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

dont manage liquid funds effectively.

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Managing Liquid Assets

Cash managementthe management of cash

and near cash (liquid) assets.

Making choices from among alternatives,

maintaining and managing the results of those choices. easily be converted into cash.

Liquid assetscash and investments that can

Low risk and low return but the more cash

your have, the more youre tempted to spend.

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Automating Savings: Pay Yourself First

Have savings automatically deducted from

your paycheckpay 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 goalstime 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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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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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
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Cash Management Alternatives

Savings Accounts Advantages:
Liquid Safefederally

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 (MMMFs) - 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
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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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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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Other Types of Checks

Cashiers Check Certified Check Money Order Travelers Checks

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Electronic Funds Transfer (EFT)

Any financial transaction that takes place

electronically.

Advantages:
Transactions take place immediately. Dont 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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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 thats actually stored magnetically on the card. credit card.

Perform the same services as a debit or

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 MistakesTheirs, 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. occur immediately and avoid use of cash or check.
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Electronic funds transfer transactions

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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