Shu Chang, 22, has just moved to Denver to begin her first professional job. She is concerned about her finances; specifically, wants to save for "a rainy day" and a new car purchase in 2 years. Shu's new job pays

$30,500,

of which she keeps

$24,000

after taxes. Her monthly expenses total

$1,400.

Shu's new employer offers a 401(k) plan and matches employees' contributions up to 6 percent of their salary. The employer also provides a credit union and a U.S. Savings Bond purchase program. Shu also just inheirited

$5,000.

Shu's older brother, Wen, has urged Shu to start saving from "day one" on the job. Wen has lost a job twice in the last 5 years through company downsizing and now keeps

$35,000

in a

2

percent money market mutual fund in case it happens again. Wen's annual take-home pay is

$45,600.

Shu has started shopping around for accounts to hold her liquid assets. She'd like to earn the highest rate possible and avoid paying fees for falling below a specified minimum balance. She plans to open two accounts: one for paying monthly bills and another for short-term savings.

a. Name at least three ways that Shu could automate her asset management. Suggest at least one option for retirement savings, general savings, and general convenience.

b. What major factors should Shu consider when selecting a checking and/or savings account?

c. Why does Shu need an emergency fund? Assuming she wants to follow her brother's lead, how much emergency savings should she try to set aside? What type of account would you recommend for her emergency fund?

d. Comment on Wen's use of liquid assets. How is his saving philosophy both risky and conservative? What is the real, after-tax rate of return, assuming a

3

percent inflation rate and a 25 percent marginal tax bracket?

e. Shu has narrowed her "savings" account choices to a standard checking account paying 0.25 percent, a money market deposit account (MMDA) paying 1 percent, and a money market mutual fund (MMMF) earning 1.75 percent. Which liquid asset vehicle would you recommend for paying monthly expenses, and which would you recommend for saving for the car down payment? Explain the advantages and disadvantages associated with each choice.

f. Shu has heard that some local auto dealerships may require a cashier's check for the down payment. Why is a cashier's check preferable to a certified check?

Question content area bottom

Part 1

a. Shu could automate her asset management for retirement savings by:(Select the best answer below.)

A.

participating in the employer-sponsored 401(k) plan, obtaining the employer match of the 401(k) plan contribution, and signing up for the U.S. Savings Bond purchase program.

B.

using direct deposit of her paycheck into a checking/savings account or joining the credit union savings plan.

C.

using direct deposit of her paycheck into Wen's money market mutual fund.

D.

using the ATM at the credit union to cash her check.

Part 2

Shu could automate her asset management for general savings by:(Select the best answer below.)

A.

participating in the employer-sponsored 401(k) plan, obtaining the employer match of the 401(k) plan contribution, and signing up for the U.S. Savings Bond purchase program.

B.

using direct deposit of her paycheck into Wen's money market mutual fund.

C.

using the ATM at the credit union to cash her check.

D.

using direct deposit of her paycheck into a savings account or authorizing automated money market mutual fund or CD deposits.

Part 3

Shu could automate her asset management for general convenience by: (Select the best answer below.)

A.

participating in the employer-sponsored 401(k) plan, obtaining the employer match of the 401(k) plan contribution, and signing up for the U.S. Savings Bond purchase program.

B.

using the ATM at the credit union to cash her check.

C.

using direct deposit of her paycheck into Wen's money market mutual fund.

D.

using direct deposit of her paycheck into a checking/savings account or joining the credit union savings plan.

Part 4

b. When selecting a checking and/or savings account, Shu should consider:(Select all that apply.)

A.

Consideration (personal attention, services provided, etc.).

B.

Cost (fees, minimum balances, per-check charges, etc.).

C.

Convenience (location, availability of specific services, etc.).

D.

Contribution (percentage from employer, brother, etc.).

E.

Cash (maximum amount you can withdraw from the ATM, etc.).

Part 5

c. Shu should keep an emergency fund because:(Select the best answer below.)

A.

without an emergency fund, Shu might have to borrow funds to handle an emergency (e.g., use of credit cards) or liquidate a long-term investment at an inopportune time.

B.

without an emergency fund, Shu cannot participate in her employer's 401(k) plan.

C.

without an emergency fund, Shu will have to quit her new job and move back home with her parents.

D.

without an emergency fund, Shu will not be doing what her older brother told her to do.

Part 6

Assuming she wants to follow her brother's lead, Shu's emergency fund should have between

$enter your response here

and

$enter your response here.

(Round to the nearest dollar.)

Part 7

d. Wen's after-tax monthly income is

$enter your response here.

(Round to the nearest dollar.)

Part 8

To be conservative, if Wen's monthly expenses are equal to his after-tax monthly income, his emergency fund should be between

$enter your response here

and

$enter your response here.

(Round to the nearest dollar.)

Part 9

Wen's real, after-tax rate of return on his money market mutual fund is

enter your response here%.

(Enter as a percentage and round to two decimal places.)

Part 10

Since Wen's real, after-tax rate of return on his money is zero, Wen should:(Select the best answer below.)

A.

reinvest the excess money (anything over the amount needed for three months of expenses) in a higher-yielding asset designed to be compatible in maturity with one of his financial goals.

B.

leave the excess money (anything over the amount needed for six months of expenses) in the account in case he needs emergency money for more than six months.

C.

reinvest the excess money (anything over the amount needed for six months of expenses) in a higher-yielding asset designed to be compatible in maturity with one of his financial goals.

D.

reinvest the excess money (anything over the amount needed for three months of expenses) in a low-yielding asset designed to mature in 25 years.

Part 11

e. For handling monthly expenses, Shu's options include a standard checking account, a bank money market deposit account, and a money market mutual fund. All of these accounts have advantages and disadvantages. MMDAs have a limit of six

checks

deposits

investments

per month, and MMMFs have

minimum

maximum

dollar requirements on

check

deposit

investment

amounts, which makes

both

neither

only one

of these accounts very suitable for paying monthly bills. However, the basic checking account does not generate a very

high

low

return. For short-term savings, typically

liquidity is more important than return

liquidity is equal in importance to return

liquidity is less important than return

;

therefore,

the lowest cost, most flexible

the highest cost, most flexible

the lowest cost, least flexible

the highest cost, least flexible

account

would be best for her monthly expense account.(Select from the drop-down menus.)

Part 12

Regarding Shu's choice of accunts available to save for her car,

either

neither

of the money market accounts would provide

less

more

return without sacrificing accessibility.

Either

Neither

the minimum check amount

nor

or

the monthly check writing limitation is of consequence given that she will theoretically be making only one withdrawal - at the time of purchase. So choosing the

highest

lowest

yielding account would be best.(Select from the drop-down menus.)

Part 13

f. Cashier's checks can be preferable to certified checks because:(Select the best answer below.)

A.

they are purchased from a bank and drawn on the bank's funds. Whereas a certified check is a check drawn on your next paycheck and the institution "certifies" that the check is good by issuing a letter stating that you are a good customer. There can be instances, though very rare, that the institution, probably due to an account closure, may not honor a certified check.

B.

they are purchased from a bank and drawn on the bank's funds. Whereas a certified check is a check drawn on your account and the institution "certifies" that the check is good by placing a hold on your account for that specific check amount. There can be instances, though very rare, that the institution, probably due to an account closure, may not honor a cashier's check.

C.

they are purchased from a bank and drawn on the bank's funds. Whereas a certified check is a check drawn on your account and the institution "certifies" that the check is good by placing a hold on your account for that specific check amount. There can be instances, though very rare, that the institution, probably due to an account closure, may not honor a certified check.

D.

they are purchased from a store and drawn on the store's funds. Whereas a certified check is a check drawn on your account and the institution "certifies" that the check is good by placing a hold on your account for that specific check amount. There can be instances, though very rare, that the institution, probably due to an account closure, may not honor a certified check.