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