Wiley Pathways Personal Finance: Managing Your Money and Building Wealth - Brossura

Bajtelsmit, Vickie L.

Brossura

ISBN 10: 0470111232 ISBN 13: 9780470111239

Casa editrice: Wiley, 2007

Riassunto

Whether looking to create and adhere to a budget or trying to best utilize consumer credit and loans, Personal Finance will help readers make smart financial decisions throughout their lives. Guiding them all the way through to retirement, this book includes numerous real-world examples to easily show them how to apply the material. They'll gain a strong understanding of critical financial concepts as they better learn how to manage their finances properly.

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Informazioni sull'autore

Vickie Bajtelsmit, is a professor in the College of Business at Colorado State University. She is the author of Personal Finance: Skills for Life as well as a member of several professional societies, including: the American Risk and Insurance Association, the Academy of Financial Services, the Financial Management Association, and the Risk Theory Society.

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You can get there

Where do you want to go? You might already be working in business and may be looking to expand your skills. You might be setting out on a new career path. Or, you might simply want to know how to wisely manage your money, make intelligent investment decisions, and maintain healthy finances.

Wherever you want to go, Wiley Pathways Personal Financewill help you get there. Easy-to-read, practical, and up-to-date, this text not only helps you master the core business competencies and skills that you need to succeed in the classroom; it also provides you with practical, real-world advice to help you make smart financial decisions at every stage of your life. The book’s brief, modular format and a variety of built-in learning resources enable you to learn at your own pace and focus your studies.

With this book, you will be able to:

• Evaluate your financial health and create a budget.
• Understand the U.S. tax system and your tax return, and use effective tax planning strategies to manage your taxes.
• Choose the right bank or financial institution and manage your cash and savings.
• Make wise credit card and consumer loan decisions.
• Learn how to purchase and finance an automobile or a home.
• Protect yourself, your family, and your property with the right insurance.
• Grow your money by investing in stocks, bonds, and mutual funds.
• Plan for retirement and preserve your estate.
• Make smart financial decisions throughout your life.

Wiley Pathwayshelps you achieve your goals

When it comes to learning about business, not every student is on the same path, but every student wants to succeed. The business series in the new Wiley Pathways imprint helps you achieve your goals. The books in this series––Marketing, Business Communication, Finance, Business Math, Real Estate, Small Business Management, Supervision, Project Management, Selling, and Personal Finance—offer a coordinated curriculum for learning business. Learn more at www.wiley.com/go/pathways.

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Pathways Personal Finance

By Vickie L. Bajtelsmit Linda G. Rastelli

John Wiley & Sons

Copyright © 2007 Vickie L. Bajtelsmit
All right reserved.
ISBN: 978-0-470-11123-9

Chapter One

MANAGING YOUR CASH AND SAVINGS

Cash Management Strategies

Starting Point

Go to www.wiley.com/college/bajtelsmit to assess your knowledge of cash and savings management. Determine where you need to concentrate your effort.

What You'll Learn in This Chapter

* Cash management

* Financial institutions

* Financial products and services

After Studying This Chapter, You'll Be Able To

* Assess your need for cash management products and services

* Evaluate the differences among providers of cash management products and services

* Choose cash management products and services that are important to your financial plan

* Compare cash management account options based on liquidity, safety, costs, and after-tax annual percentage yield

* Select appropriate tools for dealing with cash management errors

INTRODUCTION

Everyone manages cash. Your very first exposure to personal financial management was probably related to cash management. Perhaps you received a small allowance when you were a child and had to decide how to spend or save the money. Access to cash to meet transaction needs and emergencies is essential to your financial plan. A central part of your cash management strategies involves choosing cash management services, such as checking and savings accounts. This chapter helps you evaluate companies and the cash management services they offer. After you select the options that best meet your needs, you can implement your plan.

4.1 Objectives of Cash Management

Many people are guilty of occasionally, or not so occasionally, neglecting to balance their checkbooks or making bill payments after they are due. Keeping track of your cash and paying your bills are both important tasks associated with cash management. Cash management includes all your decisions related to cash payments and short-term liquid investments.

As discussed in Section 2.2, liquid investments are those that can easily be converted to cash without loss of value, such as the money in a checking or savings account. Although you can leave money in these accounts for longer periods, they are not generally the best choice for long-term savings, so we can also think of cash management as decisions related to investments of one year or less.

When you hold cash, whether it's in your pocket or in a bank checking or savings account, you incur certain costs. For one, you give up the opportunity to invest those dollars to earn a higher rate of return. Most people hold some of their money in a checking account. In some cases, this account might pay a small amount of interest, but in most cases, it does not. In fact, you may even pay for the privilege of holding money in certain types of accounts.

The lost interest is an important consideration. For example, if you carry an average balance of $1,000 in your checking account for a year, and you could instead have invested it to earn 10 percent interest, you've given up about $100 in interest (10 percent of $1,000). An additional cost of holding cash is psychological: If you have money sitting in your checking account, you can spend it very easily. It would be a shame if all your hard work in developing your budget went to waste because you couldn't resist the temptation of writing a check for an expensive item you hadn't planned to buy. In contrast, if you keep your cash in an account that's not as easily accessible, such as a savings account, you'll be more likely to stick to your plan.

Cash accounts pay less interest and increase the risk of overspending. So why are we willing to incur these costs? There are three general reasons for holding cash:

* Managing transactions

* Preparing for cash emergencies

* Making temporary investments

All these purposes are related to managing liquidity. Money held in less liquid investments, such as bonds, stocks, and real estate, provides a better investment return than money held in checking and saving accounts, but it's also more difficult to access on short notice.

4.1.1 Managing Transactions

Everyone has bills. To pay your bills easily, you need to have sufficient cash in a transaction account, commonly called a checking account, which is an account that allows you to regularly make deposits, write checks, withdraw funds, or make electronic payments in a timely fashion and at minimal cost.

Many people find it convenient to deposit their paychecks into a checking account and then to pay their bills from that account. There's a cost to using this banking service, in the form of lost interest earnings. So why not have your paycheck deposited in a savings account instead?

Although it's usually fairly easy to make transfers between accounts, the time and effort required to make multiple transfers each month as bills come due would probably outweigh the minimal interest that could be earned. Because the money is coming in and then promptly going out, the actual amount of time that it will earn interest is likely to be relatively short, and the interest you earn may not be enough to justify the time spent shifting money between accounts. However, if your paycheck is normally greater than the total monthly payments you make from the account, you should carefully estimate your needs and have the extra amount automatically transferred to an interest-earning account each month.

4.1.2 Preparing for Cash Emergencies

Life is full of unpredictable events. Maybe the car needs a new $2,000 transmission. Or your son breaks his arm playing football, and you have to pay $400 in doctors' bills. More serious emergencies might involve the loss of a job or temporary disability. To meet your emergency cash needs, you should manage your financial assets so that you can access cash when needed. For most households, this should include a cash reserve-an accumulation of liquid assets that you can turn to in an emergency.

In the past, a family might have had a few hundred dollars hidden in the bottom of a cookie jar or under a mattress. Today, in addition to traditional checking and savings accounts, you can arrange for credit cards and home equity lines of credit that can be accessed in an emergency but that otherwise incur no interest. Section 5.6 explains that you should avoid using credit cards as much as possible because of their high interest costs. However, they can be a source of short-term liquidity as long as you anticipate repaying the borrowed amounts in the future.

4.1.3 Making Temporary Investments

The third reason you might hold cash is in anticipation of a near-term need for the funds. Perhaps you're saving for a vacation or a new car, or maybe you're planning to buy a home. Or you might have sold some other assets recently and haven't yet decided how to reinvest the funds. During the recent ups and downs in the stock market, many investors used cash accounts to temporarily store funds as they bought and sold stocks.

4.1.4 How Much Should You Hold in Cash?

Financial experts disagree as to how much money a household should hold in cash. Very conservative advice suggests that you should have enough liquid assets to cover five to eight months of regular expenses. Others suggest that two months is more than enough and recommend investing the rest for higher returns.

For an average household with expenses of $2,000 per month, these rules of thumb would imply that the family should hold between $4,000 and $16,000 in cash or liquid assets. Even if the family split the difference and held $10,000 in liquid assets, these assets would greatly reduce the risk of cash shortfall in the event of a big shock to household income. But the cost can also be significant. You will forego the money you might have earned on an alternative investment-likely involving some risk-with that cash. You have to decide if having the cash is worth it. The loss of interest earnings may be more than made up for by the reduction in risk.

If you have a high risk of job loss, you might consider holding a conservatively large amount in cash. But if you have a secure job and alternative sources of funds for emergencies, you might hold only enough to meet your needs. Each strategy has costs and benefits that you must carefully identify and evaluate.

4.2 Rules of Effective Cash Management

Effective cash management minimizes the risk of bank charges for overdrafts and extra interest or penalties on overdue payments. Keeping track of cash flow is also necessary for budgeting so that you can achieve financial goals. In this section, we consider four practices that, if followed, result in better cash management outcomes.

4.2.1 Balancing Your Checkbook Every Month

Regularly balancing your checkbook is important. With the use of checks, debit cards, and automated teller machines (ATMs), it's very easy to lose track of how much you spend, particularly when more than one person is using the same account. If you don't balance your checkbook regularly, you're more likely to exceed your budget or, worse, bounce checks. Balancing your checkbook can be a daunting bookkeeping task if you write many checks or use your debit card often, particularly if you aren't careful about entering withdrawals and deposits. But the benefits to your finances far outweigh the costs.

The objective is to reconcile the balance your bank reports on its statement with the balance recorded in your checkbook register. To do this, you need to first adjust the bank balance for any additional checks and deposits that aren't reflected on the statement. Then you need to adjust your checkbook register to reflect checks and deposit transactions that aren't yet recorded, as well as any bank charges or interest.

If there's still a discrepancy between the checkbook balance and the bank statement balance, you should go over the withdrawals and deposits again to be sure you haven't missed any, and you should recheck your addition and subtraction. Because a bank statement is based on computerized account records, it is highly unlikely that such a statement will contain any mathematical errors. There is, however, the possibility of errors in automatic withdrawals or ATM transactions. You may even find that someone has fraudulently accessed your account. You should try to discover any such problems promptly because delay in discovering and reporting an incident of abuse or error makes it more difficult to get the problem corrected.

4.2.2 Paying Your Bills on Time

Timely payment of bills not only reduces your costs but also minimizes the risk that your credit rating will be hurt. A history of late payments makes you a less attractive credit risk. If your credit rating is poor, you may not be able to qualify for loans, you may have to pay higher rates of interest, and you may have increased insurance premiums. By paying your bills on time, you also avoid getting annoying phone calls from your creditors.

Although many people use ATMs or check online to determine their checking account balances, doing only these things is a poor substitute for reconciling a checkbook. The balance shown on the ATM receipt is not an accurate reflection of the true account balance because it doesn't include transactions that have not yet posted.

4.2.3 Paying Yourself First

The single most common advice given by financial planners is "Pay yourself first." What this means is that you should set aside the money necessary for achieving personal goals before you do anything else. If you wait until the end of the month to see how much is left to put into savings, inevitably there will be none left. If, instead, you treat savings as a primary expenditure and take it off the top before paying any other expenses, you are more likely to stick to your financial plan and avoid casual erosion of your cash flow.

There are many convenient ways to pay yourself first. Most banks and financial institutions offer the option of automatic funds transfer, by which you arrange to have a certain amount automatically transferred from your checking to your savings or investment account after your paycheck is deposited.

Another useful tool is automatic bill paying. Not only can you arrange directly with your creditor or service provider for automatic payments each month, you can take advantage of online bill-paying services that electronically pay all your regular bills each month. This can be particularly helpful for busy individuals.

4.2.4 Evaluating Alternative Accounts and Providers

Effective cash management requires that you carefully evaluate your alternatives and select the services and service providers that best meet your needs. You have many providers and services to choose from, and they vary widely in interest paid, fees, safety, and customer service.

4.3 Selecting a Financial Institution

At one time, cash management services could be obtained only at certain types of financial institutions. Today, many different types of financial institutions provide such services. The good news and the bad news is that you now have many choices. This is good news because competition often results in higher interest paid on accounts and lower interest charged on loans. It's bad news because having more choices means it takes more time and effort to investigate your alternatives thoroughly.

The various types of financial institutions are listed and defined in the following sections, but the differences between them are small and are becoming less important. In general, financial institutions are classified as depository or nondepository, based on where they primarily get their money to invest:

* Depository institutions-such as commercial banks, savings institutions, and credit unions-get their funds from customer deposits.

* Nondepository institutions-such as insurance companies, mortgage companies, and finance companies-get funds from other sources.

The different types of institutions in each of these categories are distinguished by what they primarily invest in.

4.3.1 Depository Institutions

Depository institutions include commercial banks, several types of savings institutions, and credit unions. All these types of firms are similar in two major ways:

* Their primary source of funds is customer deposits.

* Their primary source of income is interest earned on loans.

An important distinction between accounts held by banks and those held by mutual funds, brokerage funds, and insurance companies is insurance coverage against the organization going bankrupt. Most checking, savings, and certificate of deposit (CD) accounts in depository institutions are insured by the Federal Deposit Insurance Corporation (FDIC), a government-sponsored insurance agency, or a comparable federal agency, and thus are very safe places to put your money. Personal accounts held in commercial banks are insured for up to $100,000 per depositor by the FDIC. A common misconception is that this insurance covers accounts up to $100,000, but the guarantee is for $100,000 per depositor in a single institution. So, a good rule of thumb is to keep no more than $100,000 at any institution or to keep it in two different names (e.g., your name and your spouse's name).

On the other hand, checking and savings accounts offered by mutual funds, brokerage firms, and insurance companies are not insured. So, even if an uninsured account pays a little higher interest than an insured one, it might not be worth the risk.

Commercial Banks

Often simply called a "bank," a commercial bank is a depository institution that gets its funds from checking and savings account deposits and uses the money to provide a wide array of financial services, including business and personal loans, mortgages, and credit cards.

Savings Institutions

There are a number of types of savings institutions, including savings and loan (S&L) associations, depository institutions that receive funds primarily from household deposits and use most of their funds to make home mortgage loans), thrift institutions, and savings banks.

(Continues...)

Excerpted from Pathways Personal Financeby Vickie L. Bajtelsmit Linda G. Rastelli Copyright © 2007 by Vickie L. Bajtelsmit. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Dettagli dell'edizione

• Editore: Wiley
• Data di pubblicazione: 2007
• Lingua: Inglese
• ISBN 10: 0470111232
• ISBN 13: 9780470111239
• Rilegatura: Copertina flessibile
• Numero di pagine: 528
• Contatto del produttore: non disponibile
• Persona responsabile: GPSR Kontakt; gpsr@libri.de; ; Europaallee 1; Bad Hersfeld; 36244; Germania