Chapter 5 Flashcards
What is the best strategy at straight cash management?
envelope system
What are the pros of the envelope system?
always have cash for bills
What are the cons of the envelope system?
may lose envelope with cash
What is the best strategy at maximizing incentives?
credit cards with bonus
What are the pros of credit cards with bonus?
earn bonus miles or credits
What are the cons of credit cards with bonus?
may go over your budget
What are four common mistakes in managing cash?
overspending from impulse buying; not having enough liquid assets to pay current bills; using savings/borrowing money to pay current bills; failing to put unneeded money in interest-earning savings
What are two paths to overspending?
liquidate savings or borrowing money
What are the four types of financial services?
savings; cash availability/payment services; borrowing; investment + other financial services
Give 2 examples of savings services.
time deposits in savings; CDs
Give 3 examples of cash availability/payment services.
checking accounts/demand deposits; automatic payments (direct withdrawal); prepaid cards
What are the liabilities for lost debit cards? (3)
$50 liability if reported within 2 days; $500 liability if reported in 3-60 days; unlimited liability if reported after 60 days
What is the liability for a credit card?
$0 liability for fraudulent purchases if reported within 2 days
What are three examples of opportunity costs involving financial services?
ATM fees; “free” checking accounts with high minimum balances; high return only with low liquidity
What are three ways the Fed can increase money supply?
lowering reserve requirement; lowering the discount rate; buying securities via Open Market Operations
Mutual savings banks specialize in
savings accounts and mortgage loans
Mutual savings banks are owned by
their depositors
Mutual savings banks are common in
the Northeast
(T/F) Mutual savings banks result in lower interest rates.
False, they result in higher interest rates.
Credit unions are owned by
users.
What is the profit status of credit unions?
non profit
Which institution has the lowest loan rates?
credit unions
Which institution has the highest savings rate?
credit unions
FDIC stands for
Federal Deposit Insurance Corporation
The FDIC provides
deposit insurance which guarantees the safety of cash at banks
What is the FDIC limit per depositor, per financial institution?
$250,000
A joint account held by two people has an FDIC limit of
$500,000
Give six examples of high-cost financial services.
pawnshops; check-cashing outlets/car title loans; finance companies; payday loans; rent-to-own centers; tax refund anticipation loans
Give three examples of non-deposit institutions.
mortgage companies; life insurance companies; investment companies
The products of investment companies are called
mutual funds
Which financial institution does NOT have FDIC insurance?
investment companies
What are the five steps to choosing a financial institution?
prepare a list of important features; rank your personal top 3-4 features; prepare list of institutions; conduct research for decision; make a decision
Describe regular savings accounts (2).
usually involve low or no minimum balance; credit unions call them “share accounts”
Describe interest-earning NOW accounts. (2)
checking account paying interest; high minimum to avoid fees
What does CD stand for?
certificate of deposit
What is a CD?
requires you to leave your money on deposit for a set time period; otherwise, you incur penalties
Describe money market accounts (3).
requires minimum balances and earnings based on market interest rates; FDIC-insured funds; write a few checks per year
Describe money market funds.
non-FDIC insured funds offered by investment companies and LICs
Describe US Savings Bonds. (3)
offered by Treasury with long maturities (30 years); floating rates until 2005 but now fixed rates; redeemed series EE bonds are federal tax-free if used for college tuition and fees and held for more than 5 years
What is yield?
percentage increase in value due to interest earnings
What is compounding?
interest earned on interest
The Truth in Savings Law of 1993 requires the disclosure of (4)
fees on deposit account; interest rate; annual percentage yield (APY); other terms + conditions
What is the purpose of the APY?
to provide consistency when comparing different savings options
What is the formula for APY?
100 x ($interest/$principal)
When is the APY formula applicable?
when number of days in the term is 365 or when the account does not have a stated maturity
What is the secondary formula for APY?
total interest earned/$deposited; APY = 100 x [ ((1+i)/m)^m - 1]
What happens if APY < inflation?
means loss of purchasing power
What is the formula for after-tax rate of return?
(1 - MTR) * yield on savings
Liquidity
Allows you to withdraw money on short notice without penalty or fees
Describe regular checking accounts.
many have minimum balances or service charges
Describe activity accounts.
fees on each check and deposit.
What are two types of checking accounts?
individual or joint account
What are the 3 endorsement types?
blank (signature only); restrictive (“for deposit only”); special (“pay to the order of”)
What are the six steps for writing a check?
record the date; write the name of the payee; record dollar amount in numbers; record dollar amount in words; sign check; fill out reason for payment
Which trumps which on a check - the amount written in words or the amount written in numbers?
the amount written in words
Where on a check is the bank routing # found?
lower left
Where on a check is the account # found?
lower middle
Give 4 examples for reasons why your checkbook balance and bank balance may not match up.
interest earned or bank fees; checks that haven’t yet cleared; deposits not yet received by bank; math errors or omitted entries
What is a certified check?
personal check with guaranteed payment
What happens if a certified check isn’t cashed?
money stays in account drawn on
What is a cashier’s check?
Check of a financial institution you get by paying the face amount plus a fee
What happens if a cashier’s check isn’t cashed?
money is deducted from account (at the time of issue)
When is a cashier’s check required in TX?
when closing real estate sales
What is a money order?
recipient is guaranteed funds are good
Describe traveler’s checks.
sign each check twice - once when issued and once when cashed; allows you to make payments when away from home
What is the equivalent of an electronic traveler’s check?
prepaid travel card
