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  • Add the rest of title? “(with Illustrative Interest Rates Earned on Funds)”
  • Following from earlier edits and suggestions, this heading (flush left) would then be “2. Mutual Funds” and following slide would be “3. Stock Brokerage Firms”.
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  • rci.rutgers.edu

    1. 1. Chapter Five Management of Monetary Assets
    2. 2. Learning Objectives <ul><li>List and define tools of monetary asset management and providers of financial services </li></ul><ul><li>Understand key aspects of electronic banking and legal protections available </li></ul><ul><li>Describe different types of checking accounts. </li></ul><ul><li>Identify key aspects and benefits of a savings account. </li></ul><ul><li>Explain the importance of placing excess funds in an appropriate money market account. </li></ul><ul><li>List the benefits of putting money into longer-term savings instruments . </li></ul>
    3. 3. What Is Monetary Asset Management? <ul><li>Monetary Assets – Cash and near-cash items that can readily be converted to cash. </li></ul><ul><li>Monetary Asset (Cash) Management – How you handle your monetary assets. </li></ul><ul><li>Cash Equivalents </li></ul><ul><ul><li>Retain a constant or nearly constant value. </li></ul></ul><ul><ul><li>Have ready liquidity. </li></ul></ul><ul><ul><li>Examples??? </li></ul></ul>Liquidity – Speed and ease in which an asset can be converted to cash Safety – Freedom from financial risk
    4. 4. Four Tools of Monetary Asset Management <ul><li>A low-cost, interest-earning checking account from which to pay monthly living expenses. </li></ul><ul><li>A small savings account in a local financial institution for irregular expenses and emergency cash </li></ul><ul><li>When income begins to exceed expenses regularly, open a money market account . </li></ul><ul><li>Your monetary asset management plan is complete when you transfer some funds into longer-term savings instruments . </li></ul><ul><ul><li>Examples: CDs, U.S. Savings Bonds </li></ul></ul>
    5. 5. Figure 5.1: Four Tools of Monetary Asset Management
    6. 6. Who Provides Monetary Asset Management Services? <ul><li>Financial Services Industry – providers of monetary asset management services. </li></ul><ul><ul><li>Banks and Depository Institutions </li></ul></ul><ul><ul><li>Mutual Funds </li></ul></ul><ul><ul><li>Stock Brokerage Firms </li></ul></ul><ul><li>Examples of each??? </li></ul>
    7. 7. Banks and Depository Institutions <ul><li>Recognized and regulated by the federal government as firms that offer loans and banking services to businesses and individuals. </li></ul><ul><ul><li>Commercial Banks – corporations chartered under federal and state regulations. </li></ul></ul><ul><ul><li>Savings and Loan Associations (S&Ls) </li></ul></ul><ul><ul><li>Credit Unions (CUs) </li></ul></ul><ul><ul><li>Mutual Savings Banks (MSBs) </li></ul></ul>
    8. 8. Deposit Insurance (FDIC): A Feature of Depository Institutions <ul><li>The maximum insurance on all single-ownership accounts (in one name) is $100,000. </li></ul><ul><li>The maximum insurance on all joint accounts held with other individuals is $100,000. </li></ul><ul><li>The maximum insurance on all retirement accounts is $100,000. </li></ul><ul><li>A maximum of $100,000 in insurance per beneficiary is payable on “death accounts.” </li></ul>
    9. 9. Other Financial Institutions <ul><li>Mutual Fund </li></ul><ul><li>Investment company that raises money by selling shares to the public and then invests that money in a diversified portfolio of investments. </li></ul><ul><li>Stock Brokerage Firm </li></ul><ul><li>Financial institution that specializes in selling and buying stocks, bonds, and other investments. </li></ul><ul><li>Offer money market mutual fund accounts (operated by mutual funds) into which clients place money while waiting to make investments. </li></ul>
    10. 10. Electronic Banking <ul><li>Electronic Banking – Occurs whenever banking transactions are conducted via computers without the customer using paper documents or having face-to-face contact with financial services personnel. </li></ul><ul><li>Electronic Funds Transfers (EFTs) – funds are shifted electronically among various bank accounts. </li></ul><ul><li>Does anyone use an Internet (online only) bank? </li></ul>
    11. 11. Electronic Banking (Continued) <ul><li>Direct Deposits – Having your paycheck or other regular income deposited directly into your account rather than being paid by check. </li></ul><ul><li>Preauthorized Payments – Having certain payments, such as monthly utility bills, automatically paid by your bank when billed by the entity to whom the payment is owed. </li></ul>
    12. 12. You Can Do Your Banking with an Automatic Teller Machine <ul><li>Automated Teller Machine (ATM or Cash Machine) – Computer terminal through which customers make deposits, make withdrawals, and complete other financial transactions </li></ul><ul><li>Personal Identification Number (PIN ) – Confirms that you are authorized to access the account. Keep it secure!!! </li></ul><ul><li>ATM Transaction Fee – May be assessed for using an ATM </li></ul><ul><ul><li>Own financial institution and/or machine provider </li></ul></ul><ul><ul><li>High percentage for a low withdrawal amount </li></ul></ul>
    13. 13. You Can Make Purchases at POS Terminals Using a Debit Card <ul><li>Point-of-Sale (POS) Terminal – A computer terminal located at a store or other merchant location that allows the customer to make purchases electronically via a debit or credit card. </li></ul><ul><li>Debit (or Check) Card – A plastic card that provides instant access to your checking account. </li></ul><ul><ul><li>Advantages of debit cards??? </li></ul></ul>
    14. 14. Smart Cards and Stored-Value Cards <ul><li>Smart Cards and Stored-Value Cards – Plastic payment devices that use built-in computer chips or magnetic strips to store data and handle payment functions. </li></ul><ul><li>Electronic Benefits Transfer (EBT) – Directs cash benefits to recipients using smart cards as the delivery mode. </li></ul><ul><ul><li>Examples??? </li></ul></ul>
    15. 15. Consumer Protection Regulations <ul><li>Disclosure Statement —Notification by financial institution of the rules of the EFT account and depositor rights </li></ul><ul><li>Periodic Statement —Your monthly account statement </li></ul>
    16. 16. Monetary Asset Management: Tool #1 – Interest-Earning Checking Accounts <ul><li>Checking Account – Allows you to write checks against amounts on deposit to transfer money to others (also, online, ATM,etc.) </li></ul><ul><ul><li>A.K.A., “Demand Deposits” – Because financial institution must withdraw funds and make payments whenever “demanded” to do so by a checking account depositor. </li></ul></ul><ul><li>Lifeline Banking Account – Offers access to certain minimal financial services that every consumer needs, regardless of income, to function in our society. </li></ul>
    17. 17. Types of Interest-earning Checking Accounts <ul><li>Negotiable Order of Withdrawal (NOW) Account – Earns interest or dividends as long as minimum-balance requirements are satisfied. </li></ul><ul><li>Share Draft Account – Credit-union version of a NOW account. </li></ul><ul><ul><li>CU members own the organization </li></ul></ul><ul><ul><li>Deposits are called “shares” </li></ul></ul><ul><ul><li>Costs are often lower than at a bank </li></ul></ul>
    18. 18. Aspects of the Check Clearing Process <ul><li>Check Truncation – An alternative to receiving a canceled check. </li></ul><ul><li>Image Statements – Show miniature computer pictures of checks. </li></ul><ul><li>Substitute Checks – Warranted by banks as an acceptable version of original checks written by you. </li></ul><ul><li>Bad Check – A check for which there are insufficient funds in the account (NSF) </li></ul>
    19. 19. Payment Instruments for Special Needs <ul><li>Traveler’s Checks - Accepted almost everywhere; sign twice; fee to purchase </li></ul><ul><li>Money Orders -Bought for a specific amount </li></ul><ul><li>Certified Checks -Shows that account has enough money; fee charged </li></ul><ul><li>Cashier’s Checks - Backed by financial institution; fee charged </li></ul>
    20. 20. Monetary Asset Management: Tool #2 – Savings Accounts <ul><li>Statement Savings Account (or Passbook Savings Account) </li></ul><ul><li>Permits frequent deposits or withdrawals of funds. </li></ul><ul><li>No fee if minimum balance maintained </li></ul><ul><li>Printed receipts and periodic statements </li></ul><ul><li>Can usually be accessed through ATMs </li></ul>
    21. 21. Savings Account Interest <ul><li>The calculation of interest to be paid on deposits in financial institutions is primarily based on four variables: </li></ul><ul><ul><li>the amount of money on deposit </li></ul></ul><ul><ul><li>the method of determining the balance </li></ul></ul><ul><ul><li>the interest rate applied and </li></ul></ul><ul><ul><li>the frequency of compounding. </li></ul></ul>
    22. 22. Savings Account Interest (Continued) <ul><li>Annual Percentage Yield (APY) Percentage based on the total interest that would be received on a $100 deposit for a 365-day period, given the institution’s annual rate of simple interest and frequency of compounding. </li></ul><ul><li>More frequent compounding, the greater the effective return </li></ul><ul><li>APY must be used in advertising and disclosures…Why??? </li></ul>
    23. 23. Monetary Asset Management: Tool #3 – Money Market Accounts <ul><li>Money Market Account – Any of a variety of interest-earning accounts that: </li></ul><ul><ul><li>Pay relatively high interest rates (compared with regular savings accounts) </li></ul></ul><ul><ul><li>Offer some limited check-writing privileges </li></ul></ul><ul><ul><li>Four types: </li></ul></ul><ul><ul><ul><li>Super NOW accounts </li></ul></ul></ul><ul><ul><ul><li>Money market deposit accounts </li></ul></ul></ul><ul><ul><ul><li>Money market mutual funds </li></ul></ul></ul><ul><ul><ul><li>Asset management accounts </li></ul></ul></ul>
    24. 24. Super NOW Accounts <ul><li>Super NOW Account – Government-insured money market account offered through depository institutions. </li></ul><ul><li>High interest NOW checking account </li></ul><ul><li>Usually allow 6 checks per month </li></ul><ul><li>Usually $1,000 to $2,500 minimum deposit to earn highest interest </li></ul>
    25. 25. Money Market Deposit Accounts <ul><li>Money Market Deposit Account (MMDA) – Has minimum-balance requirements and tiered interest rates that vary with the size of the account balance; government insured. </li></ul><ul><li>Typically limited to 3 to 6 transactions per month </li></ul><ul><li>Institution sets minimum deposit to </li></ul><ul><li>earn highest interest </li></ul><ul><li>Usually pay higher rates than Super NOWs </li></ul>
    26. 26. Money Market Mutual Funds <ul><li>Money Market Mutual Fund (MMMF) – A money market account in a mutual fund investment company (rather than at a depository institution). </li></ul><ul><ul><li>Interest is calculated daily </li></ul></ul><ul><ul><li>Buys debts with short-term maturities </li></ul></ul><ul><ul><li>Usually $500 to $1,000 to open account </li></ul></ul><ul><ul><li>Limited check-writing </li></ul></ul><ul><ul><li>NO government (FDIC) insurance </li></ul></ul>
    27. 27. Asset Management Accounts <ul><li>Asset Management Account (AMA or All-in-One Account) – A coordinated account that places a customer’s monetary assets into a unified account and reports them on a single monthly statement. </li></ul><ul><ul><li>Money market mutual fund </li></ul></ul><ul><ul><li>Credit card </li></ul></ul><ul><ul><li>Checking account </li></ul></ul><ul><ul><li>Stock brokerage account </li></ul></ul>
    28. 28. Monetary Asset Management: Tool #4 – Long-Term Savings Instruments <ul><li>Involves placing money into long-term savings instruments for a given period of time (anywhere from 6 months to two years or longer) </li></ul><ul><li>Instruments include </li></ul><ul><ul><li>Certificates of Deposit (CDs) </li></ul></ul><ul><ul><li>U.S. Government Savings Bonds </li></ul></ul><ul><ul><ul><li>EE bonds (buy at half of face value) </li></ul></ul></ul><ul><ul><ul><li>I bonds (buy at full face value) </li></ul></ul></ul>
    29. 29. Certificates of Deposit <ul><li>Certificate of Deposit (CD) – An interest-earning savings instrument purchased for a fixed period of time. </li></ul><ul><ul><li>Interest rate remains fixed for entire term </li></ul></ul><ul><li>Variable-Rate Certificates of Deposit (or Adjustable-Rate CDs) – Pay an interest rate that is adjusted periodically. </li></ul><ul><ul><li>Reduces predictability </li></ul></ul><ul><li>Can buy CDs from banks and brokerage firms </li></ul>
    30. 30. Golden Rules of Managing Monetary Assets <ul><li>Choose an interest-earning checking account and reconcile the bank statement monthly. </li></ul><ul><li>Minimize ATM fees by making fewer large withdrawals rather than frequent small withdrawals. </li></ul><ul><li>Monitor bank fees and, if necessary, change financial institutions to avoid fees. </li></ul><ul><li>Build an emergency fund sufficient to cover three months’ expenses and keep in higher-interest accounts. </li></ul><ul><li>Start saving regularly when you are young. The sooner you start, the more money you will amass. </li></ul>

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