Pesonal finance 6th madura chapter 06 mananing your money

Background on Money Management 2 of 2– Using credit cards for liquidity  Interest rate usually high  Maintaining adequate liquid assets allows you to avoid using credit cards and payin

Chapter Objective

6.1 Provide a background on money management

6.2 Describe the most popular money market

Background on Money Management (1 of 2)

over a short-term period regarding cash inflows

and outflows

deficiencies that you may experience

– Related to your personal cash flow statement

Background on Money Management (2 of 2)

– Using credit cards for liquidity

 Interest rate usually high

 Maintaining adequate liquid assets allows you to avoid using credit cards and paying high finance charges

 Try to achieve highest possible returns on short-term investments

Money Market Investments (1 of 11)

– Very liquid investment

– Overdraft protection: an arrangement that protects a

customer who writes a check for an amount that exceeds the checking account balance; it is a short- term loan from the depository institution where the checking account is maintained

 Saves overdraft fees and bounced checks

 Results in high interest rate on borrowed amount

Money Market Investments (2 of 11)

– Stop payment: a financial institution’s notice that it will

not honor a check if someone tries to cash it; usually occurs in response to a request by the writer of the check

– Direct deposit – paychecks go directly to your financial

institution

– Fees – vary from institution to institution

Money Market Investments (3 of 11)

type of deposit offered by depository institutions that provides checking services and pays interest

– Requires a minimum balance, lowering liquidity

liquid than checking accounts

– Automatic transfer feature can help saving

Money Market Investments (4 of 11)

– Liquidity—penalties are imposed for early withdrawal

Money Market Investments (5 of 11)

deposit offered by a depository institution that

requires a minimum balance, has no maturity

date, pays interest, and allows a limited number of checks to be written each month

– Less liquid than checking, but pays a higher interest

rate

day-to-day and a money market for other funds

Money Market Investments (6 of 11)

U.S Treasury

maturities of one year or less

– Return—purchased at a discount; result in capital gains– Secondary market: a market where existing securities

such as Treasury bills can be purchased or sold

– Quotations – prices online and in financial news

publications

Money Market Investments (7 of 11)

money from individuals and invest in securities

that have a short-term maturity

– Typically less than 90 days

– Commercial paper: short-term debt securities issued by

large corporations that typically offer a slightly higher return than Treasury bills

 Found in financial newspapers and online

Money Market Investments (8 of 11)

EXHIBIT 6.1 Weekly Money Market Fund Yields

Fund Average Maturity 7-Day Yield Assets (millions of $)

Financial Planning Online (1 of 3)

www.federalreserve.gov

Money Market Investments (9 of 11)

combines deposit accounts with a brokerage

account and provides a single consolidated

statement

sweeps any unused balance in the brokerage account into a money market investment at the end of each

business day

Money Market Investments (10 of 11)

EXHIBIT 6.2 Comparison of Money Market Investments

Money Market Investment Advantages Disadvantages

Checking account Very liquid No interest

NOW account Very liquid Low interest rate; minimum balance required

Certificate of deposit (CD) Relatively high interest rate Less liquid

Treasury bill Relatively high interest rate High minimum purchase

Money market fund (MMF) Liquid Not as liquid as checking or NOW accounts Asset management

Money Market Investments (11 of 11)

Risk of Money Market Investments (1 of 3)

may not repay on a timely basis

investment could decline as a result of a change in interest rates

a result of converting an investment into cash

Financial Planning Online (2 of 3)

the personal finance section containing calculators

you can accumulate over time with different

interest rates in taxable or nontaxable accounts adjusted for inflation

Risk of Money Market Investments (2 of 3)

liquidity needs

– Weak economic conditions can create liquidity

problems

 Job loss

 Fewer hours worked

 Poor returns on investments

– This could be a time to allocate more funds to liquid

investments

Risk of Money Market Investments (3 of 3)

Risk Management (1 of 3)

making investment decisions

from credit risk

credit risk since they may hold commercial paper

Risk Management (2 of 3)

market investments

− Anticipate upcoming bills and have adequate funds in

your checking account

− Estimate additional funds needed in near future and

invest in a liquid investment

− Use remaining funds in a way that will maximize your

return, considering your risk tolerance

Risk Management (3 of 3)

investments have been low

– Resist temptation of reduce these investments in favor

of stocks

to provide easy access to funds

Financial Planning Online (3 of 3)

of investments are insured and what types are not

Optimal Allocation of Money Market Investments

How Money Management Fits Within

Your Financial Plan (1 of 4)

financial plan are:

bills on time?

– How can you maintain adequate liquidity in case you

incur unanticipated expenses?

money market investments?

How Money Management Fits Within Your Financial Plan (2 of 4)

EXHIBIT 6.6 How Money Management Fits Within Stephanie Spratt’s Financial Plan

GOALS FOR MONEY MANAGEMENT

1 Maintain sufficient liquidity to ensure that all anticipated bills are paid on time.

2 Maintain sufficient liquidity in case I incur unanticipated expenses.

3 Invest any excess funds in accounts that offer the highest return while ensuring adequate liquidity.

ANALYSIS

Amount Payment Method

Monthly cash inflows $2,500 Direct deposited into checking account.

Typical monthly expenses 1,400 Make payments to pay these bills.

Other expenses for clothing or

recreation 600 Use credit cards and then pay the credit cardbalance by check once a month.

How Money Management Fits Within

Your Financial Plan (3 of 4)

EXHIBIT 6.6 How Money Management Fits Within Stephanie Spratt’s Financial Plan

cover the $1,400 in anticipated bills each month I can also use this account

to write a check for the monthly credit card bill I will attempt to leave about

$400 extra in the checking account because my expenses may vary from month to month.

How Money Management Fits Within

Your Financial Plan (4 of 4)

EXHIBIT 6.6 How Money Management Fits Within Stephanie Spratt’s Financial Plan

Decision on How to Ensure Liquidity to Cover Unanticipated

Expenses:

The two paychecks I will also attempt to maintain about $2,500 in a money market fund (MMF) in case I need additional funds I can earn interest on this money while ensuring liquidity.

Decision on How to Invest Remaining Funds to Achieve the Highest Return While Enhancing Liquidity:

As I accumulate additional savings, I will invest in certificates of deposit with short terms to maturity (such as one month) This money will not be as

liquid as the MMF, but it will be accessible when the CD matures The