Financial planning should always start with cash management. As the initial building block of your overall financial plan, cash management addresses two major issues: finding the funds necessary to fund your plan, and ensuring that your cash is used to meet your goals. Think of cash management as a valuable yet, often overlooked, opportunity to put your money to work for you.
Even the least capable among us has some type of cash management system. Methods can range from “If the money is in my checking account, I’ll buy it,” to a detailed and organized plan to make the most efficient use of discretionary cash. An organized approach projects net cash flow to identify your current spending level and earmarks the funds available for investment.
Before you begin any aspect of financial planning, establish goals. Goal setting is the essential starting point of any sound financial plan — it gives a sense of purpose and direction.
Goals in each critical area of a financial plan may overlap because the areas of a plan often interrelate. For example, retirement planning also involves investment planning and cash management. Cash management goals are the starting points that work toward the attainment of broader, long-term financial goals.
Cash management goals should be realistic and attainable and should specify how to find the cash necessary to fund your goals. They must also be specific: How much will you save to achieve a particular goal (for example, by reducing entertainment and recreation expenses by $75 per month)? And how will you ensure that you save before you spend (for example, by taking advantage of an employer’s tax-qualified plan)?
Define your goals and then list them in order of importance to you. If you have limited resources, prioritization helps ensure that the most important goals are met first.
Rationalizations people use for not developing a cash management plan include not enough assets to justify a cash management plan, the belief that finances are already in order, procrastination and refusal to contemplate the future.
Failure to develop an organized approach to cash management could lead to such avoidable financial problems as:
In addition, organized planning forms the basis to effectively budget for special expenditures, such as a child’s education, personal debt and income taxes. An effective cash management plan will also help you choose the best way to meet both short-term spending needs and long-term financial goals.