Chapter Focus Chapter Focus Chapter 5. Cash Chapter 5. Cash � Cash management involves examining Cash management involves examining � liquidity needs and evaluating savings deposits liquidity needs and evaluating savings deposits Management: Funds for Management: Funds for options for meeting these needs. A sound cash options for meeting these needs. A sound cash management strategy must determine the management strategy must determine the Immediate Needs Immediate Needs appropriate amount of cash to hold, in what appropriate amount of cash to hold, in what form, and in which financial institution. More form, and in which financial institution. More over, it requires establishing an adequate level over, it requires establishing an adequate level of liquidity while minimizing cash balances. of liquidity while minimizing cash balances. A Cash Management Strategy A Cash Management Strategy Major Topics Major Topics Considers the Following Factors Considers the Following Factors � Meeting Cash Needs Meeting Cash Needs � How Much Cash Should You Hold? How Much Cash Should You Hold? � � � Deposit Options Deposit Options � In What Form? In What Form? � � � Using Your Checking Account Using Your Checking Account � In What Kind of Financial Institutions? In What Kind of Financial Institutions? � � � Understanding How Your Account Earns Understanding How Your Account Earns � Interest Interest � Cash Management Strategy Cash Management Strategy � How Much Cash? How Much Cash? – – Depending Depending In What Form? - In What Form? - Deposit Deposit on Needs on Needs Options Options � Undertake transactions Undertake transactions � Checking Accounts Checking Accounts � � � Pocket money for small transactions Pocket money for small transactions � � Regular: no interest Regular: no interest � � Checking account for large transactions Checking account for large transactions � � NOW Account (negotiated order of withdrawal): NOW Account (negotiated order of withdrawal): � If you often use cash, then you need to have more. If you often use cash, then you need to have more. � � interest earning, low rate though interest earning, low rate though � Emergency reserves Emergency reserves � � Planners recommend 3 Planners recommend 3- -6 months 6 months’ ’ of after of after- -tax income tax income � � Federal deposit insurance Federal deposit insurance � � Store of Value Store of Value � � Savings Accounts Savings Accounts � � Saving for a major purchase Saving for a major purchase � � Waiting for investment environment to improve Waiting for investment environment to improve � No check writing privileges No check writing privileges � � � How much in this category will depend on the investment environm How much in this category will depend on the investment environment. ent. � � Low interest rate (passbook rate) Low interest rate (passbook rate) � � Bottom line: Emergency reserve is the most important one. So Bottom line: Emergency reserve is the most important one. So � � Federal deposit insurance Federal deposit insurance 3- -6 months 6 months’ ’ after tax income as cash is a good idea. after tax income as cash is a good idea. � 3
� Money Market Deposit Accounts Money Market Deposit Accounts � � Money Market Mutual Funds Money Market Mutual Funds � � Savings accounts with interest rate tied to money Savings accounts with interest rate tied to money � � Offered by banks and mutual funds Offered by banks and mutual funds market rate of interest, usually slightly higher than market rate of interest, usually slightly higher than � regular savings account. regular savings account. � Minimum balance requirement Minimum balance requirement � � Limited access to account (e.g. 6 transfers a month) Limited access to account (e.g. 6 transfers a month) � � Differ in terms of investments each makes Differ in terms of investments each makes-- --read read � � Federal deposit insurance Federal deposit insurance � the Prospectus the Prospectus � Minimum balance requirement Minimum balance requirement � � Check writing privileges (not suitable for small Check writing privileges (not suitable for small � � Rates are often lower than rates available on CDs or Rates are often lower than rates available on CDs or � amount checks) amount checks) Money Market Mutual Funds-- --SHOP AROUND! SHOP AROUND! Money Market Mutual Funds � NOT FEDERALLY INSURED! But their safety NOT FEDERALLY INSURED! But their safety � record has been excellent record has been excellent � Series EE Savings Bonds Series EE Savings Bonds � � Certificates of Deposit (CDs) Certificates of Deposit (CDs) � Issued by the U.S. treasury Issued by the U.S. treasury � � � Available in many maturities Available in many maturities � Rates change with market conditions Rates change with market conditions � � � Issued in discount form Issued in discount form— — e.g. You pay $50 for e.g. You pay $50 for � Usually offer the highest rates for cash deposits Usually offer the highest rates for cash deposits � � a $100 bond a $100 bond � But, they have early withdrawal penalties But, they have early withdrawal penalties � � Tax deferred until bonds are sold Tax deferred until bonds are sold � Offered by most financial institutions, including Offered by most financial institutions, including � � � Sold by financial institutions Sold by financial institutions credit unions credit unions � � Free of state and local income taxes Free of state and local income taxes � � Free of federal income tax if used for child Free of federal income tax if used for child’ ’s s � education (income limitation) education (income limitation) Summary of Deposit Options Summary of Deposit Options Using Your Checking Account Using Your Checking Account Deposit Deposit Availability Availability Safety Safety Liquidity Liquidity Yield Yield � Selecting a bank Selecting a bank � � Geographic convenience Geographic convenience � Regular checking Regular checking A+ A+ A+ A+ A+ A+ F F � Services and charges Services and charges � Savings Savings A+ A+ A+ A+ B+ B+ D D � Interest rates Interest rates � NOW NOW A A A+ A+ A+ A+ B B- - � Check out a Check out a bank Website bank Website for services, charges, and for services, charges, and Money market deposit Money market deposit C C A+ A+ B+ B+ B B- - � interest rates interest rates Money market mutual fund Money market mutual fund B+ B+ A to C A to C A+ to B A+ to B B B- - � Check out a Check out a credit union Website credit union Website for services, charges, for services, charges, � and interest rates and interest rates Certificate of deposit (CDs) Certificate of deposit (CDs) A A A+ A+ C C A A Series EE bonds & I bonds A A+ B B+ Series EE bonds & I bonds A A+ B B+
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