Cash management 101: It's about knowing where your cash is at!

In our journey towards financial freedom, you need to know where you cash is at all at times. This ability to track your net assets daily means that you need to have a system to know how much your net worth is like distributed among your assets (cash, cash equivalents, equities, bonds, unit trusts, gold, property etc) as well as your liabilities (outstanding credit card/personal credit balances, home mortgage etc.)

Why is cash management important?
Your ability to track your financial assets will facilitate you in managing your cash and knowing when to convert your assets from one class such as equities or fixed deposits into actual cash you can pay for big ticket items.

My system has been to keep a daily worksheet that I update so that I know how much of my net worth is in cash, cash equivalents such as fixed deposits and treasury bills as well as my equity portfolio. It also tells me what is the portion of my investible savings keep between cash/cash equivalents which are very liquid and equities that are much less liquid in this current dismal Singapore stock market.

By doing this, I know whether I have sufficient cash buffer or emergency reserve to last me at least 3-6 months of expenses and to manage my cash flows when paying for big ticket items. One big ticket item to hit me is my Suzuki SX4. My dealer just called me up and told me that my car was coming earlier than scheduled. This also meant that she needed to collect the balance payment plus first month instalment and first year insurance from me soon. Fortunately, I had already planned for this outlay and had liquidated some equities to provide for cash and it could be transferred into the bank account in less than 2 working days.

Knowing where your cash goes helps you defer unnecessary expenditure
I tend to earmark funds that have been set aside for upcoming payments by subtracting them from my available cash. This makes the amount of cash available become less than it actually is and tends to have a psychological effect of making me more aware of the need to conserve cash (i.e. continue to live within my means) to save and invest.

Tracking cash flows also allows one to set aside cash equivalents in fixed deposits or treasury bills that have certain tenures such as 3-6 months and allows me to keep the minimum balances in those savings accounts that yield only 0.25% per annum on the deposits.

Surplus cash not needed for day-to-day use and part of 3-6 months cash reserves are set aside in Poems treasury bills that can be liquidated in T+1. Others are put in the Maybank iSavvy that yields 1.68% for balances exceeding $5,000.

Cash management helps you travel faster on the journey towards financial freedom
Your ability to manage track and manage your cash is critical to achieving financial freedom. One of the keys for me to be able to pay off my home loan early was to know when I had surplus cash and to deploy it by doing capital repayment within the limits allowed under my loan agreement without incurring any penalties.

The satisfaction from seeing myself move from a net liability position to a net asset position was very motivational as I found myself very happy each time I took out a large chunk of my mortgage balance by making principal repayments when bonuses were paid out in December.

It took years for this to happen but knowing that each partial capital redemption took me closer to a net asset position thrilled me that nothing else could. The interesting thing to observe was that as my net liability reduced, so did my stress levels and worries about job security and job situation. I found myself better being able to cope with job situations as I knew I was in a financially better shaper each year as I continued to plough back savings to pay off my home loan.

Are you tracking adequately your cash and net worth as part of the discipline in walking along this path towards financial freedom? Are you keen to do what is necessary to move yourself from a net liability or net asset position to an even better one? Are you ready to challenge yourself to better deploy your investible savings to generate more passive income for you?

If you say yes to any of these questions, take action RIGHT NOW and start MONITORING YOUR NET WORTH because if you don't know where you are at in this road towards financial freedom, then it'll be difficult to get to your desired destination.

Be well and prosper!