Keown_PF5_CH05

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Cash or Liquid
Asset Management
Learning Objectives
1. Manage your cash and understand why
you need liquid assets.
2. Automate your savings.
3. Choose from among the different types of
financial institutions that provide cash
management services.
4. Compare the various cash management
alternatives.
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Learning Objectives
5. Compare rates on the different liquid
investment alternatives.
6. Establish and use a checking account.
7. Transfer funds electronically and
understand how electronic funds transfers
(EFTs) work.
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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.
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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.
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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.
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Financial Institutions
 “Banks” or Deposit-type financial
institutions – Financial institutions that
provide traditional checking and savings
accounts
 Commercial banks, credit unions, savings
banks, etc.
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Table 5.1
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Financial Institutions
 Nondeposit-type financial institutions –
mutual fund companies, brokerage firms,
insurance companies offer similar services
as those offered by banks.
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Table 5.2
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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.
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Table 5.3 Online Banking
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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?
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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
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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
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Cash Management Alternatives
Money Market Deposit Account (MMDA)
– alternative to savings account, variable
interest rates, check and ATM access.
 Advantages:
 Safe, Earns interest, Check writing privileges
 Disadvantages:
 High minimum balances/penalties, interest
rates below alternatives
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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.
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Cash Management Alternatives
Money Market Mutual Funds (MMMF’s)
- investors receive interest on a pool of
investments less an administrative (usually
less than 1% of total investment)
 Advantages:
 High interest rates, check writing, limited risk,
convenient.
 Disadvantages:
 Administrative fees, minimum initial
investment, not insured, minimum checks.
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Cash Management Alternatives
Asset Management Account - a
comprehensive financial services package
(checking account, credit card, MMFs, etc)
offered by a brokerage firm.
 Advantages:
 Monthly statements, coordination of money
management, checks, high return, convenient.
 Disadvantages:
 Costly, minimum initial investment, not insured.
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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
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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.
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Comparing Cash Management
Alternatives
 Comparable Interest Rates – use the annual
percentage yield (APY) to easily compare.
 Tax Considerations – taxes affect the real
rate of return on investments.
 Safety – some deposits are federally insured
 FDIC deposits at commercial banks
 NCUA deposits at credit unions
 MMMF – not insured but diversified
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Table 5.4 Different Cash Management Alternatives
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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.
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Checklist 5.1
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Figure 5.2
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Figure 5.3
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Other Types of Checks
 Cashier’s Check
 Certified Check
 Money Order
 Traveler’s Checks
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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
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Electronic Funds Transfer
 Examples:
 ATM transactions
 Debit card transactions
 Smart cards
 Stored Value Cards
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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.
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Checklist 5.2
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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.
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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.
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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
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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.
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Summary
 Cash management is balancing the risk of
not having enough in liquid assets with the
potential for greater return on other
investments.
 Automatically save some of your income
and learn to live on take-home income.
 Choose cash management alternatives
from among deposit-type and nondeposittype institutions.
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Summary
 Compare various cash management
alternatives.
 Compare their rates, return, and safety.
 With checking accounts look into cost,
convenience, consideration, and safety.
 Electronic funds transfer transactions occur
immediately and avoid use of cash or
check.
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All rights reserved. No part of this publication may be reproduced,
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