Chapter 5

What is the after tax savings rate of return formula

(1-tax rate)*yields on savings taxes reduce the actual rate of return

What are the 3 steps to balance your checkbook?

1. adjust bank statement for new deposits and withdrawals 2. adjust your check register for bank charges and automatic deposits or withdrawals not yet recorded 3. reconcile bank statement and check register

What are the steps for choosing a financial institution?

1. prepare a list of important features 2. rank the top 3/4 features for you 3. prepare a list of financial institutions 4. conduct research 5. make decision based upon prior experience

6 steps of writing a check

1. record date 2. write name 3. record amount 4. write amount in words 5. sign check 6. note reason for payment

What is APY formula?

100* (interest/principal)

What is Strebel's recommendation given the current economic and market conditions for how much cash to hold

12-36 months of living expenses cash available for investment - depends on financial goals and risk tolerance

How much should I hold in cash as an emergency fun?

3-6 months of living expenses

What do credit unions offer

are user-owned, nonprofit cooperative financial institutions

what are the drawbacks of regular savings accounts

low rate of return

Rate of return

percentage or yield is the increase in value due to interest

What is a certified check

personal check with guaranteed payment

What are drawbacks of a certificats of deposit CDs

possible penalty (reduced interest) for early withdrawal minimum deposit

What are some concerns for online banking

privacy and security costly ATM fees difficulty depositing checks and cash overspending potential online scams, phishing

What do mortgage companies do?

provide loans to customers so they can purchase homes

What is a money order

purchase at financial institution, post office, store

What is the certificate of deposit rate?

rate for time deposit at banks

What is the fed funds rate?

rate that large banks charge each other for very short-term borrowing

What is a prime rate?

rate that large banks charge their business customers

what is a discount rate?

rate that the federal reserve charges member banks for short-term borrowing

What are the benefits of US savings bonds

rate varies with interest rates low minimum deposit government guaranteed exempt from state, local income taxes

What are four types of checking accounts?

regular activity account interest-earning/NOW share draft accounts

What do you evaluate checking accounts on?

restrictions fees and charges interest rate and computation method special services

What are the typical types of financial services

savings payment services borrowing for the short or long term other financial services

What is a traveler's check

sign each check twice electronic traveler's check - prepaid travel card

What does a mutual savings bank offer

specialized in savings accounts and mortgage loans: owned by their depositors

What do savings and loan associations offer?

specialized savings plans, loans including mortgages and other financial planning services

Which of the following answers is false regarding check-cashing outlets

the fees charged are typically less than banks?

What are some benefits of online banking?

time and money savings convenience no paper trail for identity thieves online transfer of funds e-mail notifications

What does savings include?

time deposits in savings, CDs

Bank Reconciliation Bank part

Balance per bank +deposits in transit -outstanding checks +-bank errors =correct balance

What do interest earning or NOW accounts have

a minimum balance

What are some rules of effective cash management

balance checkbook regularly pay bills on time pay yourself first evaluate alternative accounts and providers

Bank reconciliation checkbook part

balance per checkbook +deposits by bank (credit memos) -service charge -NSF checks +- checkbook errors =correct balance

Who provides a variety of financial services?

banks, saving and loan associations, credit unions, other financial institutions

What is another name for a regular savings account and what does it involve?

called share accounts usually involve a low or no minimum balance

What are the most common payment choices?

cash check credit card debit card

What is another name for asset management account? Who offers it? what does it do?

cash management account offered by brokers and financial institutions provides complete financial service program for a single fee

What are 4 other payment methods?

certified check cashier's check money order traveler's check

What do check-cashing outlets do?

charge 1-20% of the face value of a check, 2-3% is average

What is a cashier's check

check of a financial institution to get by paying the face amount plus a fee

What does payment services include?

checking accounts are called demand deposits automatic payments

What are four types of deposit institutions

commercial banks savings and loan associations mutual savings banks credit unions

What are different types of electronic payments

debit cards online payments stored value cards smart cards

What does a bank reconciliation do?

explains the difference between the cash reported on bank statement and checkbook cash balance should be prepared EACH MONTH SHOULD NOT BE PREPARED BY SAME PERSON WHO HANDLES CASH

What are the benefits of money market account/funds

favorable rate of return (based on current interest rates) allows limited number of checks to be written insured (money market account

What do activity accounts have

fees on checks and deposits

What does truth in savings require disclosure of?

fees on deposit account interest rate APY other terms and conditions

What do commercial banks offer?

full range of services including checking, savings lending and other services

What are benefits of certificates of deposits (CDs)

guaranteed rate of return for time of CD insured (when purchased from bank or comparable financial institution)

What are the drawbacks of money market account/funds

higher minimum balance than regular savings accounts service charge and/or lower rate if below certain balance not insured

What are some opportunity costs of financial services

higher rate of return obtained at cost of lower liquidity convenience of 24-hour ATM vs service fees

What to look at when evaluating savings plans

inflation (compare APY w. inflation rate) tax considerations liquidity safety restrictions and fees

What do life insurance companies offer?

insurance plus savings and investment features, some offer financial planning and retirement services

What are some examples of other financial services?

insurance, investment real estate purchases, tax assistance, financial planning

What are Share draft accounts also known as

interest earning checking accounts at credit unions

What do account services provide customers with?

online banking offering deposits, investments, credit cards, loans, mortgages, rewards programs, IRAs

What are some common mistakes in managing cash?

overspending from impulse buying and using credit cards not having enough liquid assets to pay current bills using savings or borrowing to pay for current expenses failing to put unneeded funds in an interest-earning savings account or investment plan

What is the purpose of an annual percentage yield

to provide consistency when comparing different savings options

What are some benefits of an asset management account?

tracking money in one location consolidated statements lower fees bc of higher balance aggregation ease for tax reporting ease for communicating financial issues

What is a treasury bill rate?

yield on 13-week federal debt securities

What is a treasury bond rate?

yield on federal debt securities

What are 3 cash management softwares

Microsoft money Quicken Mvelopes Personal

What are investment companies also referred to as and what do they offer

mutual funds offer a money market fund on which you can write a limited number of checks

What do certificates of deposits require you to do?

leave your money on deposit for a set time period, otherwise you incur penalties several types to chose from consider all earnings and costs

What are the benefits of a regular savings account

low minimum balance ease of withdrawal insured

What are the drawbacks of US savings bonds

lower rate when redeemed within first five years

What do pawnshops do?

make loans on possessions but charge higher fees than other financial institutions, used for quick cash

What do finance companies do?

make short and medium term loans to consumers, but at higher rates

What are the objectives of cash management?

managing transaction needs preparing for cash emergencies making a temporary investment

What do regular checking accounts have?

minimum balances

Compounding

more frequent compounding means earning more interest on interest previously earned