Managing Checking and Savings Accounts PDF

Managing Checking and Savings Accounts Anin Rupp, PhD 1 Introduction Your financial success will depend in part on how well you manage your monetary assets…cash and low-risk, near-cash items that can be readily converted to cash with little or no loss in valu...

Managing Checking and Savings Accounts Anin Rupp, PhD 1 Introduction Your financial success will depend in part on how well you manage your monetary assets…cash and low-risk, near-cash items that can be readily converted to cash with little or no loss in value If you are a typical college student, your monetary assets are the largest component of your net worth People use monetary assets in one of three ways: Spend it Save it Invest it 2 What Is Monetary Asset Management? Monetary asset (cash) management is how you handle all of your monetary assets, including cash on hand, checking accounts, savings accounts and certificates of deposit, and money market accounts The goal is to maximize interest earnings and to minimize fees while keeping funds safe and readily available for living expenses, emergencies, and saving and investment opportunities Successful monetary asset management allows you to earn interest on your money while maintaining reasonable liquidity and safety (free from financial risk) Liquidity refers to the speed and ease with which an asset can be converted to cash 3 The Three Tools of Monetary Asset Management Monetary asset management relies on three major tools: 1. Low-cost, interest-earning checking accounts from which to pay ongoing, current living expenses 2. Interest-earning savings accounts in local financial institutions in which you deposit funds for upcoming expenditures or to accumulate funds for future investments 3. Money market accounts in local financial institutions or other financial services providers…pay higher interest and are a cross between checking and savings account 4 Who Provides Monetary Asset Management Services? The financial services industry comprises companies that provide checking, savings, and money market accounts and possibly credit, insurance, investment, and financial planning services These companies include: Depository institutions Stock brokerage firms Mutual funds Financial services companies Insurance 5  Depository Institutions Depository institutions are organizations licensed to take deposits and make loans Examples of depository institutions: 1) Commercial banks – corporations offer numerous consumer services, such a checking, savings, loans, safe-deposit boxes, investment services, financial counseling, and automatic payment of bills 2) Savings banks – focus primarily on accepting savings and providing pink bank mortgage and consumer loans…usually set up by the government 3) Credit union – accepts deposits and makes loans but operate on a not-for- profit basis and are owned by their members The members of the bank are owners.. 6 Other Financial Services Providers Depository institutions are not the only providers of monetary asset management services Mutual funds are investment companies that raise money by selling shares to the public and then invest that money in a diversified portfolio of investments Stock brokerage firms are licensed financial institutions that specialize in selling and buying stocks, bonds, and other investments and providing advice to investors charge your fees.. Insurance companies provide property, liability, health, life, and other insurance products 7 Tool #1—Interest-Earning Checking Accounts A checking account at a depository institution allows you to write checks against amounts you have on deposit…but people don’t really use checks anymore Checking accounts also can be accessed by using a debit card in an automated teller machine (ATM) or a point-of-sale (POS) terminal at a retail store When you use a debit card, funds are instantaneously removed from your account…alternatively you can use bank to bank transfer using QR code on your bank app All of the transactions (inflow and outflow) for the checking account on recorded 8 Tool #1—Interest-Earning Checking Accounts Checking accounts may or may not pay interest Interest-paying accounts with no or very low fees are available since all depository institutions offer some form of interest-earning checking account The account may pay more interest on accounts with higher balances which is called tiered interest For example, an account might pay 1 percent on the first $2000 and 1.25 percent on any additional funds in the account daily transactional purposes.. 9 Tool #1—Interest-Earning Checking Accounts A lot of interest-earning checking accounts have a minimum-balance requirement that, if not met, will result in the assessment of a monthly fee In addition, interest earned is usually not paid for a month when the account falls below the minimum It is best to find an account with no minimum balance requirements…even if it may pay no interest You must compared the cost benefit of interest versus the month fees that you may incur 10 Tool #1—Interest-Earning Checking Accounts Decision making becomes more difficult when the institution only offers an interest-earning account in combination with either a minimum- or average-balance requirement…you may not have a choice With a minimum-balance account, the customer must keep a certain amount in the account throughout a specified time period to avoid a flat service charge A fee is assessed whenever the triggering event occurs…when the balance drops below the specified minimum With an average-balance account, a service fee is assessed only if the average daily balance of funds in the account drops below a certain level Know that banks may charge other fees as well… 11 Tool #2—Savings Accounts The second tool of monetary asset management is a savings account, which provides you with a readily accessible source of emergency cash and a temporary holding place for funds Funds on deposit in a savings account are considered time deposits, savings that are expected to remain on deposit in a financial institution for an extended period Some time deposits are fixed-time deposits, which specify a period that the savings must be left on deposit, such as six months or three years…an example would be certificates of deposit (CDs) 12 Tool #2—Savings Accounts The typical savings account offered by banks are called statement savings account They permit frequent deposits or withdrawals of funds with no fees but may require a low minimum balance to be maintained Transactions usually can be accessed through ATMs…the process for opening the savings account is the same as a checking account A certificate of deposit (CD) is an interest-earning savings instrument purchased for a fixed period of time (anything from a week to eight years) The CD will pay the fixed-interest when it expires 13 Tool #2—Savings Accounts How then do we save? Wise individuals who save usually follow the adage “pay yourself first” This means to treat savings as the first expenditure after—or even before—getting paid…essentially build savings right into your budget from the beginning Your first savings goal is to accumulate enough money to cover living expenses (70% of income) for three to six months…this will serve as an emergency fund in case of job layoffs, illness, etc. For a person with a $60,000 gross annual income, a three-month emergency fund would be $10,500 (60,000/12 = 5,000 * 0.7 * 3) 3 months per month 14 Tool #2—Savings Accounts Most people do not have a sufficient emergency savings fund Instead, they rely on credit cards when an emergency or unforeseen need arises…do not be one of these people, it is a very unwise way to deal with finances Creating an emergency savings fund is easy and can be done by breaking it into monthly savings targets and then setting aside the money until you reach the goal…literally put it in an envelope and set it aside…it really works 15 Tool #2—Savings Accounts The calculation of interest to be paid on a savings account is primarily based on four variables: Amount of money on deposit Method of determining this balance Interest rate applied to the balance Frequency of compounding (such as annually, semiannually, quarterly, monthly, or daily) Depository institutions are required to disclose a uniform, standardized rate of interest This rate, called the annual percentage yield (APY), is a percentage based on the total interest that would be received on a $100 deposit for a 365- day period…obviously you want to pick banks that offer the highest APY 16 Tool #2—Savings Accounts An account with a grace period provides the depositor with a small financial benefit A grace period is the period (in days) during which deposits or withdrawals can be made and still earn interest from a given day of the interest period For example, if deposits are made by the tenth day of the month, interest might be earned from the first day of the month For withdrawals, the grace period generally ranges from three to five days Thus, if a saver withdrew money from an account within three to five days of the end of the interest period, the savings might still earn interest as if the money remained in the account for the entire period 17 Tool #3—Money Market Accounts When income begins to exceed expenses on a regular basis, a substantial amount of excess funds can quickly build up Although this situation is a comfortable one, it is wise from a monetary asset management point of view to move some of the excess funds into an account that pays more interest A money market account is any of a variety of interest-earning accounts that pays relatively high interest rates (when compared to a savings account) A money market account provides both checking and savings tools at a higher interest rate than other accounts and are offered by banks, credit unions, etc. 18 Electronic Money Management Monetary asset management can be summed up today with the phrase “paper, plastic, or neither.” “Paper” comprises the traditional cash- and check-based systems “Plastic” is the use of a debit or other type of card to access your funds “Neither” is the use of your computer/phone to access and use your accounts Most major banks now provide access to their banking services via websites/phone app...there are even “internet banks” which operate entirely online, and often pay the highest interest rates 19 Electronic Money Management Electronic money management occurs whenever transactions are conducted without using paper documents Most of these activities involve electronic funds transfers (EFTs), in which funds are shifted electronically among your various accounts and to and from other people and businesses There can be costs assessed for the use of some electronic banking An ATM transaction fee may be assessed for using an ATM of another bank…making frequent, small withdrawals can be expensive A $2 ATM fee is just 1 percent of a $200 withdrawal but is 10 percent of a $20 withdrawal 20 Electronic Money Management Fees can be assessed for other uses of electronic money management Some banks charge for online banking services such as bill paying and verification of your account balances…SCB charges a fee for accessing your historical transactions You can avoid a lot of these fees by researching and shopping around for an account and paying attention to your banking habits Luckily, today, many of these fees have been gotten rid of (i.e. foreign transaction fee) due to increased competition in the banking industry 21 Electronic Money Management General protection of a customer’s account takes the form of a periodic statement (usually every month) sent by the financial institution that shows all electronic transfers to and from the account, fees charged, and opening and closing balances You should periodically check these statements to make sure there are not any charges that you aren’t familiar with The quicker you tell the bank about fraudulent charges, the better/easier it will be for you to get your money back 22 Electronic Money Management You must take some of the responsibility yourself to protect your privacy, and reducing fraudulent charges Here are some tips for reducing the risk: Never bank via computer on a wireless system away from home Never provide account information if you get an unsolicited e-mail from your bank (most likely a scam) When finished banking via computer, always log off and close the browser…or even clear history Regularly change your passwords For the love of God, don’t lose your phone 23 The Psychology of Money Management A common cause of tension in personal relationships is conflict over money Often one of the partners brings a great deal of debt to a relationship Other couples get into financial trouble because they use credit too often Mutual trust in money matters can be developed— and must be—to have happy interpersonal relationships and achieve financial success 24 The Psychology of Money Management Managing money and making financial decisions are different Managing money includes such tasks as overseeing the budget, doing the household shopping, etc. Couples should agree on who will carry out these day-to-day chores and then carry through on their responsibilities Financial experts recommend that each person in a relationship keep some money of his or her own For dual-earning couples, this can be accomplished by setting up three checking accounts: a discretionary account for each individual (two accounts) and a third joint account 25 The Psychology of Money Management While managing family money is a significant task, decision making is where most disagreements arise Shared decision making is the best model when setting goals Such as when contemplating any major expense, such as buying automobiles and housing; and when conferring on key topics such as insurance, estate planning and investments, and long-term financial plans Discussions about money matters are not always easy…you must realize that honest differences may exist among people and respect these values 26 The Psychology of Money Management The following ideas will help you discuss money with more confidence and candor: 1) Get to know yourself - the first step in learning to talk with others about financial matters is to understand your own approach to money 2) Focus on commonalities - successful communication about money requires that the effort be aimed toward agreeing on common goals 3) Learn to manage financial disagreements - give all family members time to express their views when discussing financial matters and if necessary agree to disagree or postpone difficult decisions until a later time 4) Be honest and talk regularly - achieving consensus requires that each person be honest when talking about money matters 27 Case Study Mark Rosenberg and Trina Adams are to be married in two months. Both are employed full time and currently have their own apartments. Once married, they will move into Trina’s apartment because it is larger. They plan to use Mark’s rent money to begin saving for a down payment on a home to be purchased in four or five years. Mark has a checking account at a branch of a large regional commercial bank near his workplace where he deposits his paychecks. He also has three savings accounts—one at his bank and two small accounts at a savings and loan association near where he went to college. threee saving accounts, one>> bank, others>> saving and loan 28 Case Study (cont.) Mark pays about $30 per month in fees on his various accounts. In addition, he has a $10,000 certificate of deposit (CD) from an inheritance; this CD will mature in five months. Trina has her paycheck directly deposited into her checking account at the credit union where she works. She has a savings account at the credit union as well as a money market account at a stock brokerage firm that was set up years ago when her father gave her 300 shares of stock. She also has $4300 in an individual retirement account invested through a mutual fund. 29 Case Study (cont.) What would you recommend to Trina and Mark on the subject of managing checking and savings accounts regarding: 1. Where they can obtain the services that they need for managing their monetary assets? depository institutions, stock brokerage firms, credit unions) 2. Their best use of checking accounts and savings accounts as they begin saving for a home? 3. The use of a money market account for managing their monetary assets? 4. Their use of electronic banking? 5. How they can best discuss the management of their money and finances? 30