Shares & Derivatives
Cash management 101
By Five Cents Ten Cents  •  December 30, 2007
By: PanzerGrenadier You are interested in your finances to read my blog. You want to know about investments, personal finance and money management. Ultimately, you want to be financially free. Why cash management? One of the building blocks for growing your net-worth and maximising the returns from your savings is to manage your cash well. Today's high inflation rates of 4-5% in Singapore has resulted in our savings accounts earning 0.25% having a negative return of 0.25% less 4% (or -3.75%). Thefore, just to mitigate the negative return of holding cash, you should consider cash management to hold as little cash as possible in savings or deposits and try to allocate more towards assets that generate a better return that inflation. All investments come with risk and therefore even if you are 90-99% invested in assets such as property, stocks and shares, bonds, gold, commodities etc, you would still need to hold some cash. This cash acts as both as requirement for day-to-day living expenses or incidental lifestyle expenses such as renovations, purchase of big ticket items such as car, LCD television, washing machine when they break down or when you upgrade. Holding some cash also diversifies your portfolio and gives you some liquidity to take on larger positions in stocks and shares or other investments should the opportunity arise. How to manage your cash? 1. Determine how much cash you need on hand The first step is to determine how much of your investment portfolio should be in cash. Some financial planners advocate a 3 month or 6 months of living expenses as your buffer. Others advocate a percentage of your total investment portfolio, say 5% or 10%. There is no right or wrong answer as each of you vary in risk profile, appetite and personal circumstances. My own approach is to be weighted at about 5-10% in cash which is very aggressive. This is because I am still fundamentally bullish about the Singapore economy (and hence, the stock market) for 2008 but also realise that the stock market is going to be very volatile. 2. Manage your cash among savings deposits, treasury bills, fixed deposits Once you have decided that you will need, say 10% of your investments in cash and cash equivalents for living expenses and the budgeted big ticket item, it's time to actively decide where you will place this cash. Now cash means different things to different people. For me, cash can be broken down to: a) Cash on hand - the notes and coins you have in your wallet, cashcard or prepaid transitlink card b) Savings accounts - low interest bearing POSB /DBS /UOB /OCBC /maybank isavvy/ stanchart esaver bank account c) Fixed deposits - short-term 1 to 24 month deposit bearing higher than savings rate d) Treasury bills - short-term 3-12 month interesting bearing zero-coupon government securities 3. A suggested cash portfolio My own experience with personal cash management is to keep 3 months expenses available. With minimal kept in the savings account. Every month, after my salary is credited into my bank account, I will transfer most of it into maybank's iSavvy account as it yields 1.68% (as at 28 Dec 2007) for balances S$5,000 to $50,000. I will monitor treasury bills and buy from Poems as it allows me to get in at a known yield less 12-15 basis points (0.12 to 0.15%). I do not get into fixed deposits nowadays because the higher interest paid is not sufficient to offset the relative illiquidity. Treasury bills bought through Poems allows me to sell and convert back to cash within T+1 working day. During year end when there are bonuses or windfalls, I will reallocate the cash to other investments but put more into treasury bills if I do not wish to buy more stocks and shares or bonds. In general, Maybank iSavvy + treasury bills are liquid enough as I can get the cash by T+1 or worst-case T+2 which is good enough for most lifestyle expenses. Other unbudgeted big ticket items can be funded through selling some shares but this is usually not the preferred method as I would be under pressure to sell and may even incur realised losses as the portfolio of equities will have some winners and losers. Tracking your cash Tracking your cash is important because you should know at any point in time, how much cash you can raise should you need to make changes to your investment portfolio. In addition, I also work out what is my cash holdings generating for me in terms of returns to see how I am doing in terms of growng my net-worth. At the end of the day, the combination of your cash flows to match your lifestyle as well as your investment asset allocation strategy will determine how much or how little cash to hold. So long as you are aware of where you cash flows go and that you manage to save each month, you are continuing on your journey towards financial freedom. Be well and prosper. My Comments: Hi PanzerGrenadier, I agree with you that proper cash management is important. However, not many people know that besides our normal savings account and FDs, there are also other products that offer good returns and liquidity. Like you have mention, T-bills is one. MMF is another option. I'm using POEMS MMF and I can get my money back within the same day if I request for my money before 10am on a working day with my POSB account. Another peculiar situation which I see some of my friends are doing is saving too much. They have the mentality that the more money they have on hand, the more secure they feel. However, this represents an opportunity costs as this excess money can be invested. Cheers! Derek Source: Five Cents Ten Cents
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By Five Cents Ten Cents
PanzerGrenadier is a 30-something accountant who finally grasped the concept of financial freedom at the ripe old age of 32. Ever since, he has been travelling on his journey towards financial freedom and documenting his adventures through his blog "fivecentstencents". PanzerGrenadier allocates his non-work time in between living within his means, saving and investing as well as spending quality time with family. He is an avid toastmaster and has completed 10 years of being a reservist conscript in the Lion City.
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6 Comments

6 responses to “Cash management 101”

  1. wenyi says:

    hi, recently found ur site via sgfunds.com. i would have to agree with derek that i do have the same perception of having $ kept in the savings account as being safe. however, my plan is to have at least $x in the bank before i use the subsequent amount to put into investments ( such as MMF or UT ).

    my plan is to deposit maybe 25 or 30% of my income into my bank account and the remaining 25% or 30% into a separate bank account for investments only. the rest are for expenses. however, since i’m a nsf and still have minimal expenses, i can save up to 60% of my nsf pay. however, this strategy obviously has to change when i’m out working after uni. currently i am owning a ILP(hsbc life manager), which i have paid for around 13 mths already. it was introduced by my brother. though i was still new to investments when i first bought it, i sort of questioned its usefulness like a few months ago since it is usually touted by many to buy a term policy and invest the rest. then again, since i have already incurred the high upfront cost, i might as well continue with the ILP.

    in any case, this is an interesting website and has good articles. thanks for ur contributions.

  2. Derek says:

    Hi Wenyi,

    Thanks for dropping by.

    With regards to your ILP, I’m sure you have read a lot about it in sgfunds. I personally have a neutral view on it. 13 months isn’t a long time and you should not let the initial cost deter you. What’s most important is to analyze if this plan suits your own needs, budget and your future requirements.

    Happy New Year!
    Derek

  3. C-130_SPOOKY says:

    The article is indeed useful and PanzerGrenadier has indeed put in a lot of effort and research into it. I would like to find out more about POEMS and what do you guys usually do with it?

  4. Derek says:

    Hi C-130_SPOOKY,

    It is called Phillip Cash Mgmt Acct and you can find the relevant info in Phillip’s website. I use this account solely for my investment funds e.g. dividends and from selling my stocks.

    Cheers!

  5. C-130_SPOOKY says:

    H Dereki,

    What are the advantages of using such a medium to do your investment? Is there certain advantages about it that’s why so many ppl are talking bout it?

    Thanks a lot

  6. Derek says:

    Hi C-130_SPOOKY,

    For me, the biggest advantage is convenience. POEMS offers a wide range of investment products – stocks, Unit Trusts, T-Bills etc. Hence to have all of them paid under one single account make things very much easier to manage. I guess the other thing is liquidity. If you are a DBS/POSB holder, it is possible to get your money within the same working day provided you cash out at before a certain time.

    For more info, you might want to do a search in http://forums.sgfunds.com/. They are many discussions on this.

    Cheers!

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