Cash management 101

You are interested in your finances to read my blog.

You want to know about investments, personal finance and money management.

Ultimately, you want to be financially free.

Why cash management?
One of the building blocks for growing your net-worth and maximising the returns from your savings is to manage your cash well. Today's high inflation rates of 4-5% in Singapore has resulted in our savings accounts earning 0.25% having a negative return of 0.25% less 4% (or -3.75%). Thefore, just to mitigate the negative return of holding cash, you should consider cash management to hold as little cash as possible in savings or deposits and try to allocate more towards assets that generate a better return that inflation.

All investments come with risk and therefore even if you are 90-99% invested in assets such as property, stocks and shares, bonds, gold, commodities etc, you would still need to hold some cash. This cash acts as both as requirement for day-to-day living expenses or incidental lifestyle expenses such as renovations, purchase of big ticket items such as car, LCD television, washing machine when they break down or when you upgrade. Holding some cash also diversifies your portfolio and gives you some liquidity to take on larger positions in stocks and shares or other investments should the opportunity arise.

How to manage your cash?

1. Determine how much cash you need on hand
The first step is to determine how much of your investment portfolio should be in cash. Some financial planners advocate a 3 month or 6 months of living expenses as your buffer. Others advocate a percentage of your total investment portfolio, say 5% or 10%. There is no right or wrong answer as each of you vary in risk profile, appetite and personal circumstances.

My own approach is to be weighted at about 5-10% in cash which is very aggressive. This is because I am still fundamentally bullish about the Singapore economy (and hence, the stock market) for 2008 but also realise that the stock market is going to be very volatile.

2. Manage your cash among savings deposits, treasury bills, fixed deposits
Once you have decided that you will need, say 10% of your investments in cash and cash equivalents for living expenses and the budgeted big ticket item, it's time to actively decide where you will place this cash. Now cash means different things to different people. For me, cash can be broken down to:

a) Cash on hand
- the notes and coins you have in your wallet, cashcard or prepaid transitlink card

b) Savings accounts
- low interest bearing POSB /DBS /UOB /OCBC /maybank isavvy/ stanchart esaver bank account

c) Fixed deposits
- short-term 1 to 24 month deposit bearing higher than savings rate

d) Treasury bills
- short-term 3-12 month interesting bearing zero-coupon government securities

3. A suggested cash portfolio
My own experience with personal cash management is to keep 3 months expenses available. With minimal kept in the savings account. Every month, after my salary is credited into my bank account, I will transfer most of it into maybank's iSavvy account as it yields 1.68% (as at 28 Dec 2007) for balances S$5,000 to $50,000. I will monitor treasury bills and buy from Poems as it allows me to get in at a known yield less 12-15 basis points (0.12 to 0.15%). I do not get into fixed deposits nowadays because the higher interest paid is not sufficient to offset the relative illiquidity. Treasury bills bought through Poems allows me to sell and convert back to cash within T+1 working day.

During year end when there are bonuses or windfalls, I will reallocate the cash to other investments but put more into treasury bills if I do not wish to buy more stocks and shares or bonds.

In general, Maybank iSavvy + treasury bills are liquid enough as I can get the cash by T+1 or worst-case T+2 which is good enough for most lifestyle expenses. Other unbudgeted big ticket items can be funded through selling some shares but this is usually not the preferred method as I would be under pressure to sell and may even incur realised losses as the portfolio of equities will have some winners and losers.

Tracking your cash
Tracking your cash is important because you should know at any point in time, how much cash you can raise should you need to make changes to your investment portfolio. In addition, I also work out what is my cash holdings generating for me in terms of returns to see how I am doing in terms of growng my net-worth.

At the end of the day, the combination of your cash flows to match your lifestyle as well as your investment asset allocation strategy will determine how much or how little cash to hold. So long as you are aware of where you cash flows go and that you manage to save each month, you are continuing on your journey towards financial freedom.

Be well and prosper.