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AAEC 2104, Week 7: Cash Management

by: Mara DePena

AAEC 2104, Week 7: Cash Management AAEC 2104

Mara DePena
Virginia Tech
GPA 3.62

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About this Document

These notes go over cash management, including where to keep your money, comparing different accounts, institutions, types of checks, etc.
Personal Financial Planning
Dr. White
Class Notes
cash, Management, cash management, Money, accounts, institutions, checks, commercial banks, savings, Loans, Credit, unions, online, deposit, brokerage, firms, liquidity
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This 5 page Class Notes was uploaded by Mara DePena on Sunday March 6, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 27 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.

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Date Created: 03/06/16
AAEC 2104 CASH MANAGEMENT LIQUIDITY VS. SAVINGS  Liquidity- rapid cash needs o Regular bills and expenses o Enough to meet your usual needs  Savings- emergency needs o Unexpected expenses and situations o 3-6 months of living expenses o Your financial safety net CASH MANAGEMENT  Build your checking account o Enough money to meet your needs o Need to know your monthly budget o Direct deposit of paycheck into checking  Then, build your emergency funds o Automatic savings  From checking account o Replenish as necessary  Then, use cash to pay down debts, invest, spend on yourself, donate, etc. WHERE TO KEEP YOUR MONEY  In cash- not recommended  Checking account (demand deposit) o Non-interest bearing o Interest bearing  Savings account (time deposit)  Money market deposit accounts o Similar to a savings account  Variable rate of return, usually slightly higher  May have higher minimum balances and limits on withdrawals  Certificates of Deposit (CDs) o Loan to a bank at stated interest rate and maturity o Early withdrawal penalties o Good place to park your money until you decide o Laddering your CDs  Nice way to manage emergency funds  Invest in a series of differing maturities  Renew each CD for the longest maturity o You do not want your retirement accounts invested in CDs o A simple CD ladder- $4000  $1000 in a 3-month CD  $1000 in a 6-month CD  $1000 in a 9-month CD  $1000 in a 1-year CD  Every 3 months you have CDs maturing. Renew them all for 1 year maturity.  In theory, higher returns for longer maturities  Laddering provides higher average returns  Money Market Mutual Funds (MMMF) o Mutual fund investing in very safe debt instruments o May have limited check-writing abilities o Fees involved- usually less than 1% of the investment o Not insured, but relatively safe o Slightly higher return than money market and checking and savings  Best place to keep your money would be either savings accounts or CDs  Asset Management Accounts o AKA sweeps account o Comprehensive financial account  Checking, credit card, money market, mutual funds, loans o More aggressive account, higher fees and minimum balances o Not insured o Little bit higher risk, little bit higher return o At the end of every day they take your money and try to invest it elsewhere to earn some return. Then put your money back in with what they earned.  US Series EE Bonds (AKA Savings Bonds) o Very safe, low return, low liquidity o Relatively horrible investments o Various denominations ($50-$10,000) o Not taxed at the state level o Electronic version- pay face vale o Get the face value and accrued interest at maturity  Get reduced amount if sold before maturity o Don’t keep up with inflation o Tax-exempt earnings if used for education expenses o Usually need to hold on for 15-20 years COMPARING DIFFERENT ACCOUNTS  Compare on equal footing (after tax basis).  Rate of return o Annual Percentage Yield (APY)  Allows comparison of accounts with different compounding methords o After tax APY = pre tax APY x (1-Marginal tax bracket (MTB)) o Ex: A pays 6% return, 25% tax  6% x (1 - .25) = 4.5% o B pays 4%, tax exempt  4% x (1-0) = 4%  Safety o FDIC or FSLIC- insurance. Up to $250,000 per depositor o May take a while to get your money o MMMFs- Not insured, but fairly safe  Look at convenience, fees, customer service, etc. INSTITUTIONS  Commercial banks o Full service, many locations o Online banking  Convenience vs. fees  Savings and Loans and Savings Banks o Primarily home loans (70%) and savings accounts  Credit unions o Member owned o Not for profit- profits go to shareholders o Usually higher rates of return, lower interest rates o Usually slower with technology  Online deposit accounts o Look for reliable companies o Primarily savings accounts o May be linked to credit card accounts o Drawbacks  Time to access your funds  Fees  Brokerage firms o Asset management (sweeps) account o May have deposit accounts, credit/debit cards o Don’t get one of these straight out of college WHAT TO LOOK FOR IN AN INSTITUTION  Services and products o Ones you need/want  Safety o Track record o Insurance  Fees and charges  Convenience and customer service CHECKING ACCOUNT  Opening an account o Look at:  Fees  Monthly, per-check, online banking, overdraft, minimum balance  Minimum balances  Operating hours and locations  ATMs  Customer service  Using o Deposit paycheck and other funds  Direct deposit  Keep receipts from ATM deposits o Write checks as needed  Date, payee, amount, memo, signature o Record in your check register o Online banking  Faster, easier, schedule your payments/savings  Fees? o Don’t bounce checks! Fees will get ya!  Balancing your check book o In checkbook register, mark off al deposits and checks that have cleared o Take ending balance from monthly statement o Subtract any checks that haven’t cleared o Adjusted balance = checkbook balance o If you take the difference between your adjusted balance and what is in your account and divide it by 9, if it comes out as an even number you most likely just mixed up a number. OTHER TYPES OF CHECKS  Cashier’s check o From a bank or financial institution. o Very safe. o Write a check to the bank plus a fee o They pay the check out of their funds  Certified check o Personal check guaranteed by the bank  Money order o Purchased at post office, convenience stores  Traveler’s check o Specific denomination o Safe, replaceable o Booklet of checks that are smaller denominations OTHER FORMS OF CASH MANAGEMENT  Electronic fund transfers o ATMs o Debit cards  Smart cards and stored value cards o Money is transferred to an account “on the card” o Use it like a debit card until the funds are gone  May be able to add more funds to the account o Single purpose vs. multi purpose o Pre-paid phone cards, gift cards, Hokie Passport  May be limited to where it can be used CASH MANAGEMENT TIPS  Budget, budget, budget  Track your expenses  Shop smart o Use a list, coupons, comparison shop  Use checks until you learn your spending habits o Takes time, slows you down, creates paper trail o Record your expenses, balance your account  Cash, debit cards, and smart cards are sneaky o Tend to spend more than if using checks


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