Monetary asset (cash) management encompasses how you handle all of your monetary assets, including cash on hand, checking accounts, savings accounts and certificates of deposit, and money market accounts. The goal is to maximize interest earnings and to minimize fees while keeping funds safe and readily available for livingexpenses, emergencies, and saving and investment opportunities. Successful monetary asset management allows you to earn interest on your money while maintaining reasonable liquidity and safety. Liquidity refers to the speed and ease with which an asset can be converted to cash. Your funds are safe when they are free from financial risk
The Three Tools of Monetary Asset Management
As illustrated in Figure 5.1, monetary asset management relies on three major tools:
- Low-cost, interest-earning checking accounts from which to pay ongoing, current living expenses.
- Interest-earning savings accounts in local financial institutions in which you deposit funds for upcoming expenditures or to accumulate funds for future investments
- Money market accounts in local financial institutions or other financial services.
providers. These accounts pay higher interest rates than checking and savings accounts. They have limited check-writing privileges and, thus, are a cross between a checking and a savings account.
Who Provides Monetary Asset Management Services?
The financial services industry comprises companies that provide monetary asset management and other services. The firms in this industry provide checking, savings, and money market accounts. Quite often they also provide credit, insurance, investment, and financial planning services. These firms include depository institutions such as banks and credit unions, stock brokerage firms, mutual funds, financial services companies, and insurance companies. Table 5.1 matches these various types of firms with the financial products and services that they sell. As you can see, there is considerable overlap among the services they sell. For example, State Farm, which most people recognize as an insurance company, also owns a mutual fund and a bank.
Depository Institutions Depository institutions are organizations licensed to take deposits and make loans. They all can offer some form of government account insurance on their customers’ deposits and are government regulated. They offer a wide range of financial services. Examples of depository institutions are commercial banks, savings banks, and credit unions. Although each is a distinct type of institution, people often call them all simply banks.
Commercial banks are corporations chartered under federal and state regulations. They offer numerous consumer services, such as checking, savings, loans, safe-deposit boxes, investment services, financial counseling, and automatic payment of bills. Accounts in federally chartered banks are insured against loss by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC), which is anagency of the federal government.
Savings banks (or savings and loan associations–S&Ls) focus primarily on accepting savings and providing mortgage and consumer loans. They offer checking services through interest-earning NOW accounts . Savings banks generally pay depositors an interest rate about 0.10 to 0.20 percentage points higher than the rate found at commercial banks. The FDIC insures accounts in all federally chartered savings banks through the FDIC’s Savings Association Insurance Fund (SAIF).
A mutual savings bank (MSB) is similar to a savings bank in that it also accepts deposits and makes housing and consumer loans. These banks are legally permitted in only 17 states, primarily those in the eastern United States. They are called “mutual” because the depositors own the institution and share in the earnings. Generally, MSBs have the FDIC’s BIF coverage. Like savings banks, they offer interest-earning checking accounts to checking customers.
credit union (CU) also accepts deposits and makes loans. Credit unions operate on a not-for-profit basis and are owned by their members. The members/owners of the credit union all share some common bond, such as the same employer, church, trade union, or fraternal association. People in the family of a member are also eligible to join. Federally chartered credit unions have their accounts insured through the National Credit Union Share Insurance Fund (NCUSIF), which is administered by the National Credit Union Administration (NCUA). State-chartered credit unions are often insured by NCUSIF, and most others participate in private insurance programs. Credit unions usually pay higher interest rates and charge lower fees than commercial banks, savings banks, or MSBs.
Deposit Insurance Is a Real Plus Deposits in depository institutions are insured against loss of both the amount on deposit and the accrued interest by various insurance funds. This deposit insurance for your deposits at any one institutio works as follows:
- The maximum insurance on all of your single-ownership (individual) accounts (held in your name only) is $100,000.
- The maximum insurance on all of your joint accounts (accounts held with other individuals) is $100,000.
- The maximum insurance on all of your retirement accounts is $200,000.
- A maximum of $100,000 in insurance per beneficiary is available for “payable on death accounts” (accounts set up so that the funds go to a spouse, child, parent, or sibling upon the death of the account holder).
Thus, individuals might have several increments of insurance for their accounts at any one institution. Funds on deposit at other institutions will also have these same limits. So if you had $80,000 in individual accounts at each of two different institutions, you would have a total of $160,000 of deposit insurance.
Other Financial Services Providers Other providers offer monetary asset management services. Most purchase private insurance to cover potential losses in their monetary asset accounts. No insurance is available for stocks, bonds, and other investment accounts. Mutual funds are investment companies that raise money by selling shares to the public and then invest that money in a diversified portfolio of investments. Most have created mutual fund accounts that can be used for monetary asset management purposes. For example, cash management accounts in mutual funds provide a convenient and safe place to keep money while awaiting alternative investment opportunities. Note that money deposited in a mutual fund is not insured by the federal government, although some mutual fund companies purchase insurance privately for the = noninvestment portions of customers’ accounts.
Stock brokerage firms are licensed financial institutions that specialize in selling and buying stocks, bonds, and other investments. Such firms provide advice and assistance to investors and earn commissions based on the buy and sell orders that they process for their clients. Stock brokerage firms typically offer money market mutual fund accounts (operated by mutual funds) into which clients may place money while waiting to make investments. The noninvestment portion of an account (for example, cash held in the account prior to making an investment) is insured by the Securities Investor Insurance Corporation, a nongovernment entity. Insurance companies provide property, liability, health, life, and other insurance products. Many offer monetary asset services, such as money market accounts. Some also offer vehicle loans and credit cards.
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