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Cash Management |
Your cash needs are strung out over a wide time frame, no matter what your age. For example, you have current financial obligations such as monthly bills, less frequent ones such as annual property taxes and longer-range needs such as retirement or some large purchase.
Cash management is the process that allocates resources to various needs you have across the spectrum of time. For presentation, we divide time into three periods - short, intermediate and long. Short is a year or less, intermediate is one to five years and long term is greater than five years.
Try this simple approach. Determine, by your self or with an advisor, how much you need to fund retirement, care for an aged parent, college and other long-term needs. Do the same for intermediate term needs such as an emergency fund, a grand vacation, house maintenance, auto replacement and so forth. The remainder is for short-term needs, such as mortgage or rent, groceries, insurance, taxes and the like. Most people allocate short term first, but seldom find they have enough after exigencies are satisfied.
Your pay is more elastic than you think. For example, if you have the funds or are quick to use a credit card, you may well find more things to spend your short-term money on than you would if you looked at longer range needs first.
There is no one budgeting system that is better than another. In fact, you may not even need a formal budgeting system so long as you fund your goals first and use the rest for satisfaction of short-term needs and whims. Assuming that you do not make undue use of your credit cards, funding the long term first leaves you money for the short term. It usually does not make any difference what category you spend short-term money on, so long as you care for necessities first.
Thus, successful cash management may be as simple as setting priorities and sticking to them. Failure to look to long-term needs may result in serious under funding just when you need the funds. The result may be going without or going into debt via credit card or some other means.
There is nothing wrong with debt, but it usually costs you more than it would have if you'd saved first. A good example of this is a car loan. If you had saved half of a $20,000 auto purchase and financed the rest, your total outlay (cost of the car plus interest) will be about $2,000 less than if you had financed the entire purchase. If you routinely use credit cards and are perennially in debt, you are most likely leaking off money unnecessarily to interest. Get out of debt and stay out, except for such things as a home or invested assets that help build your wealth and security.
We help you manage your cash by working with you to set goals, allocate cash to them and to place the funds in investments of appropriate risk to the maturity dates.
Be sure to read the other product briefs in this series that cover investment strategies for short, intermediate and long term needs.