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  1. 1. Chapter 6 Managing Your Money
  2. 2. Chapter Objectives <ul><li>Provide a background on money management </li></ul><ul><li>Describe the most popular money market investments </li></ul><ul><li>Identify the risk associated with money market investments </li></ul><ul><li>Explain how to manage the risk of your money market investments </li></ul>
  3. 3. Background on Money Management <ul><li>Money management: a series of decisions made over a short-term period regarding cash inflows and outflows </li></ul><ul><li>Liquidity: your ability to cover any cash deficiencies that you may experience </li></ul><ul><ul><li>Related to your personal cash flow statement </li></ul></ul>
  4. 4. Background on Money Management <ul><li>Adequate return </li></ul><ul><ul><li>Dependent upon the risk-free rate the the level of risk you are willing to tolerate </li></ul></ul><ul><ul><li>Usually should consider multiple investments with varied returns and levels of liquidity </li></ul></ul>
  5. 5. Money Market Investments <ul><li>Checking Account — also called demand deposit account </li></ul><ul><ul><li>Enables you to track spending </li></ul></ul><ul><ul><li>Overdraft protection: an arrangement that protects a customer who writes a check for an amount that exceeds the checking account balance </li></ul></ul><ul><ul><ul><li>Saves overdraft fees and bounced checks </li></ul></ul></ul><ul><ul><ul><li>Results in high interest rate on borrowed amount </li></ul></ul></ul>
  6. 6. Money Market Investments <ul><ul><li>Stop payment: a financial institution’s notice that it will not honor a check if someone tries to cash it </li></ul></ul><ul><ul><li>Fees such as monthly service charges, per check charges </li></ul></ul><ul><ul><li>No interest — regular checking accounts don’t pay interest </li></ul></ul>
  7. 7. Money Market Investments <ul><li>NOW (negotiable order of withdrawal) account: a type of deposit offered by depository institutions that provides checking services and pays interest </li></ul><ul><ul><li>Requires a minimum balance, lowering liquidity </li></ul></ul><ul><li>Savings deposits pay interest and are slightly less liquid than checking accounts </li></ul>
  8. 8. Money Market Investments <ul><li>Certificate of Deposit </li></ul><ul><ul><li>Retail CDs: certificates of deposit that have small denominations </li></ul></ul><ul><ul><li>Return — CDs pay higher interest rates than savings deposits </li></ul></ul><ul><ul><li>Liquidity — penalties are imposed for early withdrawal </li></ul></ul><ul><ul><li>Choice among CD maturities </li></ul></ul>
  9. 9. Financial Planning Online: Deposit Rates Offered by Banks <ul><li>Go to: </li></ul><ul><li>This Web site provides information on the highest interest rates offered on deposits by banks across the United States as well as in you specific city. </li></ul>
  10. 10. Money Market Investments <ul><li>Focus on Ethics: Risky Deposit Rates </li></ul><ul><ul><li>While CDs with especially high deposit rates sound appealing, they probably carry greater risk </li></ul></ul><ul><ul><li>Ask if they are insured by the FDIC </li></ul></ul><ul><ul><li>If an investment sounds too good to be true, it probably is! </li></ul></ul>
  11. 11. Money Market Investments <ul><li>Money Market Deposit Account (MMDA): a 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 </li></ul><ul><ul><li>Less liquid than checking, but pays a higher interest rate </li></ul></ul>
  12. 12. Money Market Investments <ul><li>Treasury securities: debt securities issued by the U.S. Treasury </li></ul><ul><ul><li>Treasury bills (T-bills): Treasury securities with maturities of one year or less </li></ul></ul><ul><ul><li>Return — purchased at a discount; result in capital gains </li></ul></ul><ul><ul><li>Secondary market: a market where existing securities such as Treasury bills can be purchased or sold </li></ul></ul>
  13. 13. Money Market Investments <ul><li>Money Market Funds (MMFs): accounts that pool money by individuals and invest in securities that have a short-term maturity </li></ul><ul><ul><li>Typically less than 90 days </li></ul></ul><ul><ul><li>Commercial paper: short-term debt securities issued by large corporations that typically offer a slightly higher return than T-bills </li></ul></ul>
  14. 14. Money Market Investments Exhibit 6.1: Weekly Money Market Fund Yields Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved.
  15. 15. Money Market Investments <ul><li>Asset Management Account: an account that combines deposit accounts with a brokerage account and provides a single consolidated statement </li></ul><ul><li>Comparison of money market investments </li></ul><ul><ul><li>Tradeoff between expected return and degree of liquidity </li></ul></ul>
  16. 16. Money Market Investments Exhibit 6.2 Comparison of Money Market Investments
  17. 17. Money Market Investments Exhibit 6.3: Comparison of the Liquidity and Returns of Money Market Instruments
  18. 18. Financial Planning Online: Impact of Different Deposit Rates on Your Wealth <ul><li>Go to: sellingtools /calculators </li></ul><ul><li>Click on: “Savings,” then “How much of a difference will the rate make?” </li></ul><ul><li>This Web site provides estimates of future savings at different deposit rates. </li></ul>
  19. 19. Risk of Money Market Investments <ul><li>Credit risk: the risk that a borrower may not repay on a timely basis (default risk) </li></ul><ul><li>Interest rate risk: the risk that the value of an investment could decline as a result of a change in interest rates </li></ul><ul><li>Liquidity risk: the potential loss that could occur as a result of converting an investment into cash </li></ul>
  20. 20. Risk Management of Money Market Investments <ul><li>Risk assessment of money market investments </li></ul><ul><ul><li>Most money market investments are federally insured </li></ul></ul><ul><ul><li>Treasury securities are nearly risk free </li></ul></ul><ul><ul><li>Remember the relationship between risk and return </li></ul></ul>
  21. 21. Financial Planning Online: Identifying Insured Investments <ul><li>Go to: </li></ul><ul><li>Click on: Project Money $mart, then “Different Bank Products-What’s Insured and What’s Not” </li></ul><ul><li>This Web site identifies the investments that are backed by the U.S. government. </li></ul>
  22. 22. Risk Management of Money Market Investments <ul><li>Determining the optimal allocation of money market investments </li></ul><ul><ul><li>Anticipate upcoming bills and have adequate funds in your checking account </li></ul></ul><ul><ul><li>Estimate additional funds needed in near future and invest in a liquid investment </li></ul></ul><ul><ul><li>Use remaining funds in a way that will maximize your return, considering your risk tolerance </li></ul></ul>
  23. 23. Optimal Allocation of Money Market Investments Exhibit 6.4: How Liquidity Is Affected by Anticipated Expenses
  24. 24. How Money Management Fits Within Your Financial Plan <ul><li>Key money management decisions for your financial plan are: </li></ul><ul><ul><li>How can you ensure that you can pay your anticipated bills on time? </li></ul></ul><ul><ul><li>How can you maintain adequate liquidity in case you incur unanticipated expenses? </li></ul></ul><ul><ul><li>How should you invest any remaining funds among money market investments? </li></ul></ul>
  25. 25. Integrating Key Concepts
  26. 26. Integrating Key Concepts <ul><li>Part 1: Financial Planning Tools </li></ul><ul><li>Part 2: Liquidity Management </li></ul><ul><ul><li>In Chapter 5 we learned about banking and interest rates </li></ul></ul><ul><ul><li>In Chapter 6 we learned about managing your money </li></ul></ul><ul><ul><li>Chapter 7 teaches about managing your credit </li></ul></ul><ul><li>Part 3: Financing </li></ul><ul><li>Part 4: Protecting Your Wealth </li></ul><ul><li>Part 5: Investing </li></ul><ul><li>Part 6: Retirement and Estate Planning </li></ul>