Cash management

Cash management means how you manage cash and other liquid assets to meet your personal financial goals. This includes two main topics: (a) making sure that you spend less than you earn, so that savings and investment accumulate, and that debt is paid off; and (b) getting the best return on your money.

This article presents on overview of cash management for Canadians, covering (1) the importance of cash; (2) banking arrangements; (3) cash flow; (4) tracking your expenses and budgeting; (5) emergency funds; (6) saving; (7) getting a good return.

Importance of cash
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, or more volatile, long-term investments at substantial discounts. However, higher liquidity often means accepting lower returns.

Banking arrangements
Canadians have a wide variety of institutions to choose from when setting up their banking arrangements. A wise banking choice has the potential to save hundreds of dollars a year.

For most Canadians, their main bank account is a chequing account, in which they regularly make deposits and withdrawals, including by electronic means. Many people also have a savings account or a high-interest savings account, not necessarily from the same financial institution.

Cash flow
Managing your cash flow is one of the keys to financial success. Money flowing into your hands (income) is a flow in a positive direction. Money flowing out of your hands (expenses) is in the negative direction.

Refer to the figure below. When you have a negative cash flow (left picture), more money is flowing out of your hands than coming in. A negative cash flow means that you are spending more than your net income. You are accumulating debt.

When the amount of money coming in equals the amount of your expenses, the cash flow is neutral. You are living "paycheck to paycheck."

A positive cash flow means that you are spending less than your net income. You are building wealth, which allows you to save and invest.

If your cash flow is negative, or if it is positive but you are not saving enough, you may need to track your expenses and follow a budget (see next section). Or you can try to increase your income.

Tracking and budgeting
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 software. However, it's not necessary to track expenses in order to achieve your financial goals.

Emergency fund
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 of income.

Saving
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 from each paycheque and transfer it automatically to a separate savings account or investment account, depending on the goal. This has been referred to as “paying yourself first”.

Starting to save
So how do you know how much to save? If just starting, 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.

Saving more
When the saving habit is formed, it is time to do some more serious financial planning. Once you have defined your goals, you may find that the monthly amount of savings required to reach these goals is more than the “easy” amount that readily fits in your budget. The way to think about saving a significant portion of your income is that you are delaying consumption, not giving it up. If your goals are important to you (for example, retiring at a certain age, or providing for your child's postsecondary education), then you can convince yourself to save enough to reach them. Again, automating the process helps greatly.

Getting a decent return
Simply holding cash should not be passive and investors are wise to seek a decent return, while at the same time balancing the time and effort to manage and track their cash holdings.

Deposit interest rates vary between financial institution as there tends to be significant competition among Canadian banks and other financial institutions. Due to this competitive nature, the best rate of return tends to shift among the financial institutions based on their funding needs.

Some investors enjoy chasing the "best rate" they can earn and can end up having accounts at a variety of financial institutions and cash spread across these accounts. Clearly there is a financial benefit from this approach, at the cost of increased complexity in your financial affairs.

Quicken
Quicken is the longest available software application for tracking and managing your money. Quicken products contain online services which include: downloading your transactions and balances from your bank; downloading stock quotes and news headlines; updating portfolio information; online bill pay.

Standalone versions
For many years, Quicken produced an annual update that could be purchased and operated with a three year sunset policy for their online services. The last standalone version of Quicken Canada was released in 2016 and reached sunset on May 30, 2019.

Subscription versions
Quicken changed their model in 2017 with the introduction of Quicken Canada 2017, which moved to a subscription service that entitles you to Quicken for 12 months.

Originally one key difference with Quicken Canada 2017 was what happened when the subscription expired or was not renewed. It differed from the previous sunset policies related to entering manual transactions.

Fortunately user feedback convinced Quicken to change this policy in August 2017

Quicken Canada Windows Subscription users received far fewer releases and updates for their software than their US counterparts.

Microsoft Money
Microsoft Money Plus Sunset Deluxe is no longer supported by Microsoft and can be downloaded for free at Money Plus Sunset Deluxe. A review can be found here.

Mint.com - Canada
In December 2010, Mint.com was introduced to Canada, although there have been concerns raised whether using Mint.com is consistent with Canadian online banking agreements.

Others
There are also a number of free personal finance programmes available. Some people also construct their own personalized spreadsheets for recording cash flows.