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									Personal & Family Finance

         Section 3
     Cash Management

How many of you have checking accounts?
Does anyone know what it means to
reconcile your account?
Do you balance your checking account
each month?
Why would it be important to reconcile
your account each month?


   The financial asset that is most commonly owned by most
    individuals is cash.
   Yet, most individuals take a passive approach to cash
   They miss the opportunity to manage this critical portion of
    their financial assets.
   Wise cash management should consider the following:
       The quantity of cash to hold
       In what form to hold cash
       In which financial institution the cash should be held.

    Why Hold Cash?

   Undertake Transactions
       To make every day purchases, individuals use cash. Generally,
        individuals keep enough to cover their spending for 1–2 weeks.
   Emergency Reserves
       Individuals keep cash to protect them against unexpected events.
       Financial planners recommend keeping 3–6 months’ after-tax income
        in reserve.
   Store of Value
       Individuals plan ahead by saving for major purchases such as the
        purchase of a house, car, etc.

    Fundamental Deposits
   Fundamental deposits are liquid assets. Liquid assets
    are those that can be withdrawn easily with no loss in
   Another characteristic of fundamental deposits is
    safety. These deposits are generally insured by the
    federal government up to $100,000 per depositor.
   Types of fundamental deposits:
       Checking
           Regular
           NOW Accounts
       Savings Accounts
 Fundamental Deposits (continued)

Checking and NOW Accounts
   These are used to satisfy transaction needs such as bill
    payment through the use of a check.
   Checking accounts do not pay interest on balances in the
   NOW (negotiable order of withdrawal) Account pays
    interest on balances in the account.
   When comparing the costs and benefits of checking versus
    NOW accounts, if the minimum balance is met, the NOW
    account will generally be the best choice.

 Fundamental Deposits (continued)

Savings Accounts
   This account has no check writing privileges.
   Interest is paid on the balance in the account at a rate that is
    generally higher than the rate paid on a NOW account.

Federal Deposit Insurance

   Available at many financial institutions
     Commercial Banks (FDIC)

     Savings and Loans (SAIF)

     Credit Unions (NCUA)

   Insurance at any one institution is $100,000 per depositor,
    not per deposit.

    Money Market Deposit Accounts
   Similar to a savings account but with minimum balance
   Limited check writing privileges and transfers
   Covered by Federal Deposit Insurance
   Generally earns a higher rate of interest than a savings
    account but shop around because rates may be higher on CDs
    or Money Market Mutual Funds

    Money Market Mutual Funds
   Account at a mutual fund company or bank
   Not covered by Federal Deposit Insurance but safety record
    has been excellent
   May have minimum balance requirements
   Includes check writing privileges
   Interest rates may be higher than savings accounts and money
    market deposit accounts.
   Read the prospectus to understand the types of securities that
    the fund invests in because this differs across funds.

    Certificate of Deposit
   Account where the investor commits to leave the money for a
    fixed period of time to earn a higher interest rate
   There may be early withdrawal penalties.
   They are available in many different maturities.
   They are offered by most financial institutions including
    credit unions.

    U.S. Series EE Bonds
   Bonds are a loan to the U.S. federal government that earns a
    rate of interest.
   They are issued by the U.S. Treasury.
   Their rates change with market conditions.
   No periodic interest is paid – issued in discount form.
   Interest is tax deferred until the bonds are sold.
   Interest is free of state and local income taxes.
   Interest is free of federal income tax if it is used for child’s
    education (there is an income limitation).
   These are sold by financial institutions.

    Selecting a Bank

   Geographic Convenience
     Tends to be the most important factor in choosing a

      financial institution
   Bank Services
     Financial institutions offer a wide variety of services.

     The following slide lists some of these services.

   Service Charges and Earned Interest
     Shop around! Competition has led to significant

      differences in fees and interest paid.

    Checking Account Procedures

   Opening the account
       If married, consider opening joint account with right of survivorship
   Making additional deposits and endorsing checks
   Writing checks
   Record all deposits, checks, and ATM withdrawals carefully
   Reconcile account monthly
   Avoid overdrafts (bouncing a check)
   Availability of funds
   Stopping payment on a check

Endorsing Checks

   Blank Endorsement
    Maria J. Garcia
   Restrictive Endorsement
     For Deposit Only
    Maria J. Garcia
   Special Endorsement
     Pay to the Order of Sharon Steele
    Maria J. Garcia

End-of-Month Activities

   Bank Reconciliation
     Individual compares the account balance from their
       records to the bank’s balance on the monthly statement.
     This assures that the records of the bank and the
       individual are both correct.
   Filing and Storage
     The bank statements should be saved and filed for later

       reference if a question arises.

Bank Reconciliation Procedures

   Look for checks that have not cleared.
   Note any deposits not yet recorded by the bank.
   Deduct service charges from your account balance A
   Add any interest if your account earns interest.
   Prepare end-of-month reconciliation.

Checks That Guarantee Payment

   Certified Check
     The bank verifies that the individual has sufficient funds
      in their account to cover the check. Once a check is
      certified, the funds are immediately available to the payee.
   Cashier’s Check
     An individual pays the bank to issue a check on the bank’s
      own account.
   Traveler’s Checks
     These checks are purchased by individuals to safeguard
      money when traveling. They can be used at most places in
      a manner similar to cash.

Electronic Banking

   Automated teller machines (ATM) provide access to
    accounts at all times (assuming the machines are
   Electronic funds transfer systems (EFTS) include the
     Debit cards

     Direct deposit of paychecks

     Online bill payment

   How Interest Is Calculated
   Determining Interest on Your Account

            Effective Annual Yield
                         Amount of interest earned
Effective Annual Yield =    Amount Invested

If you have earned a total of $49 in interest over the
year, after investing $1000, calculate your effective
annual yield.
      $49 / 1000 = 4.9%

Future Value of $1,000 invested at 8%
 Frequency of Compounding Amount after 1 Year

 Annually                  $1,080.00

 Semiannually               1,081.60

 Quarterly                  1,082.43

 Weekly                     1,083.22

 Daily                      1,083.28

 Continuously               1,083.30


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