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Chapter 5

Chapter 5. Cash or Liquid Asset Management. The Need for Liquidity. Liquidity offers protection enables you to have immediate access to funds keeps you from tapping into investments The reservoir effect Risks associated with liquid assets

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Chapter 5

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  1. Chapter 5 Cash or Liquid Asset Management

  2. The Need for Liquidity • Liquidity offers protection • enables you to have immediate access to funds • keeps you from tapping into investments • The reservoir effect • Risks associated with liquid assets • risk-return trade-off -- higher liquidity means lower returns • spending risk -- cash on hand is easier to spend

  3. Automate Savings: Pay Yourself First, Just Do It! • Payroll deductions • Account alternatives • Time value of money • Automatic deposit

  4. Financial Institutions • “Banks” or deposit-type financial institutions • Non-deposit-type financial institutions

  5. “Banks” or Deposit-type Financial Institutions • Commercial banks • Savings and loan associations • Savings banks • Credit unions

  6. On-Line Banking and “Net” Banks • On-line banking offers account access via personal computer; convenience at a fee. • “Net” banks are electronic banks that pay more for deposits, but have no local branch.

  7. Non-deposit-type Financial Institutions • Mutual funds • Stockbrokerage firms

  8. What to Look for in a Financial Institution • Kind of services provided. • Safety of your money. • Cost of achieving your financial goals. • Type of personal relationship provided. • Note: You should probably use more than one financial institution to take advantage of each one’s strengths.

  9. Cash Management Alternatives • Checking accounts • Savings accounts • Money market deposit accounts • Certificates of deposit • Money market mutual funds

  10. Cash Management Alternatives (cont’d) • Asset management accounts • U.S. Treasury bills • U.S. Series EE bonds

  11. Checking Accounts • Demand deposits -- non-interest bearing accounts • Negotiable order of withdrawal (NOW) accounts -- interest bearing accounts • Forced balances and opportunity costs • Fees associated with checking accounts

  12. Savings Accounts • Passbook accounts • Statement accounts • “Passbook” versus statement • Low return, reduced further by forced balances or service charges

  13. Money Market Deposit Accounts (MMDA) • Alternative to a commercial bank’s savings account • Advantages • higher rates of interest • limited check writing • Disadvantages • higher minimum balance requirements • variable rate of interest

  14. Certificates of Deposits (CDs) • Pay a fixed rate of interest for a fixed period of time • Offer higher rates, but sacrifice liquidity • Have early withdrawal penalties • Very competitive marketing tool • Shop nationally

  15. Money Market Mutual Funds (MMMFs) • Pool funds from many investors to buy higher priced securities • Offer return rates from 2% to 17% • Charge an administration fee • Are bought by the share • Most require a $500 to $2,000 minimum investment • Have limited check writing privileges

  16. Asset Management Accounts • Offer comprehensive financial services • checking accounts and credit cards • money market mutual funds • loans • brokerage services • overdraft protection • Automatically control cash flows • Have higher annual fees ($50 to $125)

  17. U.S. Treasury Bills • Are short-term, less-than 12 months, notes of debt • Are purchased at a discount • Don’t accrue periodic interest payments • Are extremely liquid • Are state and local income tax exempt

  18. U.S. Series EE Bonds • Denominations from $25 to $10,000 • Are purchased at half their face value • Liquid, but early withdrawal reduces the return • Rate of interest varies with the market rate • Offer several tax advantages

  19. Comparing Cash Management Alternatives • Use comparable interest rates • Consider tax advantages and after-tax return • Consider safety • Federal Deposit Insurance Corporation (FDIC) • National Credit Union Association (NCUA) • Money market mutual funds and safety

  20. Choosing a Financial Institution • The Three Cs of Banking • The cost factor • The convenience factor • The consideration factor

  21. The Cost Factor • Monthly fees • Minimum balance • Charge per check • Balance-dependent scaled fees

  22. The Convenience Factor • Location (branches, ATMs) • Safety deposit boxes • Overdraft protection • Stop-payment ability

  23. The Consideration Factor • Personal attention • Financial advice

  24. Balancing Your Checking Account • Just Do It! • Follow Worksheet 12

  25. Other Types of Checks • Cashier’s check • Certified check • Money order • Traveler’s check

  26. Electronic Fund Transfers (EFTs) • Automated bill payment • Automated teller machines • Debit cards • Smart cards

  27. Automated Teller Machines • Be careful with your PIN • Fees -- $1.00 to $5.00 per transaction • Security • Liability -- limited to $50 if you notify the holding institution within 24 hours

  28. Debit Cards • The plastic check • Avoid carrying cash • Avoid carrying a big credit card balance

  29. Smart Cards • Money is stored electronically on the card • Have similar usage as debit cards • Limit owner liability if stolen because the card doesn’t access an account • Examples -- Kinkos, some universities, some grocery stores

  30. Fixing Errors • Be alert to human and computer errors. • Never deposit cash in an ATM. • Call the institution that made the error. • Write the institution within 60 days of receiving your statement. • Write the Federal Reserve Board’s Division of Consumer and Community Affairs.

  31. Summary • Cash management balances the need for liquid assets and emergency funds with the potential for greater return from other investments. • Automate savings to meet your goals.

  32. Summary (cont’d) • Types of financial institutions • “banks” or deposit-type financial institutions • non-deposit-type financial institutions • Compare liquid investment alternatives using • return • safety • compounding methods • tax advantages

  33. Summary (cont’d) • Cash management accounts • checking accounts • savings accounts • money market deposit accounts • certificates of deposit • money market mutual funds • asset management accounts • U.S. Treasury bills • U.S. Series EE bonds

  34. Summary (cont’d) • The three C’s of banking • cost • convenience • consideration • Electronic fund transfers • automated teller machines • debit cards • smart cards • automated bill payment

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