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Learning Objectives

List the tools of monetary asset management and identify the types of financial services firms that provide those tools.

Earn interest and pay no or low fees on your checking accounts.

Make use of the benefits of savings accounts.

Explain the importance of placing excess funds in a money market account.

Describe electronic money management.

Chapter 5: Checking & Savings Accounts

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Monetary Asset Management

How you handle your most liquid assets

(Cash and low-risk, near-cash items that can be readily converted to cash with little or no loss in value)

What financial institutions help us manage our money needs on a daily basis?

GOALS: • maximize interest earned

• minimize fees paid

• keep funds safe

• keep funds readily available

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The Three Tools of Monetary Asset Management

1. Low-cost, interest-earning checking accounts

2. Interest-earning savings accounts

3. Money market accounts

SEE PAGE 142 for accurate rates

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Depository Institutions:– Organizations licensed to take deposits and make loans

• Commercial Banks and Savings Banks

– Government regulated

– Deposits are insured by the FDIC

• Credit Unions

– Not-for-profit; owned by members

– Deposits are insured by the NCUA

Other Services Providers:• Mutual Funds

• Stock Brokerage Firms

• Insurance CompaniesCONSIDERABLE

OVERLAP

among services

provided! See pg. 142

Maximum insurance = $250,000 per

account holder per institution

Difference between these

and above?

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Tool #1: Interest-Earning Checking Accounts

• Interest-Earning Checking Account(NOW Account): to pay monthly living expenses

• Tiered Interest

• Can be accessed using debit card

– At ATMs or POS terminals

• Balance Requirements

– Be careful of monthly fees!

• 3 Types of Overdraft protection: pg. 152

1. Automatic transfer from savings

2. Automatic overdraft loan from bank

3. Opt-in: bank charges $20-$30 for bounce protection

Beware of

penalties and other fees!Pg 147

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Tool #2: Savings Accounts

Time Deposits rather than Demand Deposits• Used for emergency funds• Passbook / Statement savings account

Some Time Deposits are Fixed-Time Deposits: CDs– $100 to $100,000$100 to $100,000– 7 days to 8 years7 days to 8 years– Insured by FDIC or NCUAInsured by FDIC or NCUA– Fixed interest rate for entire term (usually)Fixed interest rate for entire term (usually)– Longer term CD => higher interest ratesLonger term CD => higher interest rates– Variable –rate,Variable –rate, Bump-upBump-up, and , and CallableCallable CDs CDs– Not restricted to local institutionsNot restricted to local institutions– Penalties if withdrawn before maturityPenalties if withdrawn before maturity– Is there risk with CDs?Is there risk with CDs?

CD Laddering, pg149

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How to save:• How do Americans rate as savers?

• “Pay Yourself First”: build savings into your budget

Page 149

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What are the 4 most important factors that affect your savings?

1. Principle2. Rate3. Time4. Frequency of

Compounding

Institutions must use the APY as its interest rate in

advertising

http://www.moneycentral.msn.com/Investor/calcs/n_savapp/main.asp

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• Comparing frequency of compounding:

Years 4.0% 6.0% 8.0% 10.0%

1 $1,040 $1,060 $1,080 $1,100

3 $1,125 $1,191 $1,260 $1,331

5 $1,217 $1,338 $1,469 $1,611

10 $1,480 $1,791 $2,159 $2,594

This $1,000 investment earns

interest that is compounded on a

quarterly basis (4x per a year):

Years 4.0% 6.0% 8.0% 10.0%

1 $1,041 $1,061 $1,082 $1,104

3 $1,127 $1,196 $1,268 $1,345

5 $1,220 $1,347 $1,486 $1,639

10 $1,489 $1,814 $2,208 $2,685

This $1,000 investment earns

interest that is compounded on an

annual basis (once per

year):

APR vs. APY: http://www.investopedia.com/articles/basics/04/102904.asp?&viewed=1

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Tool #3: Money Market Accounts• Use when you have substantial excess funds

• Interest-earning accounts with higher rates

• A savings and checking (limited) tool

• Money market deposit accounts (MMDA)

– From depository institutions

– Government insured

– Min balance requirements; tiered interest rates

• Money market mutual funds (MMMF)

– From investment companies not depository institutions

– Check-writing privileges; Highest rate of return for liquid assets

– Funds buy mostly government securities: safe but not insured

– Funds cannot be drawn from ATMs

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Electronic Money Management• How we manage our money: Paper, Plastic, or Neither?

• Electronic Money Management

– Transactions without paper

– Funds are transferred electronically ( EFT )

– Debit Cards vs. Credit Cards?

• Easy, but not always FREE! Beware of fees!

– ATM fees

– Overdraft fees

– Hit debit button => PIN number = online transaction = fee

– Hit credit button => signature = offline transaction = avoid fee

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• Electronic Banking and Safety Concerns

– Fixing errors

– Protections for lost/stolen cards

– Within 2 days: $50

– Over 2, less than 60 days: $500

– Over 60 days: unlimited

• The Psychology of Money Management

• Decision-making

• Opposites Attract!

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How To DevelopMoney Sense in Children

• Give an Allowance

• Encourage Work

• Talk About Family Finances with Children

• Be a Role Model