Cash or Liquid Asset Management. 5-2 Copyright © 2010 Pearson Education, Inc. Publishing as...

Cash or Liquid Asset Management

5-2Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Learning Objectives

1. Manage your cash and understand why you need liquid assets.

2. Automate your savings.

3. Choose from among the different types of financial institutions that provide cash management services.

4. Compare the various cash management alternatives.


Learning Objectives

5. Compare rates on the different liquid investment alternatives.

6. Establish and use a checking account.

7. Transfer funds electronically and understand how electronic funds transfers (EFTs) work.


Introduction

Liquid assets are a necessity of personal financial management.

Without liquid funds, you might have to compromise your long-term investments to cover unexpected expenses.

You could ruin your financial plan if you don’t manage liquid funds effectively.


Managing Liquid Assets

Cash management—the management of cash and near cash (liquid) assets.

Making choices from among alternatives, maintaining and managing the results of those choices.

Liquid assets—cash and investments that can easily be converted into cash.

Low risk and low return but the more cash your have, the more you’re tempted to spend.


Automating Savings:Pay Yourself First

Have savings automatically deducted from your paycheck—pay yourself first.

Automatic savings are not in liquid reservoir therefore less likely to spend that money.

The earlier you start to save, the easier it is to achieve your goals—time value of money.


Financial Institutions

“Banks” or Deposit-type financial institutions – Financial institutions that provide traditional checking and savings accounts

Commercial banks, credit unions, savings banks, etc.


Financial Institutions

Nondeposit-type financial institutions –mutual fund companies, brokerage firms, insurance companies offer similar services as those offered by banks.


Online Banking

Access to your accounts to:check balances, transfer funds, paying bills, and view your financial information

through the internet, a mobile phone, or other electronic device.

Allows you to choose an internet-only bank.


What to Look For in aFinancial Institution

Which financial institution offers the kind of services you need and want?

Is your investment safe? Is it insured? Is the financial institution sound?

What are the costs and returns associated with the services you want? Are there minimum deposit requirements or hidden fees?


Cash Management Alternatives

Checking Accounts Advantages:

Liquid, Safe, Low minimum balance, Convenient

Non-interest bearing – demand deposits

Interest bearing – NOW accountsDisadvantages: minimum balance required,

monthly fee, opportunity cost, interest less than alternatives


Cash Management AlternativesSavings AccountsAdvantages:

LiquidSafe—federally insuredEarns higher interest than a Checking Account

DisadvantagesMinimum holding timeCharges/feesLow interest rate inconvenient



Money Market Deposit Account (MMDA) – alternative to savings account, variable interest rates, check and ATM access.

Advantages: Safe, Earns interest, Check writing privileges

Disadvantages: High minimum balances/penalties, interest rates

below alternatives



Certificates of Deposit (CD) - pays a fixed rate of interest while funds are on deposit for a period of time (30 days to years).

Advantages:Safe, fixed interest rate, convenient.

Disadvantages:Early withdrawal penalty, fixed interest rate,

minimum deposit required.


Cash Management AlternativesMoney Market Mutual Funds (MMMF’s) -

investors receive interest on a pool of investments less an administrative (usually less than 1% of total investment)

Advantages: High interest rates, check writing, limited risk, convenient.

Disadvantages:Administrative fees, minimum initial investment, not

insured, minimum checks.


Cash Management AlternativesAsset Management Account - a

comprehensive financial services package (checking account, credit card, MMFs, etc) offered by a brokerage firm.

Advantages:Monthly statements, coordination of money

management, checks, high return, convenient.

Disadvantages:Costly, minimum initial investment, not insured.



U.S. Treasury bills, or T-bills - short-term debt issued by the federal government with maturities from 3-12 months.

Advantages:Risk-free, exempt from state and local taxes,

federal tax vary with current rates.

Disadvantages:Low rate of return



U.S. Savings Bonds – Series EE and I bonds are safe, low risk savings products issued by the Treasury with low denominations.

Advantages:Safe, affordable, no taxes, convenient, redeem

at any bank, no commissions or fees.

Disadvantages:Low liquidity, long maturity, semi-annual

compounding.


Comparing Cash Management Alternatives

Comparable Interest Rates – use the annual percentage yield (APY) to easily compare.

Tax Considerations – taxes affect the real rate of return on investments.

Safety – some deposits are federally insuredFDIC deposits at commercial banksNCUA deposits at credit unionsMMMF – not insured but diversified


Establishing and Using a Checking Account

Choosing a financial institution, consider:Cost Convenience ConsiderationSafety

Balancing your checking account:Keep track of every transactionCompare monthly statement with register, then

reconcile register balance with bank balance.


Other Types of Checks

Cashier’s Check

Certified Check

Money Order

Traveler’s Checks


Electronic Funds Transfer (EFT)

Any financial transaction that takes place electronically.

Advantages:Transactions take place immediately.

Don’t have to carry cash or write a check.

Pay all kinds of bills


Electronic Funds Transfer

Examples:ATM transactionsDebit card transactions Smart cardsStored Value Cards


Automated Teller Machines

Provide cash instantly and accessed through a credit or debit card.

Convenient but can be costly.

Banks charge access fee. Using ATM not owned by your bank can cost $5 per transaction.

Attract crime.


Debit Cards

Allow you access to money in your accounts electronically.

Looks like a credit card but acts like a checking account.

ATM card is type of debit card but with access to savings accounts.

Check card blocking policies.


Smart Cards

Funds are transferred into cards which are used like debit cards, but withdraw from an account that’s actually stored magnetically on the card.

Perform the same services as a debit or credit card.

Allocated funds can run out.

Some have issuer-limited usage.


Stored Value Cards – Another Way to Carry Cash

Merchant gift cards and prepaid phone cards are examples of stored value cards.

Single purpose or “closed-loop” cards which can be used at only one store.

Multi-purpose or “open-loop” cards which can be used just like a credit card and can be reloaded.

Many have activation fees, maintenance fees, and ATM transaction fees


Fixing Mistakes—Theirs, Not Yours

Human and computer errors.

Avoid human errors such as those involved with deposits at ATMs.

Report immediately. Call or write the bank.

By law, write within 60 days of receiving your statement.


Summary

Cash management is balancing the risk of not having enough in liquid assets with the potential for greater return on other investments.

Automatically save some of your income and learn to live on take-home income.

Choose cash management alternatives from among deposit-type and nondeposit-type institutions.


Summary

Compare various cash management alternatives.

Compare their rates, return, and safety.

With checking accounts look into cost, convenience, consideration, and safety.

Electronic funds transfer transactions occur immediately and avoid use of cash or check.


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Cash or Liquid Asset Management. 5-2 Copyright © 2010 Pearson Education, Inc. Publishing as...

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