Personal

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Personal Family Finance

• Section 3
• Cash Management

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• 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?

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Introduction

• The financial asset that is most commonly owned
  by most individuals is cash.
• Yet, most individuals take a passive approach to
  cash management.
• 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.

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Why Hold Cash?

• Undertake Transactions
• To make every day purchases, individuals use
  cash. Generally, individuals keep enough to cover
  their spending for 12 weeks.
• Emergency Reserves
• Individuals keep cash to protect them against
  unexpected events.
• Financial planners recommend keeping 36 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.

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Fundamental Deposits

• Fundamental deposits are liquid assets. Liquid
  assets are those that can be withdrawn easily
  with no loss in principal.
• 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

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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 account.
• 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.

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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.

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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.

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Money Market Deposit Accounts

• Similar to a savings account but with minimum
  balance requirements
• 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

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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.

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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.

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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 childs education (there is an income
  limitation).
• These are sold by financial institutions.

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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.

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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

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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

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End-of-Month Activities

• Bank Reconciliation
• Individual compares the account balance from
  their records to the banks 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.

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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.

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Bank Account Reconciliation Adjusting Your
Balance
Your Account Balance 500


Less Bank Service
Charges 10 Plus Interest Earned
5 Plus or Minus Any
Mistakes You Might Have Made
0 Adjusted Book Balance
495
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Bank Reconciliation Adjusting the Bank Statement
Balance
Balance on Bank Statement 795 Add
Deposit in Transit 115 Less
Outstanding Checks 415 Plus or
Minus Bank Errors 0 Adjusted
Bank Balance 495
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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.
• Cashiers Check
• An individual pays the bank to issue a check on
  the banks own account.
• Travelers 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.

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Electronic Banking

• Automated teller machines (ATM) provide access to
  accounts at all times (assuming the machines are
  working).
• Electronic funds transfer systems (EFTS) include
  the following
• Debit cards
• Direct deposit of paychecks
• Online bill payment

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UNDERSTANDING HOW YOUR ACCOUNT EARNS INTEREST

• How Interest Is Calculated
• Determining Interest on Your Account

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How Interest Is Calculated

• NOW accounts, savings accounts, and other
  investments earn interest on money deposited.
• The formula can be expressed as follows
• I P R T
• Where I actual interest earned
• P principal (amount invested)
• R stated interest in decimal format
• T length of time the money is invested

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Calculating Simple Interest
I P R T Suppose P 1,000 R 0.12
per year T 6 months Then, for the first 6
months 60 (1,000) (0.12) (6/12) and
for the second 6 months 63.60 (1,060)
(0.12) (6/12)
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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

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Future Value of 1,000 invested at 8