Wealth Protection: Cash Management and Emergency Cash

Cash Management
Cash management strategies include budgeting, keeping financial records, maximizing the interest earned on checking and savings accounts, and regularly preparing financial statements, such as net worth and cash flow. One of the soundest pieces of financial advice is to spend less than you earn. It sounds simple, but if you are not fully aware of how you spend money, you may be spending more than you realize. After you track your income and expenses, following a budget that is adjusted to your individual situation and goals is an excellent strategy to plan your spending.

To estimate the value of your assets and chart your financial progress, each year you should add together everything you own (assets), then subtract everything you owe (debts), including your mortgage and credit card debt. This summary of assets and debts is called an annual net worth statement or balance sheet. It will help you analyze the way you currently manage your finances and make decisions to improve your financial situation.

You want your net worth to increase each year. During the early stages of your life, when you. re establishing yourself at work and accumulating the necessities of life, your net worth may rise slowly. It will probably grow the most right before retirement when you are at the peak of your career and accumulating assets to ensure a secure retirement. Plan to review and update your net worth annually. The actual date of your review is not important. It might be your birthday, New Year. s, or some other important date. It is more important that you remember the date and complete your annual checkup. It also is important to regularly reconcile bank and other financial statements with your own records.

A vital aspect of the cash management building block is financial record-keeping. An effective record-keeping system should be convenient and not too complicated to maintain. A number of systems are available commercially, or you can design your own (e.g., with file folders). It is important that the system makes sense to you and that you use it consistently.

Emergency Cash Reserve
Setting aside money to meet unexpected expenses provides a financial safety net and allows you to take advantage of financial opportunities as they arise. Most experts recommend an emergency fund equal to 3 to 6 months living expenses; however, you do not need to set aside this total amount in a low-yielding passbook, certificate of deposit, or money market account. The amount of your emergency fund depends upon your age, health, job outlook, and personal financial situation (e.g., amount and kind of insurance coverage). An emergency fund might be adequate with enough to cover 3 to 6 months of expenses using a combination of cash and credit if you have a source of low-cost borrowing (e.g., home equity credit-line loan, cash-value life insurance, or retirement plan). If your household has multiple sources of income or dual earners, you can count on those other sources of income in an emergency.

You might want a larger emergency fund if you are in business for yourself, your work is seasonal, or you rely heavily on commissions. If your health is questionable (e.g., you foresee long-term disability or extensive medical expenses), you anticipate a large expenditure for the care of a relative in the near future, or your child is about to enter college, you may also need a larger cash reserve.

Your emergency cash reserve can be subdivided to minimize penalties for early withdrawal of large amounts of funds at one time and to maximize interest earned on accounts should an emergency occur. Money that would be needed within 3 months of a financial emergency is best placed in an interest-bearing checking account, passbook savings, money-market deposit account, or money market mutual fund. Funds needed 4 to 6 months after an emergency could be placed in short-term certificates of deposit (CDs) as well as 3- and 6-month Treasury bills. Money that would not be needed for 7 months to 2 years could be placed in a money market mutual fund and longer term CDs (12-, 18-, and 24-month). Money you can avoid withdrawing for 2 to 5 years during a financial emergency could be placed in Treasury notes, short-term bond funds, or 3- to 5-year CDs.