Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balance requirement. Her monthly income is $4,200. Alexis has a “target” cash balance of around $1,200, and whenever it exceeds that amount she transfers the excess into her savings account, which currently pays 2.0% annual interest. Her current savings balance is $15,000, and Alexis estimates she transfers about $500 per month from her checking account into her savings account. Alexis doesn’t waste any time in paying her bills, and her monthly bills average about $2,000. Her monthly cash outlay for food, gas, and other sundry items totals about $850. Reviewing her payment habits indicates that on average she pays her bills 9 days early. At this time, most marketable securities are yielding about 4.75% annual interest.
- What can Alexis do regarding the handling of her current balances?
Alexis should transfer $1200 balance showing in checking account to saving account. He can also invest $15000 of saving account balance in marketable securities which is earning 2.75% more than saving account.
- What do you suggest that she do with her monthly surpluses?
As there is no limit of minimum balance in checking account therefore there is no need to keep a target balance of $1200 and all surplus which is around 4200-2850 = $1350 into saving account as the saving account has enough balance of $15000 therefore there should be no problem in withdrawing money from saving account. If Alexis is able to take more risk he can invest the surplus in marketable securities which is earnings 2.75% more than saving account.
- What do you suggest Alexis do about the manner in which she pays her bills?
He should not pay the bill 9 days early, by paying on time he can save around 2000*.02*9/365 = $0.98 per month and if invested in marketable securities the saving can be of = 2000*.0475*9/365 = $2.34 per month.
- Can Alexis grow her earnings by better managing her cash balances? Show your work.
At present the Alexis are earnings on monthly basis:
Saving account 15000*.02/12 = 25
Monthly deposit of $500 *.02/12= .83
Monthly earnings=25.83
If all 15000+1200 = 16200 invested in market able securities and put all surplusesof 1350 in marketable securities, earnings can be:
Earnings on 16200*.0475/12 = $64.13
On 1350 *.0475/12 = $5.34
Add saving of 9 days for bill =
2000*.09*.0475/365 =$2.34
Total monthly earnings can be = 71.81
The new strategy shows earnings for $71.81 which is higher than $25.83 being earned at present.
Urgency: HIGH