Bermuda Financial Fundamentals Review Part 3 – Cash, Foreign Currency, Credit, and Money Market Mutual Funds.

Bermuda is a small island, 21 square miles, with a resident/ guest worker population of approximately 60,000. Insignificant in size, significant in global financial stature, Bermuda has had its own coinage for more than four hundred years, then paper money evolving for daily use. Cash can appreciate in value (or depreciate) in its home country, against another foreign currency while cash not invested, or hidden under the mattress, is subject to the loss of purchasing power every single day.

Cold hard cash and crinkly counterfeit-free paper money is rapidly being supplanted by debit, credit cards, electronic transfers, smart phones, and the new, new thing — electronic currencies, such as bitcoin (still in its rocky infancy).

See the History and Anatomy of Money Chart. http://www.3833.com/history_anatomy_money_chart

Cash deposits (fixed, term, certificates) in a bank, credit union, etc. generally, have a fixed interest rate, are locked up for a period of time, are held in the bank in your name (generally not segregated) thus are a liability to you of the bank, not insured (yet), not invested in capital markets, not volatile in value, subject to penalties for early withdrawal, are used as by the bank for mortgages and lending, and may be used for cash sweeping by your bank every night.

Personal cash risk management.

Your cash and deposit account allocation strategies could look like this.

A. Maintain minimum cash balances in your checking account. Tie your credit / debit card to that account as well. Replenish the balance with online transfers from your statement savings.

B. Use several banks, locally, to spread out the bank liability risk. Remember, your bank statements are just that, paper. Your actual cash in your bank is loaned out on a revolving basis to customers needing mortgages, personal and commercial loans. Each bank handles its liability to its customer deposits base differently. You want to understand clearly what that means to your accounts.

C. Ladder your fixed deposits, if you can, timed with different maturity dates, interest rate, and currencies in order to spread out average market earnings rates on all your deposits. This is addressed on the Moneywise website in a chart.

D. Consider Foreign currency fixed deposits. Three out of the four local banks offer fixed deposits in anywhere from four to 12 other currencies on their websites. The terms to maturity range from from 21 days to 60 months with interest rates from close to zero (generally, Bermuda and US dollars) to a high of an annual interest rate for 60 months in New Zealand dollars of 4.74 percent now available at Bermuda Commercial Bank stated at their website February 6, 2014.

Foreign currency fixed deposits in other major hard currencies can reap appreciation (or loss) against the US dollar (Bermuda dollar is at par with the US dollar) while increasing your savings rate. You will need to spend some time, however, understanding how the currency game works for these deposits. Suppose that you decide on a New Zealand fixed deposit today, February 06, 2014. According to Yahoo! Finance Currency Converter, the exchange rate for one US Dollar in New Zealand dollars is NZD 1.2085, meaning that USD 1 purchases NZD 1.2085 — you get more for your money. Currency rates tend to be a function of the strength of a country’s economy. If the NZD rate drops to say NZD 1.89, does this mean that you will receive fewer US dollars back (or more) than you originally deposited? Does the extra interest earned in NZD justify the change in the exchange rate?

Use a currency calculator assistance site such as http://finance.yahoo.com/currency-converter/#from=USD;to=NZD;amt=1

Questions to ask your personal banker about foreign currency term deposits.

1. What is the spot rate for converting to New Zealand dollars today?

2. Does the spot rate stay the same for the length of the maturity of the fixed deposit? What happens if the spot rate is higher (lower) than when I opened this account?

3. How much does the bank charge in commission to convert Bermuda dollars to New Zealand dollars,?

4. How much is the foreign currency market charge to convert (exchange) my local dollars for New Zealand dollars?

5. Is there a bank commission when my New Zealand deposit matures?

6. Is there a foreign currency market fee when my New Zealand deposit matures.

7. Is the interest rate compounded and calculated daily?

8. What is the early withdrawal penalty if I have to cash out before the term to maturity, e.g. one year, three years, five years are up? And if I do cash out early, do questions 5 and 6 apply to the early withdrawal?

E. Consider owning money market funds. These are universally traded every day, but they are a different kettle of fish than cash and deposits, rising and falling with capital market interest rates, based upon very short-term debt securities such as US Treasuries and commercial paper, highly liquid, not guaranteed, portfolio managed.

Through Part 3, we have covered cash, deposits, foreign currency exchange and touched on money market mutual funds (which are not cash). You didn’t possibly think that there could be three articles on this subject alone, did you? Hopefully, it is interesting enough to incentivize you to explore and learn on your own, start with foreign currency, and take a review of money market mutual funds. Better understanding of finance means better control by you of your money. It is all you have got!

Please do understand clearly that I am not advising you, the reader, specifically to try any of the suggestions above for your personal financial plan. It is your decision to fully investigate, fulminate, discuss and then upgrade your cash strategies only if you are comfortable doing so.

The Bermuda Finance Fundamental Review is modified as space in The Royal Gazette does not permit me to include all items pertinent to this vital component of your personal finances each week. I’ve started updating the Moneywise website at www.moneywisebermuda.com to include more details of each week’s articles. Please feel free to review the site and send comments and questions to martha@marthamyron.com on anything that you do not understand. As always, note that materials within The Royal Gazette and on the website are copyright protected to Martha Harris Myron, Pondstraddler Life Consultancy.

PS Happy Birfday, Bump. May you live happily and long.

Martha Harris Myron CPA PFS CFP JSM, Masters of Law in International Tax and Financial Services. Pondstraddler* Life™ Consultancy provides independent cross border financial planning, publications and integrative presentations for international citizens (and businesses) living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre. Contact: martha@pondstraddler.com. Bermuda telephone: 1-441-735-4720

* Pondstraddler. A person with one foot on each shore whose heart resides in both countries.