Cash Management

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Cash Management

• Effective Management of all Your Monetary Assets

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Goal of Cash Management

• (1)Maximize interest earnings
• (2)Minimize cost
• (3)Maintaining adequate financial reserves for
  daily living expenses, emergencies, savings and
  contributions to investment programs.

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Cash Equivalent Accounts

• Savings Accounts
• Checking Accounts
• Money Market Accounts
• Other Short Term Investments

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Cash Equivalent Accounts

• Maintain constant or nearly constant value
• Have liquidity
• Safety

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Four Tools of Cash Management

• Checking Accounts interest earning
• Savings Accounts
• Money Market
• Low risk longer term savings such as CDs and
  Government bonds

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Providers of Cash Management Services

• Depository Institutions provide both deposit and
  lending accounts
• Commercial Banks
• Savings Loan Associations
• Mutual Savings Banks
• Credit Unions

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Providers of Cash Management Services

• Mutual Funds, Brokerage Firms Financial
  Services Companies
• Mutual Fund is an investment company that invests
  the funds it raises from selling shares to the
  public. Not Insured.
• Stock brokerage firms sell stocks, bonds, etc.
  Insured but NOT for investment losses.

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Providers of Cash Management Services

• Financial Services Companies offer a wide range
  of financial services including deposit and
  lending services. Called quasi-banks or nonbank
  banks. They accept deposits or make loans but
  not both. (Not Insured against loss)
• Examples
• Prudential Securities
• Fidelity Investments

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Electronic Banking

• Direct Deposit
• Netbank.com
• Checkfree.com
• ATM
• Debit Cards
• Smart Cards Stored Value Cards
• Electronic Benefits Cards

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Account Ownership

• Individual Ownership sole owner
• Joint Tenancy with Rights of Survivorship
• Tenancy in Common
• Tenancy by the Entirety

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Insurance on Accounts

• FDIC Banks
• NCUSIF- National Credit Union Share Insurance
  Fund
• SAIF Savings Association Insurance Fund
• Amount
• 100,000 per Social Security number per financial
  institution

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Cash Management Tool 1

• Interest Earning Checking Accounts (demand
  deposits)
• Special no minimum deposit, monthly fee
• Regular minimum deposit, no interest, no fees
• Lifeline banking account basic banking account
  income/net worth tested
• Interest bearing NOW

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Checking Account Fees

• Per check and monthly service charge
• Minimum balance accounts
• Average balance account
• Account exception fees
• Stop payment
• Bounced checks

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Endorsing a Check

• Blank endorsement
• Special endorsement
• Restrictive endorsement

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Other Types of Checks

• Travelers Checks
• Money Orders
• Certified Checks
• Cashiers Check

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Cash Management Tool 2

• Savings Accounts
• Interest rates are typically .10 to .25 higher
  than those paid on NOW accounts
• Time deposits
• Rule that savers give 30 to 60 days notice for
  withdrawals
• Fixed-time deposits (6 months or more)

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Interest on Savings Accounts

• Determined by
• Amount of money on deposit
• Method of determining balance
• Interest rate
• Frequency of compounding
• Truth in Savings (APY) Annual Percentage Yield

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Cash Management Tool 3

• Money Market Accounts
• Provide the opportunity for higher rates of
  interest.
• .5 to 1.5 percentage points higher than those
  paid on NOW checking accounts

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Cash Management Tool 3

• Super NOW Accounts
• Minimum deposits of 2,000 - 5,000 required
• Higher interest than checking account
• Minimum balance required
• Limits on number of checks allowable

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Cash Management Tool

• Money Market Deposit Accounts
• Requirements similar to Super NOW (higher rate,
  minimum deposit required, minimum balance
  required, limits on number of withdrawals)
• Plus tiered interest rates are used depending on
  account balance

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Cash Management Tool

• Money Market Funds
• Offered through mutual funds not insured
• Provides opportunity for higher interest
• Minimum deposit of 1,000 - 2,000
• Number of withdrawals limited and the amount of
  withdrawals are limited

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Cash Management Tool

• Asset Management Account
• One account with various components
• Checking account,
• Money market funds
• One stop shopping opportunity for cash
  management
• All activity on one monthly statement

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Cash Management Tool 4

• Long Term, Low Risk Savings Instruments
• Fixed- time deposits
• Pays highest interest rate of all cash management
  tools

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Certificates of Deposits

• Purchased in specific denominations (100, to
  100,000)
• Usually fixed rate of return (based on amount and
  time)
• Usually insured
• Penalties for early withdrawal

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Problem

• Purchased a 5000 CD for 4 at 13 months,interest
  penalty is 1 qtr interest. After 6 months
  interest increases to 6. Should you keep the CD
  or take penalty and purchase CD at 6?

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Check interest rates

• Magazines
• Kiplingers Personal Finance
• Money
• Websites
• www.bankrate.com

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Solution

• 5000 (/-) PV
• 4/12 I
• 13 N
• FV 5,221.05

• 5,000 (/-) PV
• 4/12 I
• 3 N
• FV 5,050.17
• 5,050.17 (/-) PV
• 6/12 I
• 7 N
• FV 5,229.59

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Savings Bonds

• Series EE Bonds (discount) sold at 50 of face
• Variable interest rates, maturity date is
  estimated (17 years max)
• Series HH Bonds
• No longer sold. As of Sept 1, 2004, can not be
  purchased by redeeming EE Bonds. Pay interest 2
  times per year.
• Series I Bonds
• Sold at discount, interest rate tied to CPI
• www.savingsbonds.gov

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Problem

• Twins Barbara and Mary are both age 22. Barbara
  begins investing 2,000 per year for 8 years then
  stops. Mary at age 32 begins investing 2,000
  per year for 33 years. Assuming they both earn
  8, how much money will each have at age 65?

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Twins

• Barbara
• Pmt - 2,000
• N 8
• I 8
• FV 21,273
• PV 21,273
• I 8
• N 35
• FV 314,529

• Mary
• Pmt - 2,000
• N 33
• I 8
• FV 291,901

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Problem

• You want a college fund of 30,000 for a child
  who is now 3 years old. You need the money in 15
  years. If you can get 7 return, how much must
  you invest now?

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Solution

• FV - 30,000
• N 15
• I 7
• PV - 10,873

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Problem

• You plan to retire in 22 years. You set aside
  6,000 per year beginning this year. If you can
  get 7 return, how much will you have in your
  retirement fund when you retire?

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Solution

• Pmt - 6,000
• N 22
• I 7
• FV 294,034

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Retirement

• I want to retire in 5 years. I need 4,000 per
  month to live on. I plan to live 20 more years.
  How much money will I need in a retirement fund,
  if I can get 5 per year on it?

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Solution

• Pmt 4,000 per month
• N 12 x 20
• I 5 12
• PV 606,101