5-1 Chapter 5 Cash or Liquid Asset Management

5-2 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.

5-3 Managing 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 = ???

5-4 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.

5-5 Financial Institutions “Banks” or Deposit-type financial institutions—Financial institutions that provide traditional checking and savings accounts Commercial banks, credit unions, savings banks, etc.

5-6 Table 5.1 “Banks” or Deposit- Type Financial Institutions

5-7 Financial Institutions Nondeposit-type financial institutions— mutual fund companies, brokerage firms, insurance companies offer similar services as those offered by banks.

5-8 Table 5.2 Nondeposit-Type Financial Institutions

5-9 Online Banking Access to your accounts to: –check balances –transfer funds –paying bills –view your financial information through the internet, a mobile phone, or other electronic device. Allows you to choose an internet-only bank.

5-10 Table 5.3 Online Banking

5-11 What to Look For in a Financial 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?

5-12 Cash Management Alternatives Checking Accounts Advantages Non-interest bearing—demand deposits Interest bearing—NOW accounts

5-13 Cash Management Alternatives Savings Accounts Advantages Disadvantages

5-14 Cash Management Alternatives Money Market Deposit Account (MMDA) —alternative to savings account, variable interest rates, check and ATM access. Advantages Disadvantages

5-15 Cash Management 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 Disadvantages

5-16 Cash Management Alternatives Money Market Mutual Funds (MMMFs) — investors receive interest on a pool of investments less an administrative (usually less than 1% of total investment) Advantages Disadvantages

5-17 Cash Management Alternatives Asset Management Account—a comprehensive financial services package (checking account, credit card, MMFs, etc.) offered by a brokerage firm. Advantages Disadvantages

5-18 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 Disadvantages

5-19 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 Disadvantages

5-20 Comparing Cash Management Alternatives Comparable Interest Rates—use the annual percentage yield (APY) to easily compare. Safety—some deposits are federally insured (currently $250,000 per depositor per insured bank) –FDIC deposits at commercial banks –NCUA deposits at credit unions –MMMF—not insured but diversified

5-21 Table 5.4 Different Cash Management Alternatives

5-22 Establishing and Using a Checking Account Choosing a financial institution, consider: –Cost –Convenience –Consideration –Safety Balancing your checking account: –Keep track of every transaction –Compare monthly statement with register, then reconcile register balance with bank balance.

5-23 Checklist 5.1

5-24 Figure 5.1 Worksheet for Balancing Your Checking Account

5-25 Figure 5.2 Balancing Your Checking Account

5-26 Other Types of Checks Cashier’s Check Certified Check Money Order Traveler’s Checks

5-27 Electronic Funds Transfer (EFT) Any financial transaction that takes place electronically. Advantages Disadvantages

5-28 Electronic Funds Transfer Examples: –ATM transactions –Debit card transactions –Smart cards –Stored Value Cards

5-29 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.

5-30 Checklist 5.2

5-31 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.

5-32 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.

5-33 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

5-34 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.

5-35 Table 5.5 Overdraft Protection and New Rules for Debit and ATM Cards