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?
THE TASK OF:
• 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?
• Cash equivalents
• Liquidity
• Safety
Who Provides Financial Services?
• Banks and depository institutions
• Mutual funds
• Stock brokerage firms
• Financial services companies
Electronic Funds Transfer
• Debit cards
• ATMs
• Smart card and storedvalue cards
• Pre-authorized
deposits and payments
• Point-of-sale terminals
• Electronic benefits
transfer
EFT Regulations
• Electronic Funds Transfer Act - 1978
• Regulation E - Federal Reserve Board
• Disclosure statement
• Periodic statement
• Liability for unauthorized use
Cash Management Tools
• Interest-earning checking accounts
• Savings accounts
• Money market accounts
• Low-risk, long-term savings instruments
Checking Accounts
•Allows transfer of deposited funds to merchants and service providers,
as well as to accounts at other financial institutions.
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.
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
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.
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 1.20 %- effective until April 2010(same rate as EE bonds)
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
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
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