HM

Cash management and liquid assets – Key concepts

Cash management and liquid assets

  • Liquid assets: cash, savings, money market accounts, marketable securities; all assets that can be quickly converted to cash with little value loss.
  • Cash management focuses on liquid assets (not just cash) to smooth cash flow, cover short-term needs, and handle unexpected expenses.
  • Even long-term investments can be liquid if traded actively; liquidity depends on market activity (not applicable to some assets like certain crypto).

Why we need liquid assets

  • Provide safety and flexibility for day-to-day living and emergencies.
  • Balance liquid and illiquid assets: liquids generally have lower returns but lower risk; aim for the right amount of liquidity for expected and unexpected expenses.
  • Concept background: there are reasons for a diversified portfolio including a low-risk, liquid component.

Building cash and emergency fund

  • Start early to benefit from the Time Value of Money.
  • Automate savings: deduct from pay before you see it; keep savings separate to reduce spending.
  • Emergency fund guideline: typically three to six months of living expenses; size depends on income and circumstances.
  • Compound interest principle: start earning interest on the interest.

Financial institutions and where to place savings

  • Two broad types of institutions:
    • Banks / deposit-type institutions (transaction accounts, etc.)
    • Non-deposit-type institutions (mutual funds, brokerages, insurance companies)
  • What to look for: available services, safety/credit quality, costs and fees, and historical returns.
  • Safety net: NZ Depositor Compensation Scheme (money protected up to 100{,}000 per institution).

Account types and features

  • Transaction accounts: non- or low-interest; highly liquid; convenient; may offer overdraft.
  • Savings accounts: higher interest than transaction accounts; may require minimum deposits; potential withdrawal limits; possible monthly fees.
  • Term deposits: fixed interest rate for a set term; higher rate than savings but reduced liquidity due to penalties for early withdrawal; FX risks if funds are in foreign currency.

Money market funds and funds

  • Money Market Mutual Funds (MMMFs): invest in high-quality, short-term debt; can buy/sell daily; typically offer higher rates than basic savings; fees may apply; not backed by the Reserve Bank.
  • Examples: Milford Cash Fund; funds held in NZ cash and short-dated debt securities.
  • Key metric: fund unit price and performance (e.g., 1Y return, since inception performance).

Asset management accounts

  • Also known as wealth management accounts; combine banking and brokerage services.
  • Pros: consolidated statements, potential for higher return, convenience.
  • Cons: higher cost, high minimums, not backed by the Reserve Bank.

Government securities

  • Treasury bills: wholesale fixed-term debt securities; typical maturities of 3, 6, or 12 months; advantages: very low risk; disadvantages: low return; traded in secondary market.
  • KiWi Bonds (NZ Debt Management): fixed-rate bonds with various maturities; generally safe but lower liquidity and lower rates; applicable to NZ residents.

Inflation, term deposits, and real returns

  • Inflation trend: rising from 2021, peaking in 2022; 2025 inflation around 2.5%; short-term deposits can show negative real return (nominal rate minus inflation).
  • Longer-term rates may offer positive real returns; markets imply inflation may rise with global headwinds.

Market risks and beta (β)

  • Market types affecting cash-management products: stock markets (β risk relative to a market index), money markets, and FX markets.
  • Beta (β) measures sensitivity to a market index (e.g., NZX40):
    • Chorus: β ≈ 0.8 → 1% NZX40 move → ~0.8% price move in Chorus.
    • THL: β ≈ 1.4 → more volatile than the market.
  • Diversification reduces idiosyncratic risk; portfolios can combine cash, bonds, and equities to target a goal.

Funds and regulation

  • Funds can be actively or passively managed; some are ETFs; funds are offered by regulated providers (e.g., NZ FMA).
  • Funds may include less liquid assets (e.g., property) and are rebalanced to maintain goals.

Rates, comparison, and choosing institutions

  • Use the Effective Annual Rate (EAR) to compare products.
  • Consider tax implications for real-rate return.
  • Compare rate, risk, fees, and accessibility when selecting a financial institution.
  • Aim to have at least two institutions/accounts (one should be a bank) for diversification and safety.

Debit and stored-value cards

  • Debit cards function like a transaction account; allow electronic payments (EFTPOS) and online use.
  • Stored-value/prepaid cards (gift/open-loop) are prepaid; can have activation and maintenance fees; spending is limited to loaded funds.

Fraud, mistakes, and protection

  • Mistakes (e.g., ATM deposits) happen; report errors immediately to the bank.
  • Identity theft signs: unexpected credit approvals, unfamiliar accounts, missing bills, or unexpected debt collectors.
  • Protect identity: monitor credit reports, use secure practices, and act quickly if compromised.

Credit reports and ratings in NZ

  • Agencies: Equifax, Centrix, Illion.
  • Credit reports contain financial history and affect loan terms and rates.
  • Your credit score ranges from excellent to awful; you can obtain a free report online.
  • How to improve score: pay bills on time, keep balances low relative to limits, reduce overall debt, check reports for errors.

Consumer credit and borrowing wisely

  • Sources: family loans, home-equity loans, cash-value life-insurance loans; government student loans; finance companies and credit cards.
  • Avoid expensive options like payday loans; aim to borrow only if benefits exceed costs and repayments fit your budget.
  • Tips for best rates: maintain strong credit, use collateral when appropriate, make large down-payments to reduce financing needs; plan to repay within a few years to minimize interest.
  • Debt limit guideline: total non-mortgage debt should be below ~15% of take-home pay; if above 20%, avoid taking on more debt.

Quick reference: warning signs and tips

  • Warning signs of trouble include min payments, high debt ratios, creditor calls, overdrafts, denied credit, and inability to repay within 4 years.
  • Regularly review credit reports and maintain a budget.

Summary

  • Cash management is about balancing liquidity and return; choose from deposit-type and non-deposit-type options based on safety, liquidity, and cost.
  • Build and maintain an emergency fund, automate savings, and use EAR for comparisons.
  • Use well-known, regulated institutions and maintain good credit hygiene to access favorable terms and protection.