Chapter 5

1. Chapter 5 Cash or Liquid Asset Management

2. The Need for Liquidity • Liquidity offers protection • Provides immediate access to funds • Keeps you from tapping into investments • The reservoir effect • Risks associated with liquid assets • Risk-return trade-off • Higher liquidity means lower returns • Spending risk • Cash on hand is easier to spend

3. Financial Institutions • “Banks” or deposit-type financial institutions • Non-deposit-type financial institutions

4. “Banks” or Deposit-Type Financial Institutions • Commercial banks • Savings and loan associations • Mutual savings banks • Credit unions

5. Non-Deposit-Type Financial Institutions • Mutual funds • Stockbrokerage firms • Pawnshops • Check-cashing outlets

6. What to Look for in a Financial Institution • Services offered • Convenience/location • Safety/deposit insurance • Interest rates • Fees and charges

7. Cash Management Alternatives • Checking accounts • Savings accounts • Money market deposit accounts • Certificates of deposit • Money market mutual funds

8. Cash Management Alternatives (cont’d) • Asset management accounts • U.S. Treasury bills • U.S. Series EE bonds

9. Checking Accounts • Regular checking accounts • Activity accounts • Interest-earning checking accounts (aka NOW accounts) • Review checking account comparison handout

10. Savings Accounts • Two primary types • Passbook accounts • Statement accounts • High accessibility but low return • Low return, reduced further by forced balances or service charges

11. Money Market Deposit Accounts (MMDA) • Offered by commercial banks as an alternative to a “regular” savings account. • Advantages • Higher rates of interest • Limited check writing • Disadvantages • Higher minimum balance requirements • Variable rate of interest

12. Certificates of Deposit (CDs) • Pay a fixed rate of interest for a fixed period of time • Offer higher rates, but sacrifice liquidity • Most have early withdrawal penalties • Very competitive marketing tool • Shop nationally for the best rate

13. Money Market Mutual Funds (MMMFs) • Pool funds from many investors to buy higher priced securities • Historical return rates range from 2% to 17% • Charge an administration fee • Are bought by the share (1 share = 1 dollar) • Most require a $500 to $2,000 minimum investment • Have limited check writing privileges

14. U.S. Treasury Bills • Are short-term, less than 12 months, notes of debt • Are purchased at a discount • Don’t accrue periodic interest payments • Are extremely liquid • Are state and local income tax exempt

15. U.S. Series EE Bonds • Denominations from $50 to $10,000 • Are purchased at half their face value • Liquid, but early withdrawal reduces the return • Rate of interest varies with the market rate • Offer several tax advantages

16. Comparing Cash Management Alternatives • Use comparable interest rates • Consider tax advantages and after-tax return • After-tax return = taxable return (1 – tax rate) • Consider safety • Federal Deposit Insurance Corporation (FDIC) • National Credit Union Association (NCUA) • Money market mutual funds and safety

17. Choosing a Financial Institution • The Three Cs of Banking • Cost • Convenience • Consideration

18. The Cost Factor • Monthly fees • Minimum balance • Charge per check • Balance-dependent scaled fees

19. The Convenience Factor • Location (branches, ATMs) • Safety deposit boxes • Overdraft protection • Stop-payment ability

20. The Consideration Factor • Personal attention • Financial advice • Staffing

21. Balancing Your Checking Account • Keep accurate records • Just Do It! • Follow Worksheet 12

22. Debit Cards • The plastic check • Avoid carrying cash • Avoid carrying a big credit card balance

23. Fixing Errors • Be alert to human and computer errors • Never deposit cash in an ATM • Call the institution that made the error • Write the institution within 60 days of receiving your statement • Write the Federal Reserve Board’s Division of Consumer and Community Affairs