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As with virtually all financial matters, the easiest way to be successful with a cash management program is to develop a systematic and disciplined approach. Spending a few minutes each week to maintain your cash management program can help you keep track of how you spend your money and pursue your financial goals.

Any good cash management system revolves around the four A’s — Accounting, Analysis, Allocation and Adjustment.

Accounting quite simply involves gathering all your relevant financial information together and keeping it close at hand for future reference. Gathering all your financial information — such as income and expenses — and listing it systematically will give you a clear picture of your financial situation.

Analysis boils down to reviewing your financial situation once you have accounted for all your income and expenses. You will almost invariably find yourself with either a shortfall or a surplus. Ideally, you should be spending less than you earn. One of the key elements in analyzing your financial situation is to look for ways to reduce your expenses. This can help to free up cash that can either be invested for the long term or used to pay off fixed debt.

For example, if you were to reduce restaurant expenses or spending on non-essential personal items by $100 per month, you could use this extra money to prepay the principal on your mortgage. On a $130,000 30-year mortgage, this extra $100 per month could enable you to pay it off 10 years early and save you thousands of dollars in interest payments.

Allocation involves determining your financial commitments and priorities and distributing your income accordingly. One of the most important factors in allocation is to distinguish between your real needs and your wants. If you need to reduce your expenses, you may want to start by cutting back on your discretionary spending. This can help free up cash that can either be invested for the long term or used to pay off fixed debt.

Adjustment involves reviewing your income and expenses periodically and making changes when necessary. Above all, be flexible. Any budget that is too rigid is likely to fail.

Using the four A’s is an excellent way to monitor your financial situation to help ensure that you are on the right track to meet your financial goals.

Available Cash Management Tools

There are a number of short-term cash management instruments available to the individual establishing a sound cash management program. These alternatives include money market mutual funds, Treasury bills, and certificates of deposit.

Money market mutual funds simply pool investors’ dollars and purchase large denomination money market instruments. Individuals invest in the mutual fund for as little as $500 and receive the advantageous short-term rates.

These money market funds are totally liquid and may be accessed by check, debit card, telephone, or wire transfer.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at one dollar per share, it is possible to lose money by investing in money market funds.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Treasury bills are simply IOUs issued by the U.S. government to meet its short- term need for cash. They generally have maturities ranging from 90 days to one year.

The minimum face value of Treasury bills is $10,000, which makes them one of the least costly items in the money market. However, they are sold at a discount to face value with the full-face amount being paid upon maturity. The difference between the discounted price you pay for the Treasury bill and the face value you receive at maturity is the interest, or yield.

Treasury bills are generally regarded as one of the safest investments available because they are backed by the full faith and credit of the federal government as to the timely payment of principal and interest.

There is an active secondary market in Treasury bills, so if you need access to your money instantly, you should have little difficulty in selling them. As with any investment traded in a secondary market prior to maturity, there is the opportunity for capital loss or capital gain, depending on the direction of interest rates.

An added advantage of Treasury bills is that they are free from local and state taxes.

Another relatively safe investment instrument is the traditional certificate of deposit (CD) that you may purchase from your local bank. Federally insured for up to $250,000 per depositor, per insured institution in interest and principal, CDs offer you a fixed interest rate for depositing your money for a specific period of time. If you withdraw your money before that period is up, you may be subject to interest rate penalties.

CDs may also be purchased through most brokerage firms. The brokerage firm will shop the market and find the most attractive rate for you, even if it is out of state. This is something you might find difficult to do on your own. CDs purchased this way are called Brokered CDs.

CDs are most suitable for purchasing and holding to maturity. However, you may find it necessary to dispose of CDs prior to maturity. An important distinction between Brokered CDs and Bank CDs is the different means for early redemption. With a Bank CD, should you redeem your CD early, you will typically be assessed an early withdrawal penalty. Brokered CDs trade in the secondary market which provides you with the opportunity to sell your CD at prevailing market prices, which may be worth more or less than the original amount you invested.

Brokered CDs are more complex and carry more risks than CDs offered directly by banks. Brokered CDs may not be suitable for all investors. Before you purchase a Brokered CD, make sure you fully understand all of its terms and carefully read its disclosure materials provided by your financial professional.

MANA welcomes your comments on this article. Write to us at [email protected].