CHAPTER 5
Managing Checking and Savings Accounts
Lecture outline
I. List and define the tools of monetary asset management and identify the types of financial services firms that provide those tools.
A. Cash management extends beyond pure cash to savings, money market funds, CDs, and other highly liquid forms of assets, held mainly in banks but other options are available—consult Table 5.1.
B. Financial services firms today can do almost everything for anybody—caveat emptor. Everything is not necessarily appropriate to be held with one institution.
II. Earn interest and pay no or low fees on your checking accounts.
A. Checking accounts are mostly used in combination with ATM and/or debit cards, writing of checks for normal monthly charges, bank bill-pay, and for deposit of our paychecks, SS checks, and so on.
1. Some accounts pay interest on balance, but then may have the requirement of high monthly balance.
2. Others may require an annual fee or monthly service charge.
3. Some require that you pay for (paper) checks.
4. Some have ATM charges.
5. Find the type of account that best fits a lifestyle.
B. Special needs checks; fees for issue of these are common.
1. Travelers’ checks.
2. Money orders.
3. Certified checks.
4. Cashier’s checks.
C. Bank statements and monthly balancing of checking account are important for three specific reasons:
1. If much activity is automatic—withdrawals, deposits, contributions, payments to service providers, ATM use, EFT, and so on—are the investor’s own records updated?
2. Copies of written checks or actual cancelled checks may be important documentation for the IRS.
3. Fees, fees, fees. The banks make mucho dollars from fees, not from the money in your account.
III. Make the best use of the benefits of savings accounts.
A. Savings accounts at the banks may carry a slightly higher rate of interest than a checking account.
1. Encourage students to have automatic withdrawals from checking into savings account to build it up.
2. Emergency funds, such as savings accounts, should be a minimum of three months of expenses, or more, depending on reliability of income.
B. Saving for children’s college can be made through:
1. 529 plans.
2. Educational savings accounts.
3. UGMA accounts.
4. Discount or zero coupon bonds and Series EE savings bonds.
5. Possible use of IRA (though those are retirement accounts and therefore not recommended as sources for college payments).
C. CDs may provide temporary good APY, but will incur penalty for early withdrawal.
IV. Explain the importance of placing excess funds in a money market account.
A. Excess liquid assets, that is, beyond checking accounts and savings account, can be put into money market accounts, providing a higher rate of interest.
Take care to set up account correctly—in case of death or disability, who needs to be able to access the money?
B. Differentiate between:
1. NOW.
2. MMDA.
3. MMMF.
4. AMA.
C. Some brokerage firms offer daily sweeps, but the MMMFs they use do not necessarily offer high rates of interest.
V. Describe electronic money management including your legal protections.
A. Electronic transactions are those where no documentation is used.
Use of plastic is common such as
1. ATM cards.
2. Debit cards—using debit (PIN #) or credit (signature).
3. Stored value cards, for example, gift cards.
4. EBT—electronic benefits transfer—used by the military and the SS.
B. Beware specifically when using plastic:
1. Fees for everything: use, nonuse; activation; maturity of card.
2. Check bank statements carefully for misuse.
C. EFTs are electronic transactions you may have preapproved, such as a fixed monthly mortgage payment, utility payment, insurance, investments.
VI. Discuss your personal finances and money management more effectively with loved ones.
A. How many checking accounts should a married couple have: 1, 2 or 3?
Each decision carries different consequences for cash management.
B. Money is a very emotional topic.
Managing the income and making financial decisions about how it’s spent—crucial dual task.
C. How to begin?
1. Understand approach to money by each partner.
2. Find common ground.
3. Learn to deal with disagreements.
4. Use positive statements—changing the other person may create resentment.
5. Honesty and regular talks.
D. Remarriage—beware!!!