Cashflow management

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  • 1. Financial Planning Process Establish and define the relationship Gather data and determine goals Evaluate and analyze the clients situation Develop recommendations and alternatives Financial Planning Assignment

2. Financial Statements Current assets & current liabilities Reinvested interest and dividends Including employer retirement contributions as plannedsavingsAnd 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 canpay bills during the summer $667 is withheld for 403(b) contribution & employermatches that with an additional $667 Sets aside $500/month for down payment on car topurchase in 2 years & $700/month for childrenseducation in 10 years 4. Spending plansLiquid assets and savings strategiesCredit management and debt reductionHousing decisions and financingCash Management Topics 5. Set goals Project cash inflow and outflow Record inflow and outflow (including purchases madeusing credit) Compare and analyze Adjust (inflows, outflows, and/or goals)Spending Plans 6. What is Your Money Personality?Desire to create wealthWillingness to take risk HoarderAchieverEntrepreneur Thrill seeker 7. Liquid Assets & Savings StrategiesSaving for: Goals Emergencies 8. Saving for Goals What do you want? How much do you need tosave 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 tocalculate annual/monthlysavings needed 9. Emergency Funds Funds to fall back on if youbecome ill or disabled andcant work, or if you or your spouse lose your job, incurlarge medical bills, or have an unexpected large bill such as a major car or home repair. 10. Keep from reducing assets for othergoals or increasing liabilities.Not to be used for major risks thatinsurance can coverPurpose of Emergency Fund 11. SizeHow much should a client have in anemergency fund?3 to 6 months is the rule of thumbBased on Income or Expenses?What are the considerationsregarding size? 12. Sizedepends on things like: Personal Financial Situation Risk Tolerance Demographic characteristics Health Job Stability and Outlook 13. Liquidity- ability to quickly convert an assets to cashwith little to no uncertainty in value Marketability- ease of buying or selling an asset for itsmarket value Investing the Money 14. Financial StatementsRank order the following from most to least liquid. Stock mutual fund Real estate Certificate of Deposit (CD) Money Market Account/Mutual Fund Savings AccountFinancial 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 $100,000over the past 6 years ($95,000 this year) Both are moderately risk tolerant They manage to pay all bills (including CC balancesmonthly) 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 theyallocate to their emergency fund? 18. How would you recommend theyaccomplish 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 toleranthow would this change your emergency fundrecommendation? 20. Benchmark3 to 6 months?Trade-offs Liquid Funds earn lower returns Liquidation Costs for Non-Liquid Assets Emergency Fund StrategyLayered Emergency Fund Money Market Account/Fund Laddered CDs / Bonds / T-Bills Lines of Credit Securities 21. LadderingYour grandmother has $90,000 she wants tokeep in a CD at a localbank; however, she wouldlike the highest returnpossible and she needsthe money for short-term emergencies. Her onlyother cash is $10,000 in a money market deposit account. What do yourecommend? 22. Investing the Money Divide the money into 4 accounts of $22,500 each.Invest in: $22,5003-month CD $22,5006-month CD $22,5009-month CD $22,50012-month CD As each CD matures, roll it into a new 12-month CD 23. LADDERINGEarn a higher rate of return without jeopardizing thenumber of months of income protection Rate of ReturnTerm2.5% CD 412 months2.0%CD39 months1.5%CD26 months1.0%CD13 months 1.75%Average 24. Systematic savings strategiesSavings instrumentsChecking instruments 25. Develop a Systematic Plan Set Goals To determine an appropriateemergency fund To determine how much to save To guide you on what types ofaccounts to use Develop a strategy that works Start earlybut its only too late ifyou dont start now 26. Apply to banks, S&Ls , mutual savings banks, and creditunions only (and MMMFs until December 2013) Apply only to deposit accounts (not annuities, etc. soldby one of the above institutions) $250,000/institution/legal ownership (throughDecember 2013then back to $100,000 for everythingexcept retirement accounts) FDIC Insurance 27. Mark and Mary Anderson have the following accounts atone Lubbock bank. Under the FDIC protection, how muchof their money is insured?CD in Marks name only: $150,000CD in Marks name only: $200,000Money Market Account in Marys name:$100,000Joint checking: $5,000Joint savings:$298,000 28. FDICMax and Sandra Smith have the following balances at theFirst National Bank in their local community. Assuming thisbank is a federally insured institution, how much of theirINSUREDfunds are covered by federal deposit insurance?--joint checking$125,000--joint money market account$180,000--individual CD in Maxs name $125,000--individual CD in Sandras name$245,000--IRA in Sandras name (5-year CD)$175,000--joint stock mutual fund shares$227,000 29. IndividualJoint tenancy (or)Tenancy in common (and)Account Ownership 30. Savings & share accounts Certificates of deposit (CD) Money market accounts (MMA orMMDA) Money market mutual funds(MMMF) US Treasury bills (T-bill) US EE savings bonds US I bonds (inflation-indexed bonds) Savings Instruments