Cash Management

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Basics: Managing Cash Outflows

It is very easy to spend cash. Cash is anonymous, leaves little in the way of records in your personal finances, and is generally used for small purchases. This ease is what makes managing cash so crucial.

Small expenditures add up. Every time you buy a coffee, a doughnut, a DVD, a book, anything, it is very tempting to write it off as being "only 1 dollar" or "only 20 bucks, but I don't do this very often". If you were to only buy one coffee ever, then, yes, that 1 dollar would be a small drop in the ocean of your finances. But the fact is that "just 1 dollar" spent every day quickly becomes more than 200 dollars in a year, and if you are spending "just 1 dollar" on a coffee, a bagel, the subway (both ways) and the newspaper each day, then you are easily spending 1000 dollars a year on those items that "only" cost 1 dollar.

Obviously, no one wants to give up all the pleasures of life just to save a couple bucks. You can still have your morning coffee every day, but you can do so without the massive cash outlays that the above scenario will lead to.

As an example, let's consider that daily cup of coffee. Let's assume that you buy a cup of coffee every morning from your favorite coffee shop just before you get to work or school. Let's say that it costs 1 dollar, even. (This is probably an underestimate!) If you go to work or school 200 days out of the year, then you are spending an extra 200 dollars every year just to buy that coffee. What can we think about changing to make this number smaller?

For coffee, the answer is simple: buy a coffee pot (25 dollars for a cheap one), some coffee (about 7 bucks for a 2-3 weeks) and a thermos (20 bucks for a really nice one). While it is true that this may look more expensive at the outset, let's check out the numbers:

Weeks Coffee pot Dollar a day
1-3 25 + 20 + 7 = 52 3 * 5 = 15
4-6 52 + 7 = 59 15 + 3 * 5 = 30
7-9 59 + 7 = 66 30 + 3 * 5 = 45
10-12 66 + 7 = 73 45 + 3 * 5 = 60
13-15 73 + 7 = 80 60 + 3 * 5 = 75
16-18 80 + 7 = 87 75 + 3 * 5 = 90
19-21 87 + 7 = 94 90 + 3 * 5 = 105
22-25 94 + 7 = 101 105 + 3 * 5 = 120
... ... ...

Look at what happens in weeks 16-18. Even though the coffee pot was more expensive up front, eventually it starts to be cheaper! The coffee pot example is a bit contrived and boring, but it has some universal appeal: most people do drink coffee, or tea, or a soda, or have some kind of daily expenditure that is worth cutting out. This experiment could easily be rerun with soda: instead of buying a coffee pot, buy a case of soda from Costco or the grocery store once in a while and bring that to the office instead of visiting the soda machine.

Imagine if you were able to lower the cost per item on a few other things that you buy on a regular basis! If each of the items saves you 50 dollars over the course of a year, you could end up saving a few hundred dollars without much change to your habits at all.

The key to controlling your cash spending is to limit how often you use your cash. Because a dollar here or there can easily be forgotten, you need to make sure that you spend them as rarely as possible. Use cash when other forms of payment are cumbersome: at a game, on the street, for small items, etc. Just remember that the whole reason you are trying to limit your use of cash is to prevent unneeded outflows!


While controlling extra spending on items you use often is crucial to cash management, a more fulfilling goal might be to control extra spending as a result of fees.

ATM fees immediately come to mind. ATM fees are wasted money. These fees are usually charged on both ends of the transaction: if you are using an ATM that doesn't have your bank's logo on it, you will be charged by the bank that owns the ATM (usually 2 or 3 dollars) and ALSO by your bank (usually another 2 or 3 dollars). That is a whole lot of fees for a withdrawal that might not even be that big. The solution here is to plan ahead and make sure you use another bank's ATM as infrequently as possible. You could also consider using a different payment instrument than cash, but there are other fees and concerns to consider on those, too.

In general, if you are considering making a withdrawal from an ATM that is not owned by your bank, instead consider making a cash-back purchase on your debit card. Most debit cards charge very small fees (25 cents or free) for cash back. Most grocery stores will give you cash back on very small items: buy a candy bar or a soda and get 40 dollars cash back, and the net fees (including the cost of the item) are usually less than 1-2 dollars. Plus, you get the small item instead of paying the fee at the ATM.

Credit card fees are another fee that you should avoid paying at all costs. You should NEVER have a credit card that charges a yearly fee. (the only exceptions are certain frequent flier cards where the benefits outweigh the fees) Whenever you carry a new balance on a credit card, you will usually be charged a financing fee. In addition to the heavy interest rate you will be saddled with, the financing fee can often be in the neighborhood of 20 dollars. Avoid these fees at all costs!

Saving a dollar or two here and there by avoiding a fee might seem paltry. The idea here is merely to get you to pay attention to fees, especially the seemingly innocuous ones on things like ATM transactions. As you become more aware of needless cash outflows to a number of sources, you will notice more places that your hard-earned dollars are not working for you. And eventually, you will start to amass those wasted dollars for yourself instead of giving them away. With some money to invest, you will have to be EVEN MORE aware of fees and wasted money, because all of the minor outflows you encounter in your daily life are even more prevalent in the investing world!

Money Market

If you have followed the advice above, and have accumulated some cash, then you are probably wondering what to do with it next. The first thing to do is to think about investing it. If you are not quite ready to do that yet, however, the next best thing to do is to use a money market account.

Money market accounts are similar to savings accounts: they pay interest, and not really meant to be "withdrawn" from at an ATM, and can be linked to your checking account. The major difference, however, is that these accounts tend to pay slightly higher interest rates than standard savings accounts, but are also NOT FDIC insured.

Why should you put your spare cash in a money market account? The best thing about the money market account is that, in general, in order to use the cash in the account, you must initiate a transfer of funds from the money market back to your checking account. Making your cash slightly more difficult for you to get at will make you slightly more reluctant to spend it, and thus better at saving it. Plus, because of the extra interest paid on the money in the money market, it will be working a bit harder for you than the savings account.

I mentioned that these accounts are not FDIC insured. If you are extremely risk averse, this may pose a problem to you. If that is the case, by all means use the savings account that is FDIC insured. On the other hand, most investments out there are not FDIC insured, and in general, having the extra insurance means lower returns. Choose based on your risk tolerance, but understand that in order to make your money work the hardest for you, you will need to take on some risk, and this particular risk is much less than other investments.

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