Chapter 4 Flashcards
__ in __ Americans have a US savings bond
1 in 4
Cash Management
ROUTINE, DAILY administration of cash and near-cash to take care of an individual’s or family’s needs
3 steps of Cash Management
- Awareness: individuals realize that money needs to be managed
- Analysis: “What do I spend money on?” “What is really important to me?”
- Action: individual takes action. (set up regular savings routine). make necessary adjustments
- move money to bank with better rate of return
- reduce debt, pay off credit cards
- spend less than your earn (MOST DIFFICULT)
Foreign currency
US Dollar: 75% made of cotton Euro: 28 countries in Europe Pound: UK Canadian Dollar Yen: Japan Real: Brazil Yuan: China
4 most important driving companies
US, China, Germany, Japan
Interest
rate is determined by:
interest: cost of using money
- rate determined by SUPPLY (amount lenders are willing too lend) and DEMAND (amount borrower is willing to pay)
Certificate of Deposit (CD)
fixed- time deposit: money is lent to a bank for a predetermined period of time and lender provides bank a fixed rate of return.
basic financial principle that applies to interest and how they are all related
all interest rates move together
when one part of the market adjusts interest rates, the other parts respond.
Mortgage rate
Tiered rate
Mortgage rate: 3.01% as of January 26th
- done DAILY
Tiered rate: tied to specific balance level
- larger amounts of money, longer time input
How much should be kept in a Checking and savings?
matter of preference
- based on risk of tolerance (how low you like to keep your balance)
- penalty fees may exist
keeping abreast of your expenditures
maintain balanced checkbook pay bills promptly establish ongoing savings program avoid large balances in low interest accounts have cash for small immediate needs
why are savings important? how much saved for EMERGENCY FUND? Savings rates - suggested - actual
savings are important as a cushion against financial emergencies
3-6 months worth of after tax income EMERGENCY FUND
savings rate:
- suggested to save 10-15% of income each year
- americans save on average of less than 5% of their incomes each year
basic liquidity ratio
number of months an individual or a household can meet expenses based on monetary assets
monetary assets/monthly expenses
savings grow based on:
amount put in
interest rate
frequency that interest is compounded
policies regarding deposits and withdrawals
compound interest
the frequency that earned interest is added to the principal (original value) so that the interest is earned on that amount as well as the principal.
- more frequently interest is compounded, the higher the future value
nominal rate of interest
effective interest
nominal rate: stated annual rate of interest
effective: actual rate taking into consideration how often it is compounded
continuous compounding
Annual percentage rate (APR)
compounding of interest continuously during the day
APR: amount of interest earned on a yearly basis expressed as a percentage
Truth in Savings Act
federal law requiring that financial institutions tell customers the important terms of their account
- APY, interest rate, fees charged, required minimum balance
deregulation
how the Depository Institutions Deregulation and Monetary Control Act of 1980 affects the monetary system and consumers
deregulation: fewer controls, opening up of competition
- many savings and loans closed
- more competition between remaining institutions
- mergers occurred
- development of nonbanks
- consumers benefit: more options
Time deposits
accounts with time limits
- not generally allowed to withdraw funds without penalty
Financial institutions
- benefits
businesses with services such as checking and savings accounts, loans, mortgages, credit cards, investment guidance, retirement counseling
- safety: protected from theft, loss and fire
- convenience
- cost savings
- security: federally insured institutions
FDIC
Federal Deposit Insurance Corporation insures banks and savings and loan companies
- came about after Depression
- Federal Govt will bail bank out
- up to $250,000 insured
NCUA
National Credit Union Administration (NCUA): insures credit unions
Various Financial Institutions
Commercial Banks: largest, full-service banks
Savings and Loan Associations: difficulty competing with commercial banks
- usually pay slightly higher interest rates
- cannot offer non-interest paying checking accounts
Credit Union: non profit cooperatives owned by their members
Brokerage firms: easy transfer of money from one account to another
- simplified record keeping
