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Managing Your Cash and
Savings
Chapter 4
How Will This Affect Me?
Finding the best mix of alternative cash management accounts and assets requires
careful cost/benefit analysis based on your personal objectives and constraints. This
chapter presents a variety of different alternatives and focuses on key
characteristics that include minimum balances, interest rate returns and costs,
liquidity, and safety. Cash management alternatives examined include checking and
savings accounts, money market deposit accounts, certificates of deposit (CDs),
money market mutual funds, U.S. Treasury bills, U.S. Series EE bonds, and U.S.
Series I bonds. After reading this chapter you should be able to design an effective
cash management strategy, which is an integral part of your comprehensive
financial plan.
The “Test Yourself” questions that following the learning goals here, provide good questions to
use in class discussion.
Learning Goals
LG1 Understand the role of cash management in the personal financial planning process.
In personal financial planning, efficient cash management ensures adequate funds for both
household use and an effective savings program. Exhibit 4.1 lists the various cash accounts and
their related representative rates of return. In late 2015, the Fed is expected to raise interest rates,
thus the rates in the exhibit will most likely change. But, the relation between the alternative
accounts will stay the same. Students need to understand the importance of the record of their
expenditures that comes with cash accounts.
LG2 Describe today’s financial services marketplace, both depository and nondepository
financial institutions.
Exhibit 4.2 will provide the focus for this section. Use it. A second point is the role of the FDIC
and other deposit insurance or lack of insurance.
LG3 Select the checking, savings, electronic banking, and other bank services that meet your
needs.
I suggest that you go to a local bank web page and copy the various plans they have for
classroom discussion. Exhibit 4.4 lists the normal types of bank charges.
LG4 Open and use a checking account.
I think the text covers this and class time is not needed. The importance of the monthly bank
reconciliation should be noted. If the students tries to get by with a quarterly or longer
reconciliation, the checking account records will contains so many errors and mistakes that there
will be no information in the check register. The account will be out of control.
LG5 Calculate the interest earned on your money using compound interest and future value
techniques.
Exhibit 4.8 presents the “magic of compounding”, a listing of rates that may apply to checking
accounts.
LG6 Develop a cash management strategy that incorporates a variety of savings plans.
The importance of an emergency fund [6 to 9 months of take home pay] and liquid assets in your
investment portfolio needs to be emphasized. While both involves liquid assets, their purposes
are different. Emergency funds are for the unexpected need for funds due to a loss of a job,
unexpected medical expenses, car accidence, major car repair, and others. The need for liquid
investments is to provide flexibility to your investments and to provide the ability to readjust the
mix of your portfolio.
The ability of the automatic deposit or transfer from checking to savings makes a systematic
saving plan possible. If you never have you hands on the money, you cannot spend it. That’s
makes saving easier.
Financial Facts or Fantasies?
These may be used as “teasers” to get the students on the right page with you. Also, they may be
used as quizzes after you covered the material or as “pre-test questions” to get their attention.
Financial Fact or Fantasy?
1. An asset is considered liquid only if it is held in the form of cash.
Fantasy: A liquid asset is one that is held in cash or can be readily converted to cash with little
or no loss in value. Thus, liquid assets include checking accounts, savings accounts, money
market accounts and funds, and other short-term investment vehicles.
2. Today’s financial marketplace offers consumers a full range of financial products and
services, many times all under one roof.
Fact: The financial marketplace offers financial products such as checking and savings accounts,
credit cards, loans and mortgages, insurance, and mutual funds, and financial services concerned
with financial planning, taxes, real estate, trusts, retirement, and estate planning. Such products
and services are offered by banks and savings institutions, insurance companies, brokerage firms,
mutual funds, and even nonfinancial companies like Kroger and General Motors.
3. Unlike money market mutual funds, money market deposit accounts are federally insured.
Fact: Money market deposit accounts are funds deposited in special, high-paying savings
accounts at banks, S&Ls, and other depository institutions and thus are covered by the same
federal deposit insurance as any other checking or savings account. Money market mutual funds
don’t have this coverage.
4. At most banks and other depository institutions, you will be hit with a hefty service
charge if your checking account balance falls even just $1 below the stipulated minimum amount
for just one day out of the month.
Fact: Many depository institutions use the daily balance in your account, rather than the average
monthly balance, to determine whether you must pay a service charge. Thus, letting it fall below
the minimum even once can have a significant cost
5. U.S. Series EE and I savings bonds are not a very good way to save.
Fntasy: Investing in Series EE and I savings bonds are excellent ways to save. The bonds are
safe because they are backed by the U.S. government, offer market rates of return, and offer
several attractive features. Series I bonds are particularly attractive to those wanting protection
against inflation.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
1. True False An asset is considered liquid only if it is held in the form of cash.
2. True False Today’s financial marketplace offers consumers a full range of financial
products and services, many times all under one roof.
3. True False Unlike money market mutual funds, money market deposit accounts are
federally insured.
4. True False At most banks and other depository institutions, you will be hit with a
hefty service charge if your checking account balance falls even
just $1 below the stipulated minimum amount for just one day out of the
month.
5. True False U.S. Series EE and I savings bonds are not a very good way to save.
Answers
1. False 2. True 3. True 4. True 5. False
YOU CAN DO IT NOW
The “You Can Do It Now” cases may be assigned to the students as short cases or problems.
They will help make the topic more real or relevant to the students. In most cases, it will only
take about ten minutes to do, that is, until the student starts looking around at the web site. But
they will learn by doing so.
Reconcile Your Checkbook
In this era of online and mobile banking, it’s easy to keep up with the current balance in your
checking account. So many people don’t bother to reconcile their checking accounts. But it’s all
too easy to forget about outstanding checks, delayed payments, and ATM withdrawals when you
just focus on your current balance. And reconciling your checkbook provides insight into how
you spend your money each month, which will inform your budgeting and overall financial
planning. So pick up your most recent bank statement and get reconciled – you can do it now.
Financial Impact of Personal Choices
Read and think about the choices being made. Do you agree or not? Ask the students to discuss
the choices being made.
Stella Likes Cash – Too Much?
Stella has a good job that pays $65,000 a year. She invests the maximum amount allowable in
her work-based retirement plan. During the financial crisis a few years ago her retirement
investments fell about 40 percent in value! While her investments have more than recovered,
Stella is very risk conscious and has consequently built up an emergency fund of $60,000, which
she keeps in a savings account that pays 0.5 percent, compounded monthly. Is Stella’s approach
to handling her emergency funds the best way to go?
Stella has done a great job setting aside a $60,000 emergency fund. And contributing the
maximum will serve her well. However, the recommended emergency fund for 9-months of
income for her $65,000 annual income is only $48,750. So Stella has set aside $11,250 more
than is recommended. Further, Stella is leaving it in a savings account only paying 0.5 percent a
year, which generates interest income of only about $300.69 a year. It would make sense for
Stella to invest the excess $11,250 more aggressively – even a CD would provide a higher return
with comparable risk. And she should at least shop around for a better savings rate than 0.5
percent for her hopefully reduced emergency fund. Stella could find another savings account
with a rate of at least 1 percent a year, which would about double her return to $602.75 a year.
Stella is doing great – but she likes cash too much for her own good. She could do even better.
Test Yourself
4-1 What is cash management, and what are its major functions?
Cash management is an activity that involves the day-to-day administration of cash and near-
cash liquid resources by an individual or family. The major functions of cash management are (1)
4-2 Give two reasons for holding liquid assets. Identify and briefly describe the popular
types of liquid assets.
Liquid assets are held for two broad reasons: (1) to meet known, near-term spending needs
4-3 Explain the effects that historically low interest rates have on borrowers, lenders,
savers, and retirees.
The current low interest rates encourages businesses to rely on debt which increases the risk of
going into business. Also, the low rates discourages saving which has negative impact for the
The benefits of lower interest rates include the reduced costs of financing the massive federal
budget deficit, which is a significant savings given that interest on the federal debt was $431
billion in 2014. And lower rates have helped support the “too big to fail” banks. Indeed, the Fed’s
4-4 Briefly describe the basic operations of—and the products and services offered by—
each of the following financial institutions: (a) commercial bank, (b) savings and loan
association, (c) savings bank, (d) credit union, (e) stock brokerage firm, and (f) mutual
fund.
Exhibit 4.2 gives a brief description of services offered by commercial banks, savings and loan
Commercial bank Offers checking and savings accounts and a full range of financial products
and services; the only institution that can offer non-interest-paying checking accounts (demand
Savings and loan association (S&L) Channels the savings of depositors primarily into
mortgage loans for purchasing and improving homes. Also offers many of the same checking,
Savings bank Similar to S&Ls, but located primarily in the New England states. Most are
Credit union A nonprofit, member-owned financial cooperative that provides a full range of
financial products and services to its members, who must belong to a common occupation,
religious or fraternal order, or residential area. Generally small institutions when compared with
Stock brokerage firms offer several cash management options, including money market mutual
Mutual funds, discussed in detail in Chapter 13, provide yet another alternative to bank savings
4-5 What role does the FDIC play in insuring financial institutions? What other federal
insurance program exists? Explain.
The FDIC provides deposit insurance on accounts up to $250,000 for commercial banks
and thrift institutions. The FDIC insurance requires a deposit account at the financial
institution. This type of insurance is not available on money market mutual funds, which
4-6 Would it be possible for an individual to have, say, six or seven checking and savings
accounts at the same bank and still be fully protected under federal deposit insurance?
Explain. Describe how it would be possible for a married couple to obtain as much as
$1,500,000 in federal deposit insurance coverage at a single bank.
A married couple can obtain as much as $1,500,000 in coverage, apart from the coverage of CDs
• One in the name of each spouse ($500,000 in coverage)
4-7 Distinguish between a checking account and a savings account.
A checking account held at a financial institution is a demand deposit, meaning, that the bank
must permit these funds to be withdrawn whenever the account holder demands.
4-8 Define and discuss (a) demand deposits, (b) time deposits, (c) interest-paying checking
accounts.
a. Demand deposit refers to an account held at a financial institution from which funds can
be withdrawn (in check or cash) upon demand by the account holder. As long as
sufficient funds are in the account, the bank must immediately pay the amount indicated
b. Time deposits are expected to remain untapped for a longer period of time than demand
deposits. While financial institutions generally retain the right to require a savings
account holder to wait a certain number of days before receiving payment on a
c. Interest-paying checking accounts are distinguished from regular checking accounts
which are not required to pay interest. As a result of the changes in the laws governing
financial institutions in the late 1970s and early 1980s, depositors now have the
opportunity to choose among a wide variety of accounts to meet their checking and cash
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
b. Money market deposit accounts (MMDAs) are vehicles offered by banks, S&Ls, and
other depository institutions to compete with money market mutual funds. Unlike
MMMFs, MMDAs are federally insured. Depositors have access to their funds through
check-writing privileges or through automated teller machines. However, most require
c. Money market mutual funds (MMMFs) are offered by investment companies and
pool the funds of many small investors to purchase high-yielding, short-term marketable
securities offered by the U. S. Treasury, major corporations, large commercial banks, and
various government organizations. The main advantage of these types of accounts to the
small investor is that you can indirectly own these types of marketable securities by
4-10 Describe the features of an AMA, its advantages, and its disadvantages.
The AMA [Asset Management Account] is a comprehensive deposit account that combines
checking, investing, and borrowing activities and is offered primarily by brokerage houses and
mutual funds. AMAs appeal to investors because they can consolidate most of their financial
transactions at one institution and on one account statement. A typical AMA account includes an
Disadvantages include a lack of “branch locations” compared to commercial banks. Also, the
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
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 form of debit card, and Visa and MasterCard also issue debit
cards. They provide a convenient form of payment and are accepted at many retail and
b. An automated teller machine (ATM) is a remote computer terminal at which bank
customers can make deposits, withdrawals, and other types of basic transactions. The
ATM can operate 24 hours a day, seven days a week. Banks and other depository
c. Another form of EFTS service is the pre-authorized deposit, an automatic deposit
made directly into your checking account on a regular basis. Some examples are
d. Bank-by-phone accounts allow customers to make many types of banking
transactions using their telephones. They can either talk to a customer service
e. Online banking and bill payment services enable one to handle nearly all account
transactions from a personal computer at any time of the day or night and on any day of
the week. Basically, with an online banking setup the customer instructs the bank to pay
various bills by electronically transferring funds to designated payees. One can also call
up a current "statement" on the computer screen at any time to check on the status of
4-12 What are your legal rights and responsibilities when using EFTSs?
You are responsible for your actions. To prevent unauthorized charges you must notify the issuer
promptly. You must notify the bank immediately about the theft, loss, or unauthorized use of
your EFTS card. Notification within 2 business days after you discover the card missing limits
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, services, and cost. Many people choose a bank based solely on convenience
One advantage of the joint account over two individual accounts is lower service charges. In
addition, the account has rights of survivorship: for a married couple, this means that if one
