AAEC 2104, Week 7: Cash Management
AAEC 2104, Week 7: Cash Management AAEC 2104
Popular in Personal Financial Planning
Popular in Agricultural & Resource Econ
verified elite notetaker
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.
Reviews for AAEC 2104, Week 7: Cash Management
Report this Material
What is Karma?
Karma is the currency of StudySoup.
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