Transcript Textbook PowerPoints

Chapter 5
Cash or Liquid
Asset
Management
5-1
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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.
5-2
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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.
5-3
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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.
5-4
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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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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
5-7
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Cash Management Alternatives
Savings Accounts
• Advantages:
• Liquid
• Safe—federally insured
• Earns higher interest than a Checking Account
• Disadvantages
•
•
•
•
5-8
Minimum holding time
Charges/fees
Low interest rate
Inconvenient
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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.
5-9
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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
5-10
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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.
5-11
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Table 5.4
Different Cash
Management
Alternatives
5-12
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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.
5-13
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Checklist 5.1
5-14
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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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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.
5-16
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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.
5-18
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Table 5.5
Overdraft
Protection
and New
Rules for
Debit and
ATM Cards
5-19
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