Managing Your Cash and Savings — Chapter 4
virtually every deposit-taking financial institution in the U.S. and are federally insured
(provided the institution offers FDIC or NCUA insurance, and virtually all do).
4-9 Briefly describe the key characteristics of each of the following forms of interest paying
checking accounts: (a) NOW account, (b) MMDA, and (c) MMMF.
a. NOW accounts (or negotiable order of withdrawal accounts) have been popular since the
removal, beginning in 1986, of all interest rate restrictions. The account itself pays interest
and offers unlimited check writing privileges so that investors can view the account as both a
savings account and a convenience checking account. While no legal minimum account
4-10 Describe the features of an AMA, its advantages, and its disadvantages.
Managing Your Cash and Savings — Chapter 4
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“sweep” balances in excess of a minimum amount into a money market fund which pays a higher
interest than banks.
Disadvantages include a lack of “branch locations” compared to commercial banks. Also, the ATM
transactions are handled through affiliates and are more costly than banks.
4-11 Briefly describe (a) debit cards, (b) banking at ATMs, (c) preauthorized deposits and
payments, (d) bank-by-phone accounts, and (e) online banking and bill-paying services.
These are alternative forms of Electronic Funds Transfers systems. They provide convenience to the
customers and cost savings to the banks. Security is always an issue. The customer must safeguard
their passwords [PIN] and the bank must have security procedures for its system. With
sophisticated hackers, the risk of electronic funds transfers is a concern.
a. Debit cards are specially coded plastic cards that permit cash withdrawals at ATM machines or
allow a transfer of funds from your checking account to the recipient’s account. ATM cards are one
Managing Your Cash and Savings — Chapter 4
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part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-
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cost of electronic home banking systems is small once the person has the computer. The cost of a
full-service teller transaction is about $1, an ATM transaction is less than 30 cents, and an Internet
transaction is less than 1 cent.
4-12 What are your legal rights and responsibilities when using EFTSs?
4-13 What are the key factors to consider when opening a checking account? Discuss the
advantages and disadvantages of individual versus joint accounts.
Factors that typically influence the choice of where to maintain a checking account are convenience,
4-14 Is it possible to bounce a check because of insufficient funds when the checkbook ledger
shows a balance available to cover it? Explain what happens when a check bounces. Can you
obtain protection against overdrafts?
It is possible to bounce a check due to insufficient funds when the checkbook ledger shows a
balance available to cover it if certain deposits added to the checkbook ledger have not yet
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part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-
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To prevent bounced checks, you can arrange for overdraft protection through an overdraft
line of credit or automatic transfer program. Here the bank will go ahead and pay a check
that overdraws the account, but be aware that bank charges and policies vary widely on the
cost and terms of such protection. The bank may even extend such protection without prior
arrangement, but in such a case it will notify the account holder of the overdraft and charge a
penalty for the inconvenience.
4-15 Describe the procedure used to stop payment on a check. Why might you wish to initiate
this process?
Payment on a check is stopped by notifying the bank. Normally, the account holder fills out
4-16 What type of information is found in the monthly bank statement, and how is it used?
Explain the basic steps involved in reconciling an account.
Your monthly bank statement contains an itemized listing of all transactions (checks written,
deposits made, electronic funds transfer transactions such as ATM withdrawals and deposits
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3. List all checks and other deductions (ATM withdrawals, automatic payments) still
outstanding (deducted in the checkbook but not returned with the statement.)
4. Repeat the process for deposits. All automatic deposits and deposits made at ATMs
should be included. Determine the total amount of deposits made but not shown on the
bank statement (deposits in transit).
5. Subtract the total amount of checks outstanding (from step 3) from the bank statement
balance, and add the amount of outstanding deposits (from step 4) to this balance. The
resulting amount is the adjusted bank balance.
6. Deduct the amount of any service charges levied by the bank and add any interest earned
to the checkbook ledger balance. The resulting amount is the new checkbook balance.
This amount should equal the adjusted bank balance (from step 5). If not, check all of the
addition and subtraction in the checkbook ledger, because there probably is a math error.
4-17 Briefly describe each of these special types of checks:
4-18 In general, how much of your annual income should you save in the form of liquid
reserves? What portion of your investment portfolio should you keep in savings and other
short-term investment vehicles? Explain.
4-19 Define and distinguish between the nominal (stated) rate of interest and the effective rate of
interest. Explain why a savings and loan association that pays a nominal rate of 4.5 percent
interest, compounded daily, actually pays an effective rate of 4.6 percent.
Managing Your Cash and Savings — Chapter 4
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part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-
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over the period of time that the funds are on deposit. It is found by dividing the dollar
amount of interest earned over the course of one year by the amount of money on deposit.
We can determine the effective rate when the S&L has a stated rate of 4.5% by calculating
how much interest is actually paid during the year. The easiest way is with a financial
calculator because the S&L compounds daily in this example. We will arbitrarily choose to
calculate the interest on a $1,000 account. (The percentage rate will be the same no matter
what dollar amount we choose to begin with.) Set the calculator on End Mode and 1
Payment/Year.
1,000 +/- PV
4.5 365 I
1 × 365 N
FV $1,046.03
Direct computation with Excel is $1.000 * ((1 + (.045/365))^365 = 1,046.025 which rounds
to $1,046.03.
During the year, this account earned $46.03 in interest, so we take the interest earned and
divide it by the beginning principal to determine the effective interest rate.
$46.03 = 4.6% effective rate of return
$1,000
4-20 What factors determine the amount of interest you will earn on a deposit account? Which
combination provides the best return?
The amount of interest earned depends on several factors, including frequency of
4-21 Briefly describe the basic features of each of the following savings vehicles:
(a) CDs, (b) U.S. Treasury bills, (c) Series EE bonds, and (d) I savings bonds.
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federal deposit insurance. In addition to purchasing CDs directly from the issuer, “brokered
CDs” can be purchased from stockbrokers.
b. U.S. Treasury bills (T-bills) are obligations of the U.S. Treasury issued as part of the on-
going process of funding the national debt. T-bills are sold on a discount basis now in
minimum denominations as low as $1,000 and are issued with 3-month (13-week), 6-month
(26-week), and one-year maturities. They carry the full faith and credit of the U.S.
government and pay an attractive and safe yield that is free from state and local income
taxes. They are almost as liquid as cash, because they can be sold at any time in a very active
secondary market without any interest penalty. If they should be sold before maturity,
however, one can lose money if interest rates have risen. In addition, broker’s fees have to be
paid in order to sell T-bills prior to maturity.
c. Series EE bonds are the well-known savings bonds that have been around for decades.
They are often purchased through payroll deduction plans or at banks or other depository
institutions. Though issued by the U.S. Treasury, they are very different from U.S. Treasury
bills. The fixed interest rate is set every six months in May and November, and change with
Managing Your Cash and Savings — Chapter 4
Critical Thinking Cases
The following are questions and solutions to “Critical Thinking Cases” for your use.
4.1 June Xu’s Savings and Banking Plans
June Xu is a registered nurse who earns $3,250 per month after taxes. She has been reviewing
her savings strategies and current banking arrangements to determine if she should make any
changes. June has a regular checking account that charges her a flat fee per month, writes an
average of 18 checks a month, and carries an average balance of $795 (although it has fallen
below $750 during 3 months of the past year). Her only other account is a money market
deposit account with a balance of $4,250. She tries to make regular monthly deposits of $50–
$100 into her money market account but has done so only about every other month.
Of the many checking accounts June’s bank offers, here are the three that best suit her needs.
• Regular checking, per-item plan: Service charge of $3 per month plus 35 cents per check.
• Regular checking, flat-fee plan (the one June currently has): Monthly fee of $7 regardless of
how many checks written. With either of these regular checking accounts, she can avoid any
charges by keeping a minimum daily balance of $750.
• Interest checking: Monthly service charge of $7; interest of 3 percent, compounded daily
(refer to Exhibit 4.8). With a minimum balance of $1,500, the monthly charge is waived.
June’s bank also offers CDs for a minimum deposit of $500; the current annual interest rates
are 3.5 percent for 6 months, 3.75 percent for 1 year, and 4 percent for 2 years.
Critical Thinking Questions
1. Calculate the annual cost of each of the three accounts, assuming that June’s banking habits
remain the same. Which plan would you recommend and why?
2. Should June consider opening the interest checking account and increasing her minimum
balance to at least $1,500 to avoid service charges? Explain your answer.
3. What other advice would you give June about her checking account and savings strategy?
4.2 Reconciling the Campbell’s Checking Account
Caleb and Eva Campbell are college students who opened their first joint checking account at
the American Bank on September 14. They’ve just received their first bank statement for the
period ending October 5. The statement and checkbook ledger are shown in the table on the
next page.
Critical Thinking Questions
1. From the following information, prepare a bank reconciliation for the Campbell’s as of
October 5, using a form like the one in Worksheet 4.1.
Critical Thinking Problem 4.2
For the month of September 6 to October 5 20 15
Accountholder’s name(s)
Caleb and Eva Campbell , 2128 E. Arbor St, Phoenix
Type of Account The American Bank, 800-000-0000
1. Ending balance shown on bank statement 95.39$
Add up checks and withdrawals still outstanding:
102 28.40$
104 16.75
108 17.25
5. Deduct any bank service charges for the period ($3) 3.00
6. Add interest earned for the period 9.25
B. New checkbook Balance (4 –5 + 6) 482.99
Note: You account is reconciled when line A equals line B.
Checking Account Reconciliation
Check Number or Date
Check Number or
Date
Amount
Amount
2. Given your answer to Question 1, what, if any, adjustments will the Campbell’s need to
make in their checkbook ledger? Comment on the procedures used to reconcile their checking
account and their findings.
3. If the Campbell’s earned interest on their idle balances because the account is a money
market deposit account, what impact would this have on the reconciliation process? Explain.
Managing Your Cash and Savings — Chapter 4
Key Concepts
Managing savings and liquid assets requires an understanding of the numerous opportunities
available in the financial marketplace as a result of deregulation. Today, many new providers offer
various types of savings accounts and vehicles. It is also necessary for those using these services to
understand procedures relating to interest calculations, differences in account features, and
procedures for opening, utilizing, and managing accounts—especially checking accounts. The
following terms represent the key concepts/terms stressed in this chapter:
account
reconciliation
Verifying the accuracy of your checking account balance in relation
to the bank’s records as reflected in the bank statement, which is an
itemized listing of all transactions in the checking account.
automated teller
machine (ATM)
A remote computer terminal that customers of depository
institutions can use to make basic transactions 24 hours a day, 7
days a week.
asset management
account (AMA)
A comprehensive deposit account, offered primarily by brokerage
houses and mutual funds.
cash management
The routine, day-to-day administration of cash and near-cash
resources, also known as liquid assets, by an individual or family.
cashier’s check
A check payable to a third part that is drawn by a bank on itself in
exchange for the amount specified plus, in most cases, a service fee
of $5 to $10.
certificate of deposit
(CD)
A type of savings instrument issued by certain financial institutions
in exchange for a deposit; typically requires a minimum deposit
and has a maturity ranging from 7 days to as long as 7 or more
years.
certified check
A personal check that is guaranteed (for a fee of $10 to $15 or
more) by the bank on which it is drawn.
checkbook ledger
A booklet, provided with a supply of checks, used to maintain
accurate records of all checking account transactions.
compound interest
When interest earned in each subsequent period is determined by
applying the nominal (stated) rate of interest to the sum of the
initial deposit and the interest earned in each prior period.
debit cards
Specially coded plastic cards used to transfer funds from a
customer’s bank account to the recipient’s account to pay for goods
or services.
demand deposit
An account held at a financial institution from which funds can be
withdrawn on demand by the account holder; same as a checking
account.
deposit insurance
A type of insurance that protects funds on deposit against failure of
the institution; can be insured by the FDIC and the NCUA.
effective rate of
interest
The annual rate of return that is actually earned (or charged)
during the period the funds are held (or borrowed).
Managing Your Cash and Savings — Chapter 4
electronic funds
transfer systems
(EFTSs)
Systems using the latest telecommunications and computer
technology to electronically transfer funds into and out of
customers’ accounts.
I Savings bond
A savings bond, issued at face value by the U.S. Treasury, whose
partially fixed rate provides some inflation protection.
Internet bank
An online commercial bank.
money market
deposit account
(MMDA)
A federally insured savings account, offered by banks and other
depository institutions that competes with money market mutual
funds.
money market
mutual fund
(MMMF)
A mutual fund that pools the funds of many small investors and
purchases high-return, short-term marketable securities.
negotiable order of
withdrawal (NOW)
account
A checking account on which the financial institution pays interest;
NOWs have no legal minimum balance.
nominal (stated)
rate of interest
The promised rate of interest paid on a savings deposit or charged
on a loan.
overdraft
The result of writing a check for an amount greater than the current
account balance.
overdraft protection
An arrangement between the account holder and the depository
institution wherein the institution automatically pays a check that
overdraws the account.
Series EE bond
A savings bond issued in various denominations by the U.S.
Treasury.
share draft account
An account offered by credit unions that is similar to interest-
paying checking accounts offered by other financial institutions
simple interest
Interest that is paid only on the initial amount of the deposit.
stop payment
An order made by an account holder instructing the depository
institution to refuse payment on an already issued check.
time deposit
A savings deposit at a financial institution; remains on deposit for a
longer time than a demand deposit.
U.S. Treasury bill
(T-bill)
A short-term (3- or 6-month maturity) debt instrument issued at a
discount by the U.S. Treasury in the ongoing process of funding the
national debt.
traveler’s check
A check sold (for a fee of 1 to 2 percent) by many large financial
institutions, typically in denominations ranging from $20 to $100,
that can be used for making purchases and exchanged for local
currencies in most parts of the world.
Managing Your Cash and Savings — Chapter 4
Chapter Outline
I. The Role of Cash Management in Personal Financial Planning
A. The Problem with Low Interest Rates [See Exhibit 4.1 for sample rates]
B. Shop for the Best Short-Term Interest Rates
II. Today’s Financial Services Marketplace
A. Types of Financial Institutions
1. Depository Financial Institutions [Exhibit 4.2]
2. Nondepository Financial Institutions
B. How Safe Is Your Money?
1. Deposit Insurance [See Exhibit 4.3]
III. A Full Menu of Cash Management Products
A. Checking and Savings Accounts [Exhibit 4.4]
1. Checking Accounts
2. Savings Accounts
3. Interest-Paying Checking Accounts
a. NOW Accounts
b. Money Market Deposit Accounts
c. Money Market Mutual Funds
4. Asset Management Accounts
B. Electronic Banking Services
1. Electronic Funds Transfer Systems
a. Debit Cards and Automated Teller Machines
b. Preauthorized Deposits and Payments
c. Bank-by-Phone Accounts
2. Online and Mobile Banking and Bill Payment Services
C. Regulation of EFTS Services
D. Other Bank Services
IV. Maintaining a Checking Account
A. Opening and Using Your Checking Account
1. What to look for in a Bank Account
2. The Cost of a Checking Account
3. Individual or Joint Account?
4. General Checking Account Procedures
5. Overdrafts
6. Stopping Payment
B. Monthly Statements
1. Account Reconciliation
2. Reconcile Your Checkbook: do it NOW [Worksheet 4.1]
C. Special Types of Checks
1. Cashier’s Check
2. Traveler’s Check
3. Certified Check
Managing Your Cash and Savings — Chapter 4
V. Establishing a Savings Program
A. Starting Your Savings Program
B. Earning Interest on Your Money
1. The Effects of Compounding See Exhibit 4.6
2. Compound Interest Generates Future Value
C. A Variety of Ways to Save
1. Certificates of Deposit
2. U.S. Treasury Bills
3 . Series EE Bonds
4. I Savings Bonds
VI. Planning Over a Lifetime