© 2013 pearson education, inc. all rights reserved.5-1 chapter 5 cash or liquid asset management
TRANSCRIPT
© 2013 Pearson Education, Inc. All rights reserved. 5-1
Chapter 5
Cash or Liquid Asset
Management
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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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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 aFinancial 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
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
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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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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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.
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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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Table 5.5 Overdraft Protection and New Rules for Debit and ATM Cards