1. Cash or Liquid Asset Management
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 Electronic fund transfers
cost
convenience
consideration
Electronic fund transfers
automated teller machines
debit cards
smart cards
automated bill payment