppt

Chapter Five

Management of Monetary Assets

Copyright ©Houghton Mifflin Company. All rights reserved. 5 - 2

Learning Objectives

1. List and define the tools of monetary asset management and describe the various providers of financial services.

2. Understand the key aspects of electronic banking and the legal protections available.

3. Describe the different types of checking accounts.


Learning Objectives

4. Identify the key aspects and benefits of a savings account.

5. Explain the importance of placing excess funds in an appropriate money market account.

6. List the benefits of putting money into longer-term savings instruments.


What Is Monetary Asset Management?

• Monetary Assets – cash and near-cash items that can readily be converted to cash.

• Monetary Asset (Cash) Management – encompasses how you handle all of your monetary assets.

• Cash Equivalents – – retain a constant or nearly constant value.– have ready liquidity.


What Is Monetary Asset Management? (continued)

• Liquidity – the speed and ease with which an asset can be converted to cash.

• Safety – freedom from financial risk.


The Four Tools of Monetary Asset Management

• You need a low-cost, interest-earning checking account from which to pay monthly living expenses.

• You might want to maintain a small savings account in a local financial institution.


The Four Tools of Monetary Asset Management (continued)

• When income begins to exceed expenses regularly, you can consider opening a money market account.

• Your monetary asset management plan is complete when you transfer some funds into longer-term savings instruments.


Figure 5.1: Four Tools of Monetary Asset Management


Who Provides Monetary Asset Management Services?

• Financial Services Industry – providers of monetary asset management services.

1. Banks and Depository Institutions

2. Mutual Funds

3. Stock Brokerage Firms


Banks and Depository Institutions

• Recognized and regulated by the federal government as firms hat offer loans and banking services to businesses and individuals.


Banks and Depository Institutions (continued)

• These include– Commercial Banks – corporations

chartered under federal and state regulations.

– Savings and Loan Associations (S&Ls)– Credit Unions (CUs)– Mutual Savings Banks (MSBs)


Deposit Insurance Is a Feature of Depository Institutions

• The maximum insurance on all of your single-ownership accounts is $100,000.

• The maximum insurance on all of your joint accounts held with other individuals is $100,000.

• The maximum insurance on all of your retirement accounts is $100,000.

• A maximum of $100,000 in insurance per beneficiary is payable on “death accounts.”


Mutual Funds

• An investment company that raises money by selling shares to the public and then invests that money in a diversified portfolio of investments.


Stock Brokerage Firms

• Licensed financial institution that specializes in selling and buying stocks, bonds, and other investment alternatives

• Typically offer money market mutual fund accounts (operated by mutual funds) into which clients place money while waiting to make their investments


Electronic Banking

• Electronic Banking – occurs whenever banking transactions are conducted via computers without the customer using paper documents or having face-to-face contact with financial services personnel.

• Electronic Funds Transfers (EFTs) – funds are shifted electronically among various bank accounts.


Electronic Banking (continued)

• Direct Deposits – having your paycheck or other regular income deposited directly into your account rather than being paid by check.

• Preauthorized Payments – having certain payments, such as monthly utility bills, automatically paid by your bank when billed by the entity to whom the payment is owed.


You Can Do Your Banking with an Automatic Teller Machine

• Automated Teller Machine (ATM or Cash Machine) – a computer terminal through which customers may make deposits, make withdrawals, and complete other financial transactions.

• Personal Identification Number (PIN) – confirms that you are authorized to access the account.

• ATM Transaction Fee – may be assessed for using an ATM.


You Can Make Purchases at POS Terminals Using a Debit Card

• Point-of-Sale (POS) Terminal – a computer terminal located at a store or other merchant location that allows the customer to make purchases electronically via a debit or credit card.

• Debit (or Check) Card – a plastic card that provides instant access to your checking account.


Smart Cards and Stored-Value Cards

• Smart Cards and Stored-Value Cards – plastic payment devices that use built-in computer chips or magnetic strips to store data and handle payment functions.

• Electronic Benefits Transfer (EBT) – directs cash benefits to recipients using smart cards as the delivery mode.


Consumer Protection Regulations

• Disclosure Statement—notification by the institution of the rules of the EFT account

• Periodic Statement—your monthly account statement


Monetary Asset Management: Tool #1 – Interest-Earning Checking Accounts

• Checking Account – allows you to write checks against amounts you have on deposit, thereby transferring your deposited funds to other people and organizations.


Types of Checking Accounts

• Demand Deposits – a financial institution must withdraw funds and make payments whenever demanded to do so by the checking account depositor.

• Lifeline Banking Account – offers access to certain minimal financial services that every consumer needs, regardless of income, to function in our society.


Types of Interest-earning Checking Accounts

• Negotiable Order of Withdrawal (NOW) Account – earns interest or dividends as long as minimum-balance requirements are satisfied.

• Share Draft Account – the credit-union version of a NOW account.

• These accounts usually pay a tiered interest rate – the combination of a base rate and a higher rate.


Aspects of the Check Clearing Process

• Check Truncation – an alternative to receiving a canceled check.

• Image Statements – show miniature computer pictures of checks.

• Substitute Checks – warranted by banks as an acceptable version of original checks written by you.

• Bad Check – a check for which there are insufficient funds in the account.


Protect Yourself from Checking Account Overdraft Fees

• Bank Agreements to Use to Avoid Bad Check Fees:– automatic funds transfer agreement– automatic overdraft loan agreement and– bounce protection agreement.


Payment Instruments for Special Needs

• Traveler’s Checks

• Money Orders

• Certified Checks

• Cashier’s Checks


How Ownership of Checking Accounts (and Other Assets) Is Established

• Signature Card – a form that can be used to verify the saver’s signature against a signed withdrawal slip or check in the future.

• Individual Account – has one owner who is solely responsible for the account and its activity.

• Payable at Death Designation – a person is named in the account to receive the funds upon the death of the individual owner.


Joint Accounts

• Joint Account – has two or more owners, each of whom has legal rights to the funds in the account.

• Joint Tenancy with Right of Survivorship (or Joint Tenancy) – each person owns the whole of the asset and can dispose of it without the approval of the other(s).


Joint Accounts (continued)

• Tenancy in Common – a form of joint ownership in which two or more parties own the asset, but each retains control over a separate piece of the property rights.

• Tenancy by the Entirety – restricted to property held between a husband and a wife. No one co-owner can sell or dispose of his or her portion of an asset without the permission of the other.


Monetary Asset Management: Tool #2 – Savings Accounts

• Statement Savings Account (or Passbook Savings Account) – permits frequent deposits or withdrawals of funds.


Savings Account Interest

• The calculation of interest to be paid on deposits in financial institutions is primarily based on four variables:– the amount of money on deposit– the method of determining the balance– the interest rate applied and– the frequency of compounding.


Savings Account Interest (continued)

• Annual Percentage Yield (APY) – a percentage based on the total interest that would be received on a $100 deposit for a 365-day period given the institution’s annual rate of simple interest and frequency of compounding.


Monetary Asset Management: Tool #3 – Money Market Accounts

• Money Market Account – any of a variety of interest-earning accounts that:– pay relatively high interest rates and– offer some limited check-writing privileges.


Super NOW Accounts

• Super NOW Account – a government-insured money market account offered through depository institutions.


Money Market Deposit Accounts

• Money Market Deposit Account (MMDA) – has minimum-balance requirements and tiered interest rates that vary with the size of the account balance.


Money Market Mutual Funds

• Money Market Mutual Fund (MMMF) – a money market account in a mutual fund investment company (rather than at a depository institution).


Asset Management Accounts

• Asset Management Account (AMA or All-in-One Account) – a multiple-purpose, coordinated package that gathers most of the customer’s monetary asset management vehicles into a unified account and reports them on a single monthly statement.


Monetary Asset Management: Tool #4 – Long-Term Savings Instruments

• Involves placing money into long-term savings instruments for a given period of time (anywhere from 6 months to two years or longer)

• Instruments include– Certificates of deposit– U.S. Government Savings Bonds


Certificates of Deposit

• Certificate of Deposit (CD) – an interest-earning savings instrument purchased for a fixed period of time.

• Variable-Rate Certificates of Deposit (or Adjustable-Rate CDs) – pay an interest rate that is adjusted periodically.


Certificates of Deposit (continued)

• Bump-Up CDs – allow savers to bump up the interest rate once to a higher market rate and add up to 100 percent of the initial deposit whenever desired.

• Brokered Certificates of Deposit – CDs purchased through a stockbroker.


U.S. Government Savings Bonds

• Series EE Savings Bonds – U.S. government savings instruments that are purchased for 50 percent of their face value.

• Series I Savings Bonds – not discount bonds but instead are purchased at their face value.


Golden Rules of Managing Monetary Assets

1. Choose an interest-earning checking account for your checking account needs and reconcile the bank statement monthly.

2. Minimize ATM fees by making fewer large withdrawals rather than more frequent small withdrawals.

3. Monitor your bank fees and, if necessary, change financial institutions to avoid fees.


Golden Rules of Managing Monetary Assets (continued)

4. Build and maintain an emergency fund sufficient to cover three months of expenses and keep those funds in higher-interest accounts.

5. Start saving regularly when you are young. The sooner you start, the more funds you will amass over time.

Date post:	17-Nov-2014
Category:	Economy & Finance
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