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Personal finance notes Ch:6

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Personal finance notes Ch:6 52307

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Pers Finan Mgt - FIN 108 - 007
Harry E. Gallatin
Class Notes
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This 3 page Class Notes was uploaded by Onome Notetaker on Saturday September 24, 2016. The Class Notes belongs to 52307 at Indiana State University taught by Harry E. Gallatin in Fall 2016. Since its upload, it has received 6 views.


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Date Created: 09/24/16
Chapter 6 – Managing your money 9/22/16 Personal finance notes Money management: a series of decisions made over a short-term period regarding cash inflows and outflows Liquidity: your ability to cover any cash deficiencies that you may experience - Related to your personal cash flow statement - Using credit cards for liquidity  Interest rate usually high  Maintaining adequate liquid assets allows you to avoid using credit cards and paying high finance charges - Adequate return  Try to achieve highest possible returns on short-term investments Money Market Investments Checking Account - Very liquid investment Overdraft protection: an arrangement that protects a customer who writes a check for an amount that exceeds the checking account balance; it is a short-term loan from the depository institution where the checking account is maintained  Saves overdraft fees and bounced checks  Results in high interest rate on borrowed amount Stop payment: a financial institution’s notice that it will not honor a check if someone tries to cash it; usually occurs in response to a request by the writer of the check  Direct deposit – paychecks go directly to your financial institution  Fees – vary from institution to institution  No interest on most checking accounts NOW (negotiable order of withdrawal) account: a type of deposit offered by depository institutions that provides checking services and pays interest  Requires a minimum balance, lowering liquidity  Savings deposits pay interest and are slightly less liquid than checking accounts - Automatic transfer feature can help saving Certificate of Deposit  Retail CDs: certificates of deposit that have small denominations  Return—CDs pay higher interest rates than savings deposits  Liquidity—penalties are imposed for early withdrawal  Choice among CD maturities Money Market Deposit Account (MMDA): a deposit offered by a depository institution that requires a minimum balance, has no maturity date, pays interest, and allows a limited number of checks to be written each month - Less liquid than checking, but pays a higher interest rate - Many people keep a checking or NOW account for day-to-day and a money market for other funds  Treasury securities: debt securities issued by the U.S. Treasury  Treasury bills (T-bills): Treasury securities with maturities of one year or less - Return—purchased at a discount; result in capital gains - Secondary market: a market where existing securities such as Treasury bills can be purchased or sold - Quotations – prices online and in financial news publications - Money market fund quotations  Found in financial newspapers and online Asset Management Account: an account that combines deposit accounts with a brokerage account and provides a single consolidated statement Sweep account: an asset management account that sweeps any unused balance in the brokerage account into a money market investment at the end of each business day Risk of Money Market Investments Credit risk (or default risk): the risk that a borrower may not repay on a timely basis Interest rate risk: the risk that the value of an investment could decline as a result of a change in interest rates Liquidity risk: the potential loss that could occur as a result of converting an investment into cash - Impact of expected economic conditions on liquidity needs - Weak economic conditions can create liquidity problems  Job loss  Fewer hours worked  Poor returns on investments - This could be a time to allocate more funds to liquid investments Risk Management  Determining the optimal allocation of money market investments 1. Anticipate upcoming bills and have adequate funds in your checking account 2. Estimate additional funds needed in near future and invest in a liquid investment 3. Use remaining funds in a way that will maximize your return, considering your risk tolerance  Recently, interest rates on money market investments have been low - Resist temptation of reduce these investments in favor of stocks - Money market investments have a specific purpose – to provide easy access to funds How Money Management Fits Within Your Financial Plan  Key money management decisions for your financial plan are: - How can you ensure that you can pay your anticipated bills on time? - How can you maintain adequate liquidity in case you incur unanticipated expenses? - How should you invest any remaining funds among money market investments?


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