Cash or Liquid Asset Management 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 risk-return trade-off -- higher liquidity means lower returns spending risk -- cash on hand is easier to spend

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

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

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

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.

Non-deposit-type Financial Institutions Mutual funds Stockbrokerage firms

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.

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

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

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

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

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

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

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

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)

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

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

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

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

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

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

The Consideration Factor Personal attention Financial advice

Balancing Your Checking Account Just Do It! Follow Worksheet 12

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

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

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

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

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

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.

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.

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

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

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