Chapter 5

1. Chapter 5 Cash or Liquid Asset Management

2. Learning Objectives • Manage your cash and understand why you need liquid assets. • Automate your savings. • Choose from among the different types of financial institutions that provide cash management services. • Compare the various cash management alternatives.

3. Learning Objectives • Compare rates on the different liquid investment alternatives. • Establish and use a checking account. • Transfer funds electronically and understand how electronic funds transfers (EFTs) work.

4. Introduction • Cash management means making choices among a large range of banking options • It also means maintaining and managing your assets so that you can: • Pay your bills • Pay normal living expenses • Have enough to cover unexpected expenses

5. Introduction • What does “liquid” mean? How quickly an asset can be turned into • Liquid assets are a necessity of personal financial management. • Without liquid funds, you might have to compromise your long-term investments or go into debt to cover unexpected expenses. • You could ruin your financial plan if you don’t manage liquid funds effectively. cash

6. Managing Liquid Assets • Cash management —the management of cash and near cash (liquid) assets. • It also means making choices from among banking alternatives; then maintaining and managing the results of those choices.

7. Liquid Assets • Liquid assets —cash and investments that can easily be converted into cash • Examples: cash, checking accounts, savings accounts, money market account. • Liquid assets are low risk and low return • Another downside: the more cash you have, the more you’re tempted to spend.

8. Automating Savings:Pay Yourself First • Have savings automatically deducted from your paycheck—pay yourself first. • Automatic savings are not in a liquid reservoir; therefore it is less likely you will spend that money. • The earlier you start to save, the easier it is to achieve your goals • Remember the time value of money.

9. Financial Institutions • “Banks” or other deposit-type institutions such as credit unions • Financial institutions that provide traditional checking and savings accounts • Examples: • Commercial banks, credit unions, savings banks, etc.

10. Table 5.1 “Banks” or Deposit-Type Financial Institutions

11. Financial Institutions • Nondeposit-type financial institutions that don’t provide checking and savings accounts • Examples: • mutual fund companies, brokerage firms, insurance companies offer similar services as those offered by banks

12. Table 5.2 Nondeposit-Type Financial Institutions

13. Online Banking • Access to your accounts at any time to: • check balances, • transfer funds, • pay bills, and • view your financial information through the internet, a mobile phone, or other electronic device. • Allows you to choose an internet-only bank.

14. Table 5.3 Online Banking

15. What to Look For in aFinancial Institution- Questions You Should Ask • 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?

16. Cash Management Alternatives Checking Accounts – you can access your funds through written check or debit card • Advantages: • Liquid, Safe, Low minimum balance, Convenient • Disadvantages: little or no interest • Non-interest bearing —demand deposits • Interest bearing —NOW accounts • Disadvantages: minimum balance required, monthly fee, opportunity cost, interest less than alternative savings options

17. Cash Management Alternatives Savings Accounts • Advantages: • Liquid • Safe—federally insured • Earns higher interest than a checking account • Online access • Disadvantages • Possible minimum holding time • Possible charges/fees • Low interest rate

18. Cash Management Alternatives Money Market Deposit Account (MMDA) —alternative to savings account, variable interest rates, check and ATM access. • Advantages: • Safe, earns interest or higher interest, check writing privileges • Disadvantages: • High minimum balances/penalties, interest rates below alternatives

19. Cash Management Alternatives Certificates of Deposit (CD)—pays a fixed rate of interest while funds are on deposit for a set period of time (30 days to several years). • Advantages: • Safe, fixed interest rate, convenient, higher interest rate than other alternatives • Disadvantages: • Early withdrawal penalty, fixed interest rate, minimum deposit required.

20. Cash Management Alternatives Money Market Mutual Funds (MMMFs) —investors receive interest on a pool of investments minus an administrative fee (usually less than 1% of total investment) • Advantages: • Higher interest rates, check writing, limited risk, convenient. • Disadvantages: • Administrative fees, minimum initial investment, not insured, minimum check amount

21. Cash Management Alternatives Asset 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

22. Cash Management Alternatives 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 varies with current rates • Disadvantages: • Low rate of return

23. Cash Management Alternatives • 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.

24. Comparing Cash Management Alternatives • Comparable Interest Rates —use the annual percentage yield (APY) to easily compare. • By law, all financial institutions must declare APY • Tax Considerations —taxes affect the real rate of return on investments.

25. Comparing Cash Management Alternatives • Safety —some deposits are federally insured • FDIC: deposits at commercial banks • Up to $250,000 per depositor • NCUA: deposits at credit unions • Cover at the same rates as FDIC • MMMF: not insured but diversified

26. Establishing and Using a Checking Account • Choosing a financial institution, consider: • Cost • Convenience • Consideration (personal attention) • Safety • Balancing your checking account: • Keep track of every transaction • Compare monthly statement with register, then reconcile register balance with bank balance.

27. Figure 5.1 Worksheet for Balancing Your Checking Account

28. Figure 5.2 Balancing Your Checking Account

29. Other Types of Checks • Cashier’s Check • Certified Check • Money Order • Traveler’s Checks

30. 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

31. Electronic Funds Transfer • Examples: • ATM transactions • Debit card transactions • Smart cards • Stored Value Cards

32. Checklist 5.2

33. 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.

34. 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.