What a Mess…
Why oh why does anyone have actual cash – physical or in your bank more than what you need?
If you have cash on hand that isn’t sitting in at least a savings account that means you do not believe you can do anything productive with that cash. Your lack of believing you can do something with it may stem from not really knowing what to do with it, your scared to do something with it, your lazy, or something else.
As we discussed in the framework (Link: The Framework: Your Life as a Profit and Loss Statement and Balance Sheet), when you generate profit you generate idle cash which represent an opportunity for your finances. If you are after building wealth or just making life a little bit easier for you – you need to take advantage of this opportunity!
What I Realized…
As much as I knew profit or idle cash was an opportunity for our finances, whenever I got busy at work just like anyone else does, I just punted and waited to make a decision at some point in the future – sometimes as much as two months later when I had time to pull out the spreadsheet and update where I stood on everything. I also have other small side income coming in as well as bonuses that make my cash flow a little bit “lumpy.”
I know it sounds stupid to say “I didn’t know if I had idle cash or not” but the reality is that even $100 excess cash represents an opportunity. If large Corporations are extremely focused on putting their cash to work (just like I am at work) – why am I not doing something similar?
Regardless, I realized I had a problem and I defined my minimum need of cash in my bank account at any given point in time……….. if I ever saw cash in excess of that amount – boom! Time to make a quick decision and get that cash working!
My Method
As with any good personal financial decision you need to get out a spreadsheet. I have a picture below to show you a visual but here is was I do/did:
- Aggregate a list of everything that comes out of your checking account regularly – your rent, your mortgage, etc…EMPHASIS – this is on cash OUTFLOW only and items that have SET payment schedules.
- Write how that cash flow is actually happening – is it happening on the first for the month, on a weekly basis, on a set date, etc…
- I exclude credit cards as you always have the option of when to pay your credit card.
- Create a calendar for two months in a row and chart out you cash outflow.
- Then chart out how much cash you need in the next week and two weeks. **This assumes you or your spouse are paid at least bi weekly, if you are paid once a month you may want to stretch out the analysis for the next month.
Here is a picture:
The above numbers are fake but what does this tell us? If I am paid weekly, at any given time I should have $1,300 in my checking account as that is the “worst case scenario” of cash outflow. If I am paid bi-weekly or just want a little extra cushion, I should have $1,700 in my checking account as that is the “worst case scenario” of cash outflow. Cash in excess of this amount = opportunity to do something and I typically sweep it out as soon as I see it.
Another item that shows up here that also showed up in my personal financial cash flow analysis: The peak amount of cash that goes out the door in a two week period is actually from a bunch of small expenses – not the mortgage payment! This was a bit interesting for me!
What I Realized From this Exercise and How I Modified My Method over time.
From doing this exercise I realized a few things and changed my method over time:
- I was able to reduce the amount of cash I had tied up by changing when bills were due. If you are really “peaky” on your cash needs in one week – isolate a bill and move it to a different time in the month….. nearly all bills can have the time of the month scheduled differently.
- I tried to go to the weekly management despite getting paid bi-weekly as I had the ability to shift some cash in and out of savings if needed easily. Overtime I switched back to the bi-weekly management process as I needed to come up something sustainable for me and my family especially with two kids running around. One week of “float” on the cash was hard to really move the needle on anything.
- There always was “something” that came up above and beyond my cash outflow and you are likely seeing the same with your finances. For me it was baby sitter checks or paying into my fantasy football league as examples that needed cash. To compensate for this I added a flat $500 buffer. Using the examples above, I always needed $1,700 in the account plus $500 for a buffer or $2,300…. anything above $2,300 = opportunity. The $500 is excessive in my mind but helped take the guess work out of these “what ifs.”
Ok I Followed What You said and I have some idle cash… what do I do?
When you get idle cash you need to evaluate your game plan but here are your options:
- You should pay down your credit card. We can argue all day long if paying your credit card ahead of time makes sense but the fact is, that amount is due soon and you need to pay it off. I am busy enough where a 30 day float from the CC company doesn’t get much of a rise out of me. My first step is always paying down by CC as I use my credit card for EVERYTHING I CAN…. I’ll share a separate post on this later.
- If your Credit Card is paid down to $0 you have the following options:
- Put the excess cash into a savings account
- Invest in a low cost ETF and work on generating some side income.
- Pay down other debt. In general I am a fan of paying down the debt that gets you a reduced payment the fastest unless you have high interest debt. I’ll post on this later.
- Take care of known expenses you know you have coming up….. those car tires aren’t going to last forever – why not go ahead and knock 2 or all 4 of them out?
- Make an investment that saves you money going forward…. For those homeowners AND renters – have you replaced all your lights with LEDs? If not, why not? Upfront cost but your cost goes down moving forward.
In Summary
Corporations have people full time dedicated to making sure idle cash is deployed… it takes time. You don’t have an army of people to watch your cash, don’t want to pay someone to do it, but you know you need to do something. I would encourage you to come up with some sort of plan and keep it simple and sustainable. As I have gotten older, the more sustainable my process is, the more likely I am to stick to it.
Maybe my plan is too aggressive for you or your expenses or income are not as predictable but at some point you will have too much cash on hand and the cash needs to be deployed. Remember – just $400 can make you $1 of Income moving forward.
