Cash Management

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What is cash management? Cash management means how you manage cash and other liquid assets to meet your personal financial goals. Cash management isn't just about getting the best return on your money. Cash is important; it provides needed protection because of its liquidity. Liquidity means that your funds are immediately accessible; having liquid funds protects you from having to sell less-liquid, long-term investments at substantial discounts. However, higher liquidity means lower returns. Generally speaking, the more liquid the financial asset, the lower the return you can expect to receive on the asset. And cash leaves little in the way of records in your personal finances, and is generally used for small purchases. This ease is what makes managing cash so crucial. Because the purchases are small, we generally spend less time keeping track of cash than we do other types of financial assets. However, if you visit the ATM frequently, it's likely that you have significant total cash expenditures.

If you have financial goals such as retirement, a house, higher education, a boat, an annual vacation, etc. etc., you need to first save and then invest. It would be ideal if you kept track of where your money was going because that would allow you to find additional savings without sacrificing much in the way of lifestyle. Tracking expenses and investments can be greatly simplified by using programmes such as Quicken or Microsoft Money. There are also a number of free personal finance programmes available. However, it's not necessary to track expenses in order to achieve your financial goals.

In addition to achieving financial goals, part of cash management includes having an emergency fund equal to a minimum of three to six months worth on income.

Saving competes with the other daily living expenses and usually loses out if it's based on whatever is left after other expenses have been taken care of. To overcome this, treat your savings as an expense, i.e., set aside an amount that you want to save and have it deposited to a separate account. This can be done through an automatic payroll deduction if your employer offers that option. Or it can be done through a combination of Pre-Authorized Purchase Plan(PPP) and systematic withdrawal plan(SWP). You would set up a money market fund PPP and a savings account SWP to fund the PPP. If the money is being saved/invested in a money market fund, it is possible that the PPP amount can be much lower than the money market fund minimum. For example, TD Financial Group offers a PPP minimum of $25 into its TD Money Market Fund which has an investment minimum of $1000.

So how do you know how much to save? You can go through a thorough expense analysis or you can do something simple such as pulling a number out of thin air and trying it for a couple of months. If you don't even notice not having the money to spend, you've probably set the amount too low and should increase it. If you do notice not having the money to spend, is the amount too much? It depends on how often you feel it. If you feel it only when you have a large unexpected expense, the amount is not too much. If you feel it every month, the amount is too much and you should reduce it. It order for you to stay with this savings approach, it is important that you do not feel that you are constantly sacrificing.

You may feel that starting with a small amount of $25 is pointless because it will never add up to much. As time passes, compounding will start to play an increasing large impact on the amount saved. There are other ways to add to the savings pot as well. For example, save the entire amount of any pay increase for say the first six months. Save some, if not all, of any bonus you receive.