Cash or Liquid Asset Management Chapter 5 Cash or Liquid Asset Management

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.

Managing Liquid Assets Cash management—the management of cash and near cash (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 and low return but the more cash your have, the more you’re tempted to spend.

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.

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

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?

Cash Management Alternatives Checking Accounts Advantages: Liquid, Safe, Low minimum balance, Convenient Non-interest bearing—demand deposits Interest bearing—NOW accounts Disadvantages: minimum balance required, monthly fee, opportunity cost, interest less than alternatives

Cash Management Alternatives Savings Accounts Advantages: Liquid Safe—federally insured Earns higher interest than a Checking Account Disadvantages Minimum holding time Charges/fees Low interest rate Inconvenient

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: Safe, fixed interest rate, convenient. Disadvantages: Early withdrawal penalty, fixed interest rate, minimum deposit required.

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 vary with current rates. Disadvantages: Low rate of return

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.

Table 5.4 Different Cash Management Alternatives

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.

Checklist 5.1

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

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.

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

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.

Table 5.5 Overdraft Protection and New Rules for Debit and ATM Cards