PERSONAL FINANCE COURSE
CASH MANAGEMENT
BYU Course: chapters 3 and 4.
Part 1 of 3
Cash Management
Cash management is NOT Investing.
Basically it’s record-keeping.
BYU course: chapters 3 and 4.
- Record keeping
- Cash management
“Cash management” is different from investing; cash management IS NOT investing.
What cash management is:
- Tracking income.
- Tracking expenses.
- Setting up a budget.
- Accounting for “every” dollar.
- Developing a record-keeping system.
That’s it. Nothing about investing.
That doesn’t mean we won’t talk about interest rates in savings and checking accounts, but we don’t use savings or checking accounts for investing.
Part 2 of 3
Budgeting
When your life changes, your budget will change.
When starting a new job, starting a new year at college, when planning for retirement, your life changes; budgets change.
Your budget may change monthly. Don’t worry about that. Once things settle down, one’s budget will start to fall into place.
What’s important: developing a budget format that works for you.
I would start with a “notional budget” using percentages at first, and then over time develop your actual budget using percentages and dollars.
One cannot successfully budget without knowing your income (and income sources) and your expenses. Your first budget can only be developed by tracking income and expenses for a period of time.
BYU says one must account for “every” dollar. Taken to extremes that does not work for everyone. My own dad did not do that. I had an uncle who did. My dad did very, very well financially; my uncle did not. But my uncle did know where every dollar went.
I would recommend a “miscellaneous” category where a given amount of money each month is unaccounted for. It might be as little as $10 or as much as $100 depending on your income.
Your income should be known to the penny.
Your expenses should have a dozen or so specific line items.
But if you have a line item for the dollar you gave Sophia last month while shopping, you’re going to go nuts tracking each dollar. If you routinely give Sophia $10 each month for spending money, that needs to be an expense line time. If you give her a dollar or so every six months or so, that needs to be “lost in miscellaneous.”
It’s easier to talk about this than to write it all out, so if this doesn’t make sense, we can talk about it later.
Part 3 of 3
Cash Management
For me cash management is simply figuring out what to do with your income or your money that doesn’t go out the door to pay expenses. If it’s something else, let me know. Cash management is not investing. We’ll talk about investing later.
For me, cash management is figuring out where to put your money (cash or electronic) while waiting to pay expenses, spend it, or invest it.
In the context of cash management, I don’t like the concept of a “savings account,” but it is what it is.
I think of a “savings account” as a place to keep money for unexpected short-term expenses. Whatever amount you put in this account needs to be immediately available, and immediately accessible. I would hope that a student would need to keep very little money in any account for emergencies. Students are still dependents and generally speaking, the dependents’ guardians and extended family members will have their dependents’ “backs” for major emergency expenses.
Saving money for a one-time large expense such as a computer might be placed in a “savings account” but should not be thought of as “savings.” Putting money aside each month for six months for a new computer is an expense.
Cash for monthly expenses — expected, planned, and budgeted — might as well go into a checking account. I can’t think of where else I would put cash that will be used to be pay budgeted expenses.
Money that does not go into your “savings account” — unexpected expenses — or into your checking account then needs to get to a third location, and that third location now starts to get into short-term cash management and long-term investing.
Short-term cash management vs long-term investing in excess of what you need for budgeted items and unexpected expenses.
At this point in your life, “all” of your money may be tied up in budgeted items and unexpected expenses.
I can’t imagine college students having that much money that they need to be thinking about interest rates on money in “savings accounts.”
But once you start talking about money market funds (MMF); savings bonds (I-bonds); Treasuries, etc, you have moved into investing. (BYU won’t necessarily agree with that.)
We will be talking about investments in future chapters.
Unless you have — pick a number — I would pick $2,000 — unless you have $2,000 in your checking account or savings account that you will absolutely not need in the next year or so, then we can start talking about investing.
Right now, your money needs to be readily available to pay your bills and unexpected expenses while you set up your budget.
One expense item: investment. PAY YOURSELF FIRST.
Have one expense item called “investing,” or “financial independence” or something to that effect. Whether it is $1 or $10 or $100 / month, make that an expense item and put that amount into your “investing account” or “investment portfolio.
Once that “account” reaches $2,000 or more then you can start worrying about interest rates. Today, 5% in a money market fund nets you $50 on $1,000. But that’s $50 over the course of a full year. I have never been impressed with interest rates credit unions or banks pay their customers. USAA is an exception: they partner with Schwab to pay you a better rate.
I did not know about the relationship between USAA and Schwab. I was quite impressed. If you can find a better investment firm than Schwab, let me know. For one-stop shopping for cash management and investing, I’ve not found a better financial option than Schwab.
