Cash management refers to how you manage your cash or other liquid assets; liquid assets are assets that are immediately accessible. Are there risks to poorly managing your cash? How does one properly manage their cash investments? The first thing we should look at is the risks associated with cash investments.
Cash investing can carry more risks then most understand, 1st is inflationary risk. Inflationary risk is the risk that your money today will be worth less tomorrow with real value. Did you ever hear your grandfather tell you how when he was a child it cost $.05 for a loaf of bread? But today it costs on average $1.59? This is inflation! What you could buy with your money in 1940, bread being $.08 a loaf at the time, now cost 80% more! The historical average inflation in the US is around 3%, while the average cash position returned historically a 3.8% this means that over time if you maintain a cash portfolio your inflation adjusted return would be .8% annually. This truly is terrible for any money that has a long term goal, so make sure that your long term investments are well diversified with a mix of stocks, bonds, and cash.
Another risk with cash investments is the ease at which it can be spent. Since these funds are extremely accessible; being accessible means that it is easy to spend, and when it is easy to spend it can be easy to over spend. Did you know that banks hope you overspend? Most banks will incorporate an overdraft protection on your account. This means that if you accidentally spend more then you have in your account they don't mind covering it on the short term, but they smack you with an average fee of $27 per overdraft. An FDIC study recently released (http://www.fdic.gov/bank/analytical/overdraft/) shows that on average the APR of overdraft loans is 3,520%!! This brought in $37 Billion in revenue for the banking system in 2008!! Some banks will even reorder your transactions from largest to smallest to maximize these returns from there members. For example, lets say you have $100 in your checking account, and you, in this order spend out of your checking account with your debit card; $10, $10, $20 and $80. The $80 put you over your spending limit and if you have a good bank that values its customers this would cost you, $27 on average. If you're using a bank that reorders the day's transactions from largest to smallest, these same transactions would show up on your statement as $80, $20, $10, and $10. This means that your first 2 transactions would hit your spending limit and you would see an overdraft fee of $27 on each of the following 2 more transactions!! Yikes, keeping track of how you spend, when you spend it should eliminate this fee altogether if not teach you about your banks accounting methods. In general if you have a short term cash position, the more liquid the investment, the lower the rate; the less liquid the investment, the higher the rate.
Another risk of cash management is default risk; default risk is the risk that the institution accepting your money, promising to give it back at a rate stated, fails. When a banking institution fails this brings the risk of default as you are relying on this banking institutions ability to pay you back. In general banks, credit unions and brokerage firms are insured by a government sponsored company, to protect you from this type of default, but there are limits to this coverage and not all institutions are members of these guarantee companies. It is important to learn what these limits are at the time of investing, as they can change, and make sure your cash is properly diversified amongst different institutions, in general try to keep less then $100k in cash, per institution.
After looking at some of the major risks associated with cash management, it becomes clear that discipline and organization can save you a lot of money. Learning simple tasks such as balancing your checkbook or using a money management software like, Microsoft Money or Intuit QuickBooks to do it for you will not only save you a lot of your time in managing your cash, but will help keep you organized in knowing what you do spend to help you in avoiding these outrageous fees. When looking at banking institutions you should make sure to review there overdraft policies, this could save you the extra $27 when you accidentally do go over. Try establishing a checking account that is linked to a saving account that way you can cover your own overdrafts without paying the extra fees to the bank if the bank has to cover it for you. When looking to invest your cash, always remember that the higher the rate, the higher the risk and the only truly guaranteed investment currently is considered US treasury investments; try comparing your banks current rate to the national average on bankrate.com. If your bank offers rates below the average it may be more conservative with your money, if wildly over the national average one would question what that bank is investing in to achieve these wild returns. Checking the financial stability of your financial institution can help you in avoiding a default headache (bauerfinancial.com rates banks on an easy 5 star setting).
If you don't know how to balance your checkbook, here is a site I found that gives the basic steps. http://www.ehow.com/how_2299584_balance-checkbook.html
Resources used for this Article.
http://blog.thinkcashfinancial.com/2008/12/fdic-study-highlights-true-cost-bank-overdraft-programs/
http://www.fdic.gov/bank/analytical/overdraft/
http://en.wikipedia.org/wiki/Inflation
