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Chapter 4 - Managing Your Cash and Savings

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					Chapter 4 –   Managing Your Cash and
              Savings

                                  4 - 1
         Agenda

            Review of learning goals
            Key chapter terms and definitions
            Role of cash management
            Canada‘s financial services marketplace
            Cash management products
            Electronic banking services
            Other bank services
            Establishing a savings program
            Earning interest on your money
            Savings vehicles
            Maintaining a chequing account
            Summary
Agenda
            Internet links and on-line resources
                                                                      4 - 2
                         Chapter 4 – Managing Your Cash and Savings
           Chapter 4 - Learning Goals


           1.   Understand the role of cash management in the personal
                financial planning process.
           2.   Describe today‘s financial services marketplace, both
                traditional and non-depository financial institutions.
           3.   Select the chequing, savings, electronic banking, and
                other bank services that meet your needs.
           4.   Calculate the interest earned on your money using
                compound interest.
           5.   Develop a savings strategy that incorporates a variety of
                savings plans.
           6.   Open and use a chequing account.


Learning
Goals
                                                                       4 - 3
                          Chapter 4 – Managing Your Cash and Savings
        Key Chapter Terms and Definitions

           Cash management                             Nominal (stated) rate of
           Chartered bank                               interest
           Credit union                                Effective rate of interest
           Trust companies                             Guaranteed investment
           Securities dealers                           certificate (GIC)
           Demand deposit                              Canada treasury bill
           Time deposit                                Canada Savings Bonds (CSB)
           Money market mutual fund                    Chequebook ledger
           Asset management account                    Overdraft
           Electronic Funds Transfer                   Overdraft protection
            System                                      Stop payment
           Debit cards                                 Account reconciliation
           Automated banking machine                   Bank draft
            (ABM)                                       Traveller‘s cheque
           Compound interest                           Certified cheque
Terms      Simple interest
                                                                             4 - 4
                        Chapter 4 – Managing Your Cash and Savings
    Cash Management in Personal Financial
    Planning
             Cash management deals with the routine, day-
              to-day use of liquid assets.

              •   Liquid assets consist of cash and other assets which
                  can be readily converted to cash with little or no loss
                  in value.
LG 1
             Having ready access to cash is important to
              meet emergencies, take advantage of
              opportunities, and to simply be able to afford
              the daily necessities of life.
             A general rule of thumb is that you should keep
              3 to 6 months of earnings on hand as a liquid
Cash on       reserve.
Hand
                                                                     4 - 5
                        Chapter 4 – Managing Your Cash and Savings
         Examples of Liquid Assets

             Cash
             Chequing Accounts
             Savings Accounts
LG 1
             Money Market Deposit Accounts
             Money Market Mutual Funds
             Government of Canada Treasury Bills
             Canada Savings Bonds
             Certificates of Deposit (shorter-term)
Liquid
Assets
                                                                  4 - 6
                     Chapter 4 – Managing Your Cash and Savings
         Purpose of Liquid Assets


             Make purchases.
             Meet recurring living expenses.
LG 1         Provide reserve for unexpected expenses
              or opportunities.
             Used temporarily to accumulate funds
              for longer-term financial goals.


Liquid
Assets
                                                                 4 - 7
                    Chapter 4 – Managing Your Cash and Savings
           The Financial Marketplace

           The financial services industry provides
             products and services:

              Financial products                            Financial services
               •   chequing and savings                         •     financial planning
LG 2               accounts                                     •     tax preparation
               •   credit cards                                 •     brokerage
               •   loans and mortgages                                services
               •   insurance                                    •     real estate
               •   mutual funds                                 •     trusts
                                                                •     retirement
Finance
                                                                •     estate planning
Industry
                                                                                   4 - 8
                         Chapter 4 – Managing Your Cash and Savings
           Types of Financial Institutions

           Deposit Taking
              •   Chartered Banks
              •   Trust Companies
              •   Credit Unions-Caisse Populaires
              •   Finance/Acceptance Companies
LG 2          •   Internet Banks
           Insurance
              •   Life Insurance
              •   Property and Casualty Insurance (home and auto)
           Other
              •   Securities Dealers
Finance       •   Mutual Funds
Industry
                                                                       4 - 9
                          Chapter 4 – Managing Your Cash and Savings
           Types of Financial Institutions
           Deregulation of the Financial Services Industry in Canada




               Deregulation of the Financial Services Industry in
                Canada since 1980 has moved the industry from
                specialized roles of banking, trust, insurance and
LG 2            securities into financial institutions that provide
                ‗universal banking services‘ a one-stop financial
                supermarket

               The process in not yet complete. Banks, for
                example cannot provide leasing services or sell
                insurance through their branch networks.
Finance
Industry
                                                                        4 - 10
                           Chapter 4 – Managing Your Cash and Savings
           Internet Banks


             •   Offer online banking services.
             •   Feature lower fees and higher yields
                 than ―brick-and-mortar banks.‖
LG 2
             •   Suitable for people who do not need
                 to physically go to a bank.




Finance
Industry
                                                                    4 - 11
                       Chapter 4 – Managing Your Cash and Savings
           How Safe is Your Money?

               Almost all financial institutions are federally insured or have
                         developed an consumer insurance program.

               Canada Deposit Insurance Corporation (CDIC) insures
                accounts at federally-regulated banks and trust companies.
                ($100,000 per depositor – mutual funds and other investments that can
                face market losses are NOT included.)
LG 2
               Credit Union Centrals (provincial stabilization fund) insures
                accounts at credit unions.
               Canadian Investor Protection Fund (CIPF) insurers
                customers of member Securities Dealers against losses in
                the case the financial institution fails. (does not cover
                market losses)
               Similar industry-supported consumer-protection funds
                insulate customer‘s from non-market losses in the
Finance
Industry        Insurance industry.
                                                                                4 - 12
                              Chapter 4 – Managing Your Cash and Savings
Cash Management Products



                           4 - 13
            Chequing Accounts                     (a type of demand deposit)




LG 3



              With sufficient funds, banks must
              immediately pay the amount of your
              cheque or ATM withdrawal.
Financial
Products
                                                                        4 - 14
                     Chapter 4 – Managing Your Cash and Savings
            Types of Chequing Accounts
               Customers of financial institutions are offered a choice of
                options with regard to chequing accounts.
                 •   Value chequing
                           o   Limited number of transactions per month for free
                           o   Paperless statements
                 •   Self Serve chequing
                           o   Higher monthly fee
                           o   Higher minimum daily balance
                           o   More free transactions per month
LG 3             •   Full Serve chequing
                           o   Even higher monthly fee
                           o   Higher minimum daily balance
                           o   More free transactions per month
                 •   Select Service chequing
                           o   Highest monthly service fees
                           o   Highest minimum daily balance
                           o   Unlimited free cheques
                           o   Free traveller‘s cheques
                           o   Free saftey deposit box

Financial      The account that is right for you depends on your needs
Products        and banking behaviours.                              4 -           15
                               Chapter 4 – Managing Your Cash and Savings
            Money Market Mutual Funds



              •   Offered by investment (mutual fund)
                  companies
LG 3          •   Not federally insured; trade on open
                  market
              •   Interest bearing; limited cheques



Financial
Products
                                                                     4 - 16
                        Chapter 4 – Managing Your Cash and Savings
            Asset Management Accounts



             •   Primarily offered by brokerage firms;
                 consolidate financial activities
LG 3         •   Insured by CIPF (Canadian Investor
                 Protection Fund); open market
             •   Interest bearing; cheque writing privileges



Financial
Products
                                                                    4 - 17
                       Chapter 4 – Managing Your Cash and Savings
            Savings Accounts                     (A type of time deposit)




                   Funds are expected to remain on
                    deposit for a longer time period than
                    are demand deposits.
LG 3               Generally pay higher interest rates than
                    demand deposits.
                   At many institutions, the larger the
                    balance, the higher the interest rate
                    offered.

Financial
Products
                                                                            4 - 18
                        Chapter 4 – Managing Your Cash and Savings
            Electronic Banking Services



              Electronic Funds Transfer Systems (EFTS)
              make possible
LG 3           •   ATM service
               •   Debit cards—linked to your chequing
                   account
               •   Pre-authorized deposits and payments
               •   Banking by phone
               •   Online banking and bill payment services
Financial
Products
                                                                     4 - 19
                        Chapter 4 – Managing Your Cash and Savings
            Other Bank Services


                 Safe Deposit Boxes

                 Trust Services—provide investment and
LG 3              estate planning advice and management for
                  trust accounts.

                 Mutual Fund Sales—along with other
                  brokerage and investment services.

Financial
Products
                                                                      4 - 20
                         Chapter 4 – Managing Your Cash and Savings
             Starting Your Savings Program

                 PAY YOURSELF FIRST!!!!

                 Establish an emergency fund.

                 Regularly set aside funds for financial goals.
LG 4
                 Utilize direct deposits and automatic
                  transfers.

                 Choose instruments best suited to your goals
                  and time horizon.

                 Keep 3 to 6 months of after-tax income
Savings           available as a liquid reserve.
Strategies
                                                                       4 - 21
                          Chapter 4 – Managing Your Cash and Savings
             Ten Strategies to Build Your Nest Egg
             1.    Make saving a priority when you pay your bills.
             2.    Reexamine your spending habits and look for places to cut
                   back.
             3.    Set up a payroll savings plan or regular investment plan with
                   you bank (RIP)
             4.    Save any wage increases – continue to live on your past
                   wage.
             5.    Work a little harder – make more money
LG 4         6.    Focus on debt reduction – increase loan payments – make
                   additional payments on the principal if you can.
             7.    Examine the rates of return you are earning on your
                   investments and look for ways to increase them – examine
                   rate of interest you are paying and payoff first the ones with
                   the highest rates
             8.    Reinvest interest and dividends received
             9.    Set up a retirement plan and use tax-deferred vehicles such
                   as RRSPs.
             10.   Splurge once in a while – reward yourself for all the hard
Savings
Strategies
                   work.
                                                                           4 - 22
                              Chapter 4 – Managing Your Cash and Savings
           Earning Interest on Your Money

            Interest can be earned in two ways:
            1. Some investments are sold on a discount
              basis. (Treasury bills, commercial paper) with
              no stated rate of interest
LG 5           •   Security sold for a price lower than redemption (face)
                   value.
               •   Difference between sales price and redemption value is the
                   amount of interest earned.


            2. Other investments offer direct payment or a
              stated rate of interest. (Canada Savings Bonds,
              GICs)
Interest
Rates
                                                                       4 - 23
                          Chapter 4 – Managing Your Cash and Savings
           How is the interest calculated?


               Simple Interest—interest paid
                only on initial amount of deposit.

LG 5
               Compound Interest—interest paid
                at set intervals and added back to
                principal.



Interest
Rates
                                                                   4 - 24
                      Chapter 4 – Managing Your Cash and Savings
           Interest


              The charge for the privilege of borrowing
               money
                   Usually expressed as an annual percentage rate.
                   Lenders charge interest for the use of their
LG 5
                    money…borrowers pay the lend for the privilege.




Interest
Rates
                                                                      4 - 25
                         Chapter 4 – Managing Your Cash and Savings
           Interest


           Invest $10,000 @ 8% for one year:

           Interest earned by the lender by the end of
LG 5
             one year =

             = $1,000 × .08 = $80


Interest
Rates
                                                                   4 - 26
                      Chapter 4 – Managing Your Cash and Savings
           Simple Interest


           Invest $10,000 @ 8% for one year:

           Interest and principal forecast at end of one
LG 5
             year =

             = ($1,000 × .08) + $1,000 = $1,080
             = $1,000 × (1 +.08) = $1,080

Interest
Rates
                                                                   4 - 27
                      Chapter 4 – Managing Your Cash and Savings
           Simple Interest


           A General Formula (one year):

             Future Value = ($1,000 × .08) + $1,000 FV
LG 5
             = $1,080
             FV = $1,000 × (1+r)
             FV = C × (1+r)


Interest
Rates
                                                                  4 - 28
                     Chapter 4 – Managing Your Cash and Savings
           Simple Interest



           Simple interest assumes that when interest is
             received at the end of the investment
LG 5         period, the interest is removed from the
             investment…and only the original principal
             is invested in the next period.



Interest
Rates
                                                                   4 - 29
                      Chapter 4 – Managing Your Cash and Savings
Compounding
Time Value of Money Skills


                             4 - 30
           Compound Interest


           Compound interest assumes that when interest is
              received at the end of the investment period, the
              interest is reinvested together with the original
              principal.
LG 5
           This means that in each successive period, interest is
              earned on both the original principal as well as
              the accumulated interest of prior periods.




Interest
Rates
                                                                     4 - 31
                        Chapter 4 – Managing Your Cash and Savings
           Compound Interest

           How much will you have in (at the end of)
             two years at 8%?


LG 5
             Future Value2 = $1,000 × (1+r1) × (1+r2)
             FV2 = $1,000 (1.08)(1.08)
             FV2 = $1,000 (1.08)2
             FV2=C×(1+r)t


Interest
Rates
                                                                  4 - 32
                     Chapter 4 – Managing Your Cash and Savings
           Compound Interest
           Notice the compound interest assumptions that are
              embodied in the basic formula:

              Future Value2 = $1,000 × (1+r1) × (1+r2)
              FVt= C × (1+r)t

LG 5       Assumptions:
                    The rate of interest does not change over the
                     periods of compound interest
                    Interest is earned and reinvested at the end of each
                     period
                    The principal remains invested over the life of the
                     investment
                    The investment is started at time 0 (now) and we
                     are determining the compound value of the whole
                     investment at the end of some time period (t= 1,
Interest
Rates                2, 3, 4,…)
                                                                      4 - 33
                         Chapter 4 – Managing Your Cash and Savings
           Compound Interest




            Time = 0                          Time = 1                Time = 2
LG 5



            Time of Investment



Interest
Rates
                                                                           4 - 34
                         Chapter 4 – Managing Your Cash and Savings
           Compound Interest Formula
           (For a single cash flow)


           FVt=C(1+r)t

           Where:
               FVt= the future value (sum of both interest and principal) of
                   the investment at some time in the future
LG 5           C= the original principal invested
               r = the rate of return earned on the investment
               t = the time or number of periods the investment is allowed
                   to grow




Interest
Rates
                                                                       4 - 35
                          Chapter 4 – Managing Your Cash and Savings
           Compound Interest Formula
           (For a single cash flow)



           FVt=C(1+r)t

           (1+r)t is known as the
             future value interest
LG 5         factor = FVIFr,t




Interest
Rates
                                                                       4 - 36
                          Chapter 4 – Managing Your Cash and Savings
           FVIFr,t
           (For a single cash flow)

           Tables of future value interest factors can be
             created:

                                      FVIF,t  (1  r )
                                          r
                                                                          t



LG 5                Period     1%       2%        3%        4%        5%        6%       7%
                      1      1.0100   1.0200    1.0300    1.0400    1.0500    1.0600   1.0700
                      2      1.0201   1.0404    1.0609    1.0816    1.1025    1.1236   1.1449
                      3      1.0303   1.0612    1.0927    1.1249    1.1576    1.1910   1.2250
                      4      1.0406   1.0824    1.1255    1.1699    1.2155    1.2625   1.3108
                      5      1.0510   1.1041    1.1593    1.2167    1.2763    1.3382   1.4026
                      6      1.0615   1.1262    1.1941    1.2653    1.3401    1.4185   1.5007
                      7      1.0721   1.1487    1.2299    1.3159    1.4071    1.5036   1.6058
                      8      1.0829   1.1717    1.2668    1.3686    1.4775    1.5938   1.7182
                      9      1.0937   1.1951    1.3048    1.4233    1.5513    1.6895   1.8385
                      10     1.1046   1.2190    1.3439    1.4802    1.6289    1.7908   1.9672
Interest
Rates
                                                                                                4 - 37
                             Chapter 4 – Managing Your Cash and Savings
           FVIFr,t
           (For a single cash flow)

             The table shows that the longer you invest…the greater the
                  amount of money you will accumulate.
             It also shows that you are better off investing at higher rates of
                  return.

                        Period     1%        2%        3%        4%       5%       6%       7%
                          1      1.0100    1.0200    1.0300    1.0400   1.0500   1.0600   1.0700
LG 5                      2      1.0201    1.0404    1.0609    1.0816   1.1025   1.1236   1.1449
                          3      1.0303    1.0612    1.0927    1.1249   1.1576   1.1910   1.2250
                          4      1.0406    1.0824    1.1255    1.1699   1.2155   1.2625   1.3108
                          5      1.0510    1.1041    1.1593    1.2167   1.2763   1.3382   1.4026
                          6      1.0615    1.1262    1.1941    1.2653   1.3401   1.4185   1.5007
                          7      1.0721    1.1487    1.2299    1.3159   1.4071   1.5036   1.6058
                          8      1.0829    1.1717    1.2668    1.3686   1.4775   1.5938   1.7182
                          9      1.0937    1.1951    1.3048    1.4233   1.5513   1.6895   1.8385
                          10     1.1046    1.2190    1.3439    1.4802   1.6289   1.7908   1.9672

Interest
Rates
                                                                                          4 - 38
                           Chapter 4 – Managing Your Cash and Savings
           FVIFr,t
           (For a single cash flow)


             How long does it take to double or triple your investment? At
                  5%...at 10%?

             Period     1%       2%       3%       4%       5%       6%       7%       8%       9%      10%
               1      1.0100   1.0200   1.0300   1.0400   1.0500   1.0600   1.0700   1.0800   1.0900   1.1000
               2      1.0201   1.0404   1.0609   1.0816   1.1025   1.1236   1.1449   1.1664   1.1881   1.2100
               3      1.0303   1.0612   1.0927   1.1249   1.1576   1.1910   1.2250   1.2597   1.2950   1.3310

LG 5
               4      1.0406   1.0824   1.1255   1.1699   1.2155   1.2625   1.3108   1.3605   1.4116   1.4641
               5      1.0510   1.1041   1.1593   1.2167   1.2763   1.3382   1.4026   1.4693   1.5386   1.6105
               6      1.0615   1.1262   1.1941   1.2653   1.3401   1.4185   1.5007   1.5869   1.6771   1.7716
               7      1.0721   1.1487   1.2299   1.3159   1.4071   1.5036   1.6058   1.7138   1.8280   1.9487
               8      1.0829   1.1717   1.2668   1.3686   1.4775   1.5938   1.7182   1.8509   1.9926   2.1436
               9      1.0937   1.1951   1.3048   1.4233   1.5513   1.6895   1.8385   1.9990   2.1719   2.3579
               10     1.1046   1.2190   1.3439   1.4802   1.6289   1.7908   1.9672   2.1589   2.3674   2.5937
               11     1.1157   1.2434   1.3842   1.5395   1.7103   1.8983   2.1049   2.3316   2.5804   2.8531
               12     1.1268   1.2682   1.4258   1.6010   1.7959   2.0122   2.2522   2.5182   2.8127   3.1384
               13     1.1381   1.2936   1.4685   1.6651   1.8856   2.1329   2.4098   2.7196   3.0658   3.4523
               14     1.1495   1.3195   1.5126   1.7317   1.9799   2.2609   2.5785   2.9372   3.3417   3.7975
               15     1.1610   1.3459   1.5580   1.8009   2.0789   2.3966   2.7590   3.1722   3.6425   4.1772
               16     1.1726   1.3728   1.6047   1.8730   2.1829   2.5404   2.9522   3.4259   3.9703   4.5950




                        Almost 15 years at 5% - Amost 8 years at 10%!!
Interest
Rates
                                                                                                           4 - 39
                                   Chapter 4 – Managing Your Cash and Savings
           The Rule of 72


              If you don‘t have access to time value of money tables or a
               financial calculator but want to know how long it takes for
               your money to double…use the rule of 72!


LG 5
                                                           72
           Number of years to double 
                                                Annual compoundinterest rate

           If you expect toearn a 4.5% rate on your money it will double in :
              72
                  16 years
              4.5
Interest
Rates
                                                                          4 - 40
                          Chapter 4 – Managing Your Cash and Savings
           FVIFr,t
           (For a single cash flow)

            Let us predict what happens with an investment if it is invested at
                 5% …show the accumulated value after t=1, t=2, t=3, etc.
            Period     1%       2%       3%       4%                     5%
              1      1.0100   1.0200   1.0300   1.0400                 1.0500
              2      1.0201   1.0404   1.0609   1.0816                 1.1025
              3      1.0303   1.0612   1.0927   1.1249                 1.1576
              4      1.0406   1.0824   1.1255   1.1699                 1.2155
              5      1.0510   1.1041   1.1593   1.2167                 1.2763
              6      1.0615   1.1262   1.1941   1.2653                 1.3401
              7      1.0721   1.1487   1.2299   1.3159                 1.4071
LG 5          8
              9
                     1.0829
                     1.0937
                              1.1717
                              1.1951
                                       1.2668
                                       1.3048
                                                1.3686
                                                1.4233
                                                                       1.4775
                                                                       1.5513
              10     1.1046   1.2190   1.3439   1.4802                 1.6289

                                                                                        FV

                                                              1.8000

                                                              1.6000

                                                              1.4000

                                                              1.2000
                                                FV of $1.00




                                                              1.0000

                                                              0.8000

                                                              0.6000

                                                              0.4000

                                                              0.2000
Interest                                                      0.0000
Rates                                                                  1    2   3   4   5           6   7   8   9   10
                                                                                             Year
                                                                                                                4 - 41
                                  Chapter 4 – Managing Your Cash and Savings
           FVIFr,t
           (For a single cash flow)
           Let us predict what happens with an investment if it is invested at
                5% and 10% …show the accumulated value after t=1, t=2,
                t=3, etc.
                                                                                                    Future Value

            Period     5%      10%
                                                           8.0000
              1      1.0500   1.1000
              2      1.1025   1.2100
              3      1.1576   1.3310                       7.0000
              4      1.2155   1.4641
              5      1.2763   1.6105
                                                           6.0000

LG 5
              6      1.3401   1.7716
              7      1.4071   1.9487
              8      1.4775   2.1436                       5.0000
              9      1.5513   2.3579

                                             FV of $1.00
              10     1.6289   2.5937                       4.0000



                                                           3.0000


            Notice: compound                               2.0000
            interest creates an
            exponential curve and                          1.0000
            there will be a
            substantial difference                         0.0000
                                                                    1   2   3   4   5   6   7   8      9   10      11   12   13   14   15   16   17   18   19   20
            over the long term
                                                                                                             Time
Interest    when you can earn
Rates       higher rates of return.
                                                                                                                                                 4 - 42
                                  Chapter 4 – Managing Your Cash and Savings
           The Frequency of Compounding

              Nominal rate—the named or stated
               rate of interest.

LG 5
              Effective rate—the annual rate of
               return actually earned.

                  If interest is compounded more frequently than
                  once a year, the effective rate will be greater
                  than the nominal rate of interest.

Interest
Rates
                                                                     4 - 43
                        Chapter 4 – Managing Your Cash and Savings
           The Frequency of Compounding
           EAR – The Effective Annual Rate of Return




LG 5
                                           Example:
                    Invest $1000 at 5% for 1 year.


Interest
Rates
                                                                          4 - 44
                             Chapter 4 – Managing Your Cash and Savings
           The Frequency of Compounding
           EAR – The Effective Annual Rate of Return




               If simple interest is used, there is no
                compounding:
LG 5               Interest               = Principal x rate x time
                                          = $1000 x .05 x 1
                                          = $50




Interest
Rates
                                                                       4 - 45
                          Chapter 4 – Managing Your Cash and Savings
           The Frequency of Compounding
           EAR – The Effective Annual Rate of Return


               If compound interest is used and the
                compounding occurs semiannually —

                First 6 months' interest:
LG 5                      $1000 x .05 x 6/12                           =   $25.00

                Second 6 months' interest: +
                         $1025 x .05 x 6/12                            =   $25.63

                Total annual interest                                  =   $50.63

Interest
Rates
                                                                           4 - 46
                          Chapter 4 – Managing Your Cash and Savings
           The Frequency of Compounding
           EAR – The Effective Annual Rate of Return



                   The nominal rate is 5%, the
                    stated rate of interest.
                   The effective rate is 5.063%.
LG 5


           Effective Rate                = $50.63  $1000
                                         = 0.05063
                                         = 5.063%
Interest
Rates
                                                                       4 - 47
                          Chapter 4 – Managing Your Cash and Savings
           The Frequency of Compounding
           EAR – 5% compounded semi-annually

              The (EAR) effective annual rate depends on the frequency of
               compounding.
              To adjust the formula divide the rate ‗r‘ by ‗m‘ (the frequency of
               compounding) and multiply ‗t‘ time by ‗m‘ and subtract 1.

                                                      nominal rate 1m
               EAR5%,com poundedsem i-annually  (1              ) 1
LG 5                                                      m
                           .05 12
                    (1       ) 1
                            2
                    (1.025) 2  1
                    (1.025)  (1.025)  1
                       5.063%
Interest
Rates
                                                                             4 - 48
                             Chapter 4 – Managing Your Cash and Savings
           The Frequency of Compounding
           EAR – 8% compounded quarterly


              The (EAR) effective annual rate depends on the frequency of
               compounding.
              To adjust the formula divide the rate ‗r‘ by ‗m‘ (the frequency of
               compounding) and multiply ‗t‘ time by ‗m‘ and subtract 1.

                                                   nominal rate 1m
LG 5             EAR8%,com poundedquarterly  (1              ) 1
                                                       m
                             .08 14
                      (1       ) 1
                              4
                      (1.02) 4  1
                      (1.02)  (1.02)  (1.02)  (1.02)  1
Interest                8.24%
Rates
                                                                             4 - 49
                             Chapter 4 – Managing Your Cash and Savings
           How much interest will you earn?

           Amount of interest earned depends on:

              Frequency of compounding
              Balance on which interest is paid
LG 5
              Interest rate applied


                Time value of money concepts
                are used in compounding to
Interest        find interest earned.
Rates
                                                                   4 - 50
                      Chapter 4 – Managing Your Cash and Savings
         A Variety of Ways to Save
         Alternative Savings Vehicles

              Guaranteed Investment Certificates (GICs) and
               Term Deposits
               •   Funds are to remain on account for a given time period.
               •   Early withdrawals incur an interest penalty.
              Canada Savings Bonds
LG 5           •   May be purchased in late October each year through your
                   financial institution in denominations of $100.
               •   May be purchased through your employer through regular
                   monthly payroll savings plans.
              Government of Canada Treasury Bills
               •   Debt securities issued by the Canadian Government through
                   the Bank of Canada to financial institutions.
               •   Sold at a discount from face value; $1000 minimum.
How to         •   Mature in 1 year or less (3 month, 6 month, one year)
Save
                                                                         4 - 51
                           Chapter 4 – Managing Your Cash and Savings
         Maintaining a Chequing Account

              Determine services needed.
              Consider costs involved.
              Keep track of cheques written, automatic
               deposits, and ATM withdrawals.
LG 6          Don‘t write cheques for more than you
               have in the account (i.e., don‘t bounce
               cheques!).
              Arrange for overdraft protection.
              Know how to stop a payment.
              Periodically reconcile your account.
How to
Save
                                                                  4 - 52
                     Chapter 4 – Managing Your Cash and Savings
         Special Types of Cheques

         When personal cheques are not
         accepted, special cheques can be used
         to guarantee payment.
LG 6
             Cashier‘s—drawn on the bank.
             Traveler‘s—used for making purchases
              worldwide.
             Certified—drawn on your account but
How to
              guaranteed by the bank.
Save
                                                                  4 - 53
                     Chapter 4 – Managing Your Cash and Savings
          In summary you have …

               gained an understanding the role of cash management
                in the personal financial planning process.
               reviewed the Canadian financial services marketplace
                including traditional and non-depository financial
                institutions.
               tools to use in the selection of chequing, savings,
                electronic banking, and other banking services that meet
                your needs.
               skills necessary to determine rates of return on your
                money.
               gained an understanding of how to establish a savings
                strategy that incorporates a variety of savings plans.
               knowledge on how to open and use a chequing account.


Summary
                                                                       4 - 54
                          Chapter 4 – Managing Your Cash and Savings
    Internet Links and On Line Resources

            •   Credit Union Central of Canada
            •   ING Bank (internet bank)
            •   PC Financial (internet bank owned by CIBC)
            •   ICICI Bank (internet bank)
            •   Canada Deposit Insurance Corporation (CDIC)
            •   Order cheques online or for a list of websites providing this
                service.
            •   Financial Consumer Agency of Canada
            •   A Working Women’s Guide to Financial Security, “Planning for
                Independence”
            •   Current rates found at Canoe Money
            •   Government of Canada on T-bills and other government
                financial securities
            •   Canada Savings Bonds
            •   Banking Basics: Chequing Account Checklist
Web Links
            •   How to Read a bank statement
                                                                           4 - 55
                            Chapter 4 – Managing Your Cash and Savings
THE END!


           4 - 56
Appendices
1.   Key Terms and Definitions


                                 4 - 57
        Key Chapter Terms and Definitions

           Cash management                             Nominal (stated) rate of
           Chartered bank                               interest
           Credit union                                Effective rate of interest
           Trust companies                             Guaranteed investment
           Securities dealers                           certificate (GIC)
           Demand deposit                              Canada treasury bill
           Time deposit                                Canada Savings Bonds (CSB)
           Money market mutual fund                    Chequebook ledger
           Asset management account                    Overdraft
           Electronic Funds Transfer                   Overdraft protection
            System                                      Stop payment
           Debit cards                                 Account reconciliation
           Automated banking machine                   Bank draft
            (ABM)                                       Traveller‘s cheque
           Compound interest                           Certified cheque
Terms      Simple interest
                                                                             4 - 58
                        Chapter 4 – Managing Your Cash and Savings
        Definitions
        Cash Management




           The routine, day-to-day administration of cash and
            near cash resources, also known as liquid assets,
            by an individual or family.




Terms
                                                                   4 - 59
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Chartered Bank



           A financial institution in
            Canada that is chartered by
            the federal government under
            the Bank Act to provide
            banking services including
            deposit-taking in the form of
            chequing and savings
            accounts as well as lending
            services in the form of
            personal and corporate loans
            and mortgages.



Terms
                                                                     4 - 60
                        Chapter 4 – Managing Your Cash and Savings
        Definitions
        Credit Union and Caisses Populaire




           A member-owned financial
            cooperative that offers
            different types of chequing
            accounts, savings
            accounts, and loans to its
            members (depositors.)
           Caisses Populaire is the
            french term for credit
            union used in the province
            of Quebec, Ontario and
            Manitoba.
Terms
                                                                     4 - 61
                        Chapter 4 – Managing Your Cash and Savings
        Definitions
        Trust Company




           A deposit-taking financial institution registered
            under either federal or provincial law.
            •   Most are subsidiaries of major Canadian banks.
            •   Like banks they accept deposits and provide lending
                services.
            •   In addition, they are able to act as trustees (administer
                an estate) – hence their name!
            •   Trust companies have developed a number of other lines
                of business in service of the corporate community
                including maintaining shareholder‘s registers, etc.



Terms
                                                                     4 - 62
                        Chapter 4 – Managing Your Cash and Savings
        Definitions
        Deposit Insurance




           A type of insurance that protects funds on
            deposit against the failure of the
            institution; insuring agencies include the
            Canada Deposit Insurance Corporation
            (CDIC) for banks and various provincial
            stabilization funds for credit unions.


Terms
                                                                 4 - 63
                    Chapter 4 – Managing Your Cash and Savings
        Definitions
        Securities Dealers



           Securities Dealers (Investment Dealers) act
            as brokers for individual and corporate
            investors. In addition, they provide a wide
            range of services:
            •   Sell money market mutual funds
            •   Special ‗wrap‘ accounts
            •   Credit cards
           Securities dealers also provide underwriting
            services (supports corporations and advises
            them and implements the design and sale
            of new securities)
Terms
                                                                   4 - 64
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Canada Deposit Insurance Corporation




           A federal crown corporation with access to the
            consolidated revenue accounts of the Government
            of Canada – provides deposit insurance to
            customers of federally-regulated financial
            institutions (banks and most trust companies)




Terms
                                                                  4 - 65
                     Chapter 4 – Managing Your Cash and Savings
        Definitions
        Demand Deposit




           An account held at a financial institution
            from which funds can be withdrawn (by
            cheque or in cash) on demand by the
            account holder; same as a chequing
            account.




Terms
                                                                  4 - 66
                     Chapter 4 – Managing Your Cash and Savings
        Definitions
        Time Deposit




           A savings deposit at a financial institution;
            so-called because it is expected to remain
            on deposit for a longer period of time than
            a demand deposit.
           Examples:
            •   Term deposits
            •   Guaranteed Investment Certificates


Terms
                                                                    4 - 67
                       Chapter 4 – Managing Your Cash and Savings
        Definitions
        Money Market Mutual Fund


           A mutual fund that pools the funds of many small
            investors and purchases high-return, short-term
            marketable securities offered by the Canadian
            government, major corporations, chartered banks
            and various government organizations.

           A mutual fund invested in money market securities
            such as:
            •   Government of Canada Treasury Bills
            •   Commercial Paper
            •   Bankers‘ Acceptances
            •   Finance Company Paper
Terms
                                                                      4 - 68
                         Chapter 4 – Managing Your Cash and Savings
        Definitions
        Asset Management Account




           •   A comprehensive deposit account; combines
               chequing, investing and borrowing activities
               and automatically ―sweeps‖ excess balances
               into a money market mutual fund and
               automatically provides loans when shortages
               exist.




Terms
                                                                   4 - 69
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Electronic funds transfer systems (EFTS)




           •   Systems that use the latest telecommunications
               and computer technology to electronically
               transfer funds into and out of customers‘
               accounts.




Terms
                                                                   4 - 70
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Debit cards




           •   Specially coded plastic cards used to transfer
               funds from a customer‘s bank account to the
               recipient‘s account to pay for goods or services.
           •   An ABM card is a debit card that also provides
               access to a variety of banking transactions
               through an ABM.




Terms
                                                                   4 - 71
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Automated banking machine (ABM)




           •   A type of remote computer terminal at which
               customers of a bank or other depository
               institution can make basic transactions 24
               hours a day, 7 days a week.




Terms
                                                                   4 - 72
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Compound interest




           •   Interest earned by applying the nominal
               (stated) rate of interest to the sum of the initial
               deposit and the combined interest already
               earned.




Terms
                                                                    4 - 73
                       Chapter 4 – Managing Your Cash and Savings
        Definitions
        Simple interest




           •   Interest that is paid only on the initial amount
               of the deposit.




Terms
                                                                   4 - 74
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Nominal (stated) rate of interest




           •   The promised rate of interest paid on a savings
               deposit or charged on a loan.




Terms
                                                                   4 - 75
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Effective rate of interest




           •   The annual rate of return that is actually
               earned (or charged) during the period the
               funds are held (or borrowed).




Terms
                                                                   4 - 76
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Guaranteed investment certificate (GIC)




           •   A type of savings instrument issued by certain
               financial institutions in exchange for a deposit;
               typically requires a minimum deposit and has a
               maturity ranging from 30 days to as long as
               five or more years.




Terms
                                                                   4 - 77
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Canada Treasury bill (T-bill)




           •   A short-term (3-month, 6-month or 12-month
               maturity) debt instrument issued by the
               Canadian government in the ongoing process of
               funding the national debt.




Terms
                                                                   4 - 78
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Canada savings bond (CSB)




           •   A savings bond issued in various denominations
               by the Canadian government.




Terms
                                                                   4 - 79
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Chequebook ledger




           •   A ledgeer, provided with a supply of cheques,
               used to maintain accurate records of all
               chequing account transactions.




Terms
                                                                   4 - 80
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Overdraft




           •   The result of writing a cheque for an amount
               greater than the current account balance.




Terms
                                                                   4 - 81
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Overdraft protection




           •   An arrangement between the account holder
               and the depository institution wherein the
               institution automatically pays a cheque that
               overdraws the account.




Terms
                                                                   4 - 82
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Stop payment




           •   An order made by an account holder instructing
               the depository institution to refuse payment on
               an already issued cheque.




Terms
                                                                   4 - 83
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Account reconciliation




           •   The process of verifying the accuracy of one‘s
               chequing account records in light of the bank‘s
               records as reflected in the bank statement,
               which contains an itemized listing of all
               transactions within the chequing account.




Terms
                                                                   4 - 84
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Bank draft




           •   A cheque payable to a third party that is drawn
               on a bank on itself in exchange for the amount
               specified plus, in most cases, a service fee (of
               $5 or $10).




Terms
                                                                   4 - 85
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Traveller’s cheque




           •   A cheque sold (for a fee of about 1.5 percent)
               by many large financial institutions, in
               denominations ranging from $20 to $100, that
               can be used for making purchases and
               exchanged for local currencies in most parts of
               the world.




Terms
                                                                   4 - 86
                      Chapter 4 – Managing Your Cash and Savings
        Definitions
        Certified cheque




           •   A personal cheque that is guaranteed (for a fee
               of $10 to $15 or more) by the bank on which it
               is drawn.




Terms
                                                                   4 - 87
                      Chapter 4 – Managing Your Cash and Savings
THE END!

           4 - 88

				
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