Chapter 5. Cash Management: Funds for Immediate Needs

Transcription

1 Chapter 5. Cash Management: Funds for Immediate Needs Chapter Focus Cash management involves examining liquidity needs and evaluating savings deposits options for meeting these needs. sound cash management strategy must determine the appropriate amount of cash to hold, in what form, and in which financial institution. More over, it requires establishing an adequate level of liquidity while minimizing cash balances. Major Topics Meeting Cash Needs Deposit Options Using Your Checking ccount Understanding How Your ccount Earns Interest Cash Management Strategy Cash Management Strategy Considers the Following Factors How Much Cash Should You Hold? In What Form? In What Kind of Financial Institutions? How Much Cash? Depending on Needs Undertake transactions Pocket money for small transactions Checking account for large transactions If you often use cash, then you need to have more. Emergency reserves Planners recommend months of after-tax tax income Store of Value Saving for a major purchase Waiting for investment environment to improve How much in this category will depend on the investment environment. ent. Bottom line: Emergency reserve is the most important one. So 3-66 months after tax income as cash is a good idea. In What Form? - Deposit Options Checking ccounts Regular: no interest NOW ccount (negotiated order of withdrawal): interest earning, low rate though Savings ccounts No check writing privileges Low interest rate (passbook rate)

2 Money Market Deposit ccounts Savings accounts with interest rate tied to money market rate of interest, usually slightly higher than regular savings account. Limited access to account (e.g. 6 transfers a month) Minimum balance requirement Rates are often lower than rates available on CDs or Money Market Mutual Funds-- --SHOP ROUND! Money Market Mutual Funds Offered by banks and mutual funds Minimum balance requirement Differ in terms of investments each makes-- --read the Prospectus Check writing privileges (not suitable for small amount checks) NOT FEDERLLY INSURED! But their safety record has been excellent Certificates of Deposit (CDs) vailable in many maturities Usually offer the highest rates for cash deposits But, they have early withdrawal penalties Offered by most financial institutions, including credit unions Series EE Savings Bonds Issued by the U.S. treasury Rates change with market conditions Issued in discount form e.g. You pay $50 for a $100 bond Tax deferred until bonds are sold Sold by financial institutions Free of state and local income taxes Free of federal income tax if used for child s education (income limitation) Summary of Deposit Options Using Your Checking ccount Deposit Regular checking Savings NOW Money market deposit Money market mutual fund Certificate of deposit (CDs) vailability C Safety to C Liquidity to B C Yield F D Selecting a bank Geographic convenience Services and charges Interest rates Check out a bank Website for services, charges, and interest rates Check out a credit union Website for services, charges, and interest rates Series EE bonds & I bonds B

3 Checking ccount Procedures Check insurance status is offered by many financial institutions Commercial Banks (FDIC) Savings ssociations (SIF) Credit Unions (NCU) Insurance at any one institution is $100,000 per depositor, not per deposit Opening an account Click to see an online application If married, consider Joint ccount with Right of Survivorship (WROS) Making additional deposits and endorsing checks Blank endorsement Maria J. Garcia Restrictive endorsement For deposit only, Maria J. Garcia Special endorsement Pay to the order of Sharon Steele, Maria J. Garcia Writing checks Use duplicated checks Bouncing a check (overdraft) Check bouncing fee can be expensive Consider overdraft protection Stop check order Fee involved End-of of-month ctivities Bank reconciliation Sort checks numerically, look for checks that have not cleared Note any deposits not yet recorded by the bank Deduct service charges from your account balance; dd any interest if your account earns interest Prepare end-of of-month reconciliation Filing and storage Checks That Guarantee Payment Certified check Bank verifies that your account has sufficient funds to cover the check Cashiers check Sold by financial institutions Convenient for people without checking accounts Traveler s s check Purchased from a bank usually when a payer is traveling away from home Electronic Banking utomated teller machines (TMs) Electronic funds transfer systems (EFTS)

4 Understanding How Your ccount Earns Interest Compounding issue Most banks use either daily compounding or continuous compounding (similar to daily compounding) Determine the balance that earns interest Day of Deposit to Day of Withdrawal (generally, the most favorable to savers) Minimum Balance Fist In, First Out (FIFO) Last In, First Out (LIFO) Day of Deposit to Day of Withdrawal Method ccount ctivity: Interest Calculation: $1,000 x 30/360 x 0.06 = $5.00 plus $2,000 x 30/360 x 0.06 = $10.00 plus $1,100 x 30/360 x 0.06 = $5.50 Total = $20.50 Minimum Balance Method FIFO METHOD ccount ctivity: Interest Calculation: $1,000 x 90/360 x 0.06 = $15.00 Total = $15.00 ccount ctivity: Interest Calculation $100 x 90/360 x 0.06 = $1.50 plus $1,000 x 60/360 x 0.06 = $10.00 Total = $11.50 LIFO Method Cash Management Strategy ccount ctivity: Interest Calculation $1,000 x 90/360 x 0.06 = $15.00 plus $100 x 60/360 x 0.06 = $1.00 Total = $16.00 Resolve the question: Will interest rates increase, decrease, or stay the same over the upcoming planning period? Obtain yield information on deposit accounts that appeal to you llocate your liquid funds among the accounts to satisfy your preferences for yield, safety, and liquidity

5 Please Check Out These Websites For up-to to-date interest rate information see Bankrate.com Check out information on U.S. Saving bonds at roducts.htm For information on U.S. banks, check out merican Bankers ssociation website. ssignment for Chapter 5 Examine your cash reserve. Does the reserve meet the expert recommendation of months of after-tax tax income? In what form is your cash reserve? Find out the interest rate and interest calculation methods of all the cash deposit accounts you have. Study the fee structure of your bank or credit Union.