Many people are guilty of occasionally, or not so occasionally, neglecting to balance
their checkbooks or making bill payments after they are due. Keeping track of your
cash and paying your bills are both important tasks associated with cash management.
Cash management includes all your decisions related to cash payments and
short-term liquid investments.
As discussed in Section 2.2, liquid investments are those that can easily be
converted to cash without loss of value, such as the money in a checking or savings
account. Although you can leave money in these accounts for longer periods,
they are not generally the best choice for long-term savings, so we can also
think of cash management as decisions related to investments of one year or less.
When you hold cash, whether it’s in your pocket or in a bank checking or
savings account, you incur certain costs. For one, you give up the opportunity
to invest those dollars to earn a higher rate of return. Most people hold some
of their money in a checking account. In some cases, this account might pay a
small amount of interest, but in most cases, it does not. In fact, you may even
pay for the privilege of holding money in certain types of accounts.
The lost interest is an important consideration. For example, if you carry an
average balance of $1,000 in your checking account for a year, and you could
instead have invested it to earn 10 percent interest, you’ve given up about $100
in interest (10 percent of $1,000). An additional cost of holding cash is
psychological: If you have money sitting in your checking account, you can
spend it very easily. It would be a shame if all your hard work in developing
your budget went to waste because you couldn’t resist the temptation of writing
a check for an expensive item you hadn’t planned to buy. In contrast, if you
keep your cash in an account that’s not as easily accessible, such as a savings
account, you’ll be more likely to stick to... [continues]
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(2010, 07). Cash Management. StudyMode.com. Retrieved 07, 2010, from http://www.studymode.com/essays/Cash-Management-350247.html
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"Cash Management." StudyMode.com. 07, 2010. Accessed 07, 2010. http://www.studymode.com/essays/Cash-Management-350247.html.