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Cashflow management

  1. • Financial Planning Process • Establish and define the relationship • Gather data and determine goals • Evaluate and analyze the client’s situation • Develop recommendations and alternatives Financial Planning Assignment
  2. Financial Statements • Current assets & current liabilities • Reinvested interest and dividends • Including employer retirement contributions as planned savings And what is the definition of savings anyway? Financial Planning Assignment
  3. Professor Solis  Earns $100,000 for 9 mos./paid over 9 mos. or $11,111/mos.  Has $2,775 automatically transferred to MMA so can pay bills during the summer  $667 is withheld for 403(b) contribution & employer matches that with an additional $667  Sets aside $500/month for down payment on car to purchase in 2 years & $700/month for children’s education in 10 years
  4. Spending plans Liquid assets and savings strategies Credit management and debt reduction Housing decisions and financing Cash Management Topics
  5. • Set goals • Project cash inflow and outflow • Record inflow and outflow (including purchases made using credit) • Compare and analyze • Adjust (inflows, outflows, and/or goals) Spending Plans
  6. What is Your Money Personality? Desire to create wealth Willingness to take risk Hoarder Achiever Entrepreneur Thrill seeker
  7. Liquid Assets & Savings Strategies Saving for: • Goals • Emergencies
  8. Saving for Goals • What do you want? • How much do you need to save to get it? • Do you have funds already set aside? • How soon do you want it? • How much can you earn on savings/investments? • Use time value of money to calculate annual/monthly savings needed
  9. Emergency Funds Funds to fall back on if you become ill or disabled and can't work, or if you or your spouse lose your job, incur large medical bills, or have an unexpected large bill such as a major car or home repair.
  10. Keep from reducing assets for other goals or increasing liabilities. Not to be used for major risks that insurance can cover Purpose of Emergency Fund
  11. Size How much should a client have in an emergency fund? 3 to 6 months is the rule of thumb Based on Income or Expenses? What are the considerations regarding size?
  12. Size depends on things like: • Personal Financial Situation • Risk Tolerance • Demographic characteristics • Health • Job Stability and Outlook
  13. • Liquidity- ability to quickly convert an assets to cash with little to no uncertainty in value • Marketability- ease of buying or selling an asset for its market value Investing the Money
  14. Financial Statements Rank order the following from most to least liquid…. • Stock mutual fund • Real estate • Certificate of Deposit (CD) • Money Market Account/Mutual Fund • Savings Account Financial Planning Assignment
  15. What rate of return do you expect to earn on an emergency fund? tehome.asp?params=US,416&product=160 tehome.asp?params=US,416&product=14
  16. Jack and Sarah Thompson  Jack (age 30), Sarah (29), married, no kids  Jack is a teacher earning $30,000/year  Sarah is a pharmacy rep. earning $20,000 to $100,000 over the past 6 years ($95,000 this year)  Both are moderately risk tolerant  They manage to pay all bills (including CC balances monthly) and are saving regularly ($20,000 this year)  They currently have $35,000 in retirement accounts, $25,000 in equity MFs, & $3,000 in savings accounts.
  17. How much would you recommend they allocate to their emergency fund?
  18. How would you recommend they accomplish that allocation? Reallocate assets? Regular savings? Use of lines of credit? Use of investment asset?
  19. What if… • They adopt twins • Both of their salaries are more stable? Closer to equal? • They are very risk tolerant …how would this change your emergency fund recommendation?
  20. Benchmark—3 to 6 months? Trade-offs • Liquid Funds earn lower returns • Liquidation Costs for Non-Liquid Assets Emergency Fund Strategy Layered Emergency Fund • Money Market Account/Fund • Laddered CDs / Bonds / T-Bills • Lines of Credit • Securities
  21. Laddering Your grandmother has $90,000 she wants to keep in a CD at a local bank; however, she would like the highest return possible and she needs the money for short-term emergencies. Her only other cash is $10,000 in a money market deposit account. What do you recommend?
  22. Investing the Money • Divide the money into 4 accounts of $22,500 each. Invest in:  $22,500—3-month CD  $22,500—6-month CD  $22,500—9-month CD  $22,500—12-month CD • As each CD matures, roll it into a new 12-month CD
  23. LADDERING “Earn a higher rate of return without jeopardizing the number of months of income protection…” Rate of Return Term 2.5% CD 4 12 months 2.0% CD3 9 months 1.5% CD2 6 months 1.0% CD1 3 months 1.75% Average
  24. Systematic savings strategies Savings instruments Checking instruments
  25. Develop a Systematic Plan • Set Goals  To determine an appropriate emergency fund  To determine how much to save  To guide you on what types of accounts to use • Develop a strategy that works • Start early…but it’s only too late if you don’t start now
  26. • Apply to banks, S&Ls , mutual savings banks, and credit unions only (and MMMFs until December 2013) • Apply only to deposit accounts (not annuities, etc. sold by one of the above institutions) • $250,000/institution/legal ownership (through December 2013—then back to $100,000 for everything except retirement accounts) FDIC Insurance
  27. Mark and Mary Anderson have the following accounts at one Lubbock bank. Under the FDIC protection, how much of their money is insured? CD in Mark’s name only: $150,000 CD in Mark's name only: $200,000 Money Market Account in Mary’s name: $100,000 Joint checking: $5,000 Joint savings: $298,000
  28. FDIC Max and Sandra Smith have the following balances at the First National Bank in their local community. Assuming this bank is a federally insured institution, how much of their INSURED funds are covered by federal deposit insurance? --joint checking $125,000 --joint money market account $180,000 --individual CD in Max's name $125,000 --individual CD in Sandra’s name $245,000 --IRA in Sandra's name (5-year CD) $175,000 --joint stock mutual fund shares $227,000
  29. Individual Joint tenancy (“or”) Tenancy in common (“and”) Account Ownership
  30. • Savings & share accounts • Certificates of deposit (CD) • Money market accounts (MMA or MMDA) • Money market mutual funds (MMMF) • US Treasury bills (T-bill) • US EE savings bonds • US I bonds (inflation-indexed bonds) Savings Instruments