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Discussion Case

Shu Chang, 22, has just moved to Denver to begin her first professional job. She is concerned about her finances and, specifically, wants to save for •a rainy day• and a new car purchase in 2 years. Su's new job pays $30,SOO, of which she keeps $24,000 after taxes. Her monthly expenses total S 1 ,600. 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 inherited $5,000.
Shu's older brother, Wen, has urged Shu to start saving from Nday 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 4 percent money market mutual fund in case it happens again. Wen's annual take-home pay is $48,000.
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 shortterm savings.

Questions

1. 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.

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

3. 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?

4. Comment on Wen's use of liquid assets. How is his savings philosophy both risky and conservative? What is the real, after-tax rate of return, assuming a 3 percent inflation rate and 2S percent marginal tax bracket?

5. Shu has narrowed her usavings• account choices to a standard checking account paying 1.25 percent, a money market deposit account (MMDA) paying 3 percent, and a money market mutual fund (MMMF) earning 3.75 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.

6. 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?

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