© 2013 Pearson Education, Inc. All rights reserved.5-1 Chapter 5 Cash or Liquid Asset Management.

© 2013 Pearson Education, Inc. All rights reserved. 5-1

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 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?


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



Savings Accounts• Advantages:

• Liquid• Safe—federally insured• Earns higher interest than a Checking Account

• Disadvantages• Minimum holding time• Charges/fees• Low interest rate• Inconvenient



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.



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



• 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

© 2013 Pearson Education, Inc. All rights reserved.5-1 Chapter 5 Cash or Liquid Asset Management.

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