BC Journal

#Finterms: Bank Liquidity

Bank liquidity is a risk measurement involving the ability to meet near-term financial commitments, such as to pay bills, at a reasonable cost. More specifically, this closely managed metric measures of a bank's ability to quickly convert its assets into cash in order to satisfy withdrawals from depositors and other fund providers.

Liquidity is central to a bank's stability and solvency and is measured by ratios such as liquidity coverage ratio and the net stable funding ratio.

Primary sources of bank liquidity include assets, such as their cash reserves and securities portfolio, their operating cash flow as well as deposit and other wholesale funding liabilities. Facilities at the Federal Reserve and other short-term borrowings provide additional liquidity resources.

Managing bank liquidity is highly nuanced and overseen by regulatory bodies. The management of bank liquidity depends on a number of factors -- business mix, balance sheet composition and prevailing economic conditions being chief among them.

#liquidity #banking #stability #solvency #cashreserves

Simplified Retirement Plans

A retirement plan is generally available for every business type. Traditional qualified plans receive the lion’s share of attention, but certain alternatives may be appropriate for small businesses and the self-employed. Article 4 of BaldwinClarke’s business retirement plan series discusses simplified options.

Business retirement plans are intricate beasts. This series has covered plan innovations, selection considerations, and regulatory requirements. Such topics might intrigue a room of financial professionals, but BaldwinClarke understands that entrepreneurs are most concerned about the bottom line. This piece spotlights an important plan category: simplified retirement plans.

Previous articles covered the advantages and pitfalls of traditional qualified plans. Some offer significant flexibility (401(k)s, profit sharing plans), and others allow substantial contributions (pension plans).[1] While these features can be attractive, compliance requirements are a major deterrent. Fortunately, simplified alternatives are available.

Simplified retirement plans are readymade plan templates for small business owners and the self-employed. Popular examples include Safe Harbor 401(k)s, Solo 401(k)s, SEP IRAs, and SIMPLE plans. The plan designs differ, but all provide one key advantage. Simplified retirement plans eliminate many compliance obligations associated with traditional qualified plans.

#Finterms: Compound Interest

Compound interest is the interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods. In other words, compound interest is "interest on interest."

It differs from simple interest, where interest is calculated only on the initial amount (principal) that was deposited or borrowed.

Here's how compound interest works:

Let's say you have $1,000 in a savings account that earns an annual interest rate of 5%, compounded yearly.

After the first year, you would earn $50 in interest (5% of $1,000). This brings your total balance to $1,050.

In the second year, you earn interest not just on your initial $1,000, but also on the $50 in interest that you earned in the first year. So, your interest for the second year would be $52.50 (5% of $1,050), and your total balance would be $1,102.50.

In the third year, you would earn interest on $1,102.50, and so on. Over time, this compounding effect can significantly increase the amount of money you earn from interest, especially if the interest is compounded more frequently (for example, monthly or quarterly, instead of yearly).

It's important to understand the concept of compound interest because it's a fundamental principle in finance that impacts various aspects of personal finance, including loans, mortgages, savings, and investments.

#finance #interest #interestrate #loans #compoundinterest

#Finterms: Annual Gift Tax Exclusion

The annual gift tax exclusion is the maximum amount of money or property value that one person can give to another person in a single year without incurring a gift tax or having to report the gift to the IRS.

As of July 2023, the annual gift tax exclusion in the United States is $17,000 per recipient per year. This means that an individual can give up to $17,000 each to any number of individuals in a single year without having to pay gift tax or report the gift.

For couples, they can jointly gift up to $34,000 to any individual tax-free and without having to report it.

Keep in mind that this is the amount for the annual gift tax exclusion and the actual estate tax exemption amount is much higher (currently $12,920,000). Any gift that exceeds this annual exclusion counts towards the lifetime gift and estate tax exemption.

Also, remember that tax laws are subject to change, so it's always a good idea to check for updates or consult with a tax professional for the most current information.

#estatetax #gifttax #estateplanning #exclusion

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#Finterms: Bank Liquidity

Simplified Retirement Plans

#Finterms: Compound Interest

#Finterms: Annual Gift Tax Exclusion