Cash management is a term often used by businesses to determine how much revenue coming in is available for day-to-day operations, and how much is available for investing in the future of the business.
But cash management is important for individuals, too. Your own personal balance sheet is not unlike that of a business. You want to determine how much of your income is available for covering expenses, discretionary spending, and investing for your future.
When you take control of your spending and saving in proportion to your income, you’re engaging in cash management. Here, we’ll explain the process in more depth, highlight the benefits you’ll reap, and guide you through this process, step by step.
What Is Cash Management?
You may wonder about the meaning of cash management; it can sound like a complicated term. But here’s the simple truth: Cash management is all about managing the money that’s coming in and the money that goes out in the best way possible for your day-to-day living. You can also think of it as cash planning, as it helps you stay in good financial shape today and tomorrow. Let’s look at this through a somewhat different lens: Solid money management strategies like the ones we’ll explore help you maintain healthy cash balances, stay on budget, earn a return on your savings, and reduce expensive debt.
💡 Recommended: Business Cash Management, Explained
Why Is Cash Management Important?
Good cash management is essential for a business’s financial stability. By the same token, borrowing cash management techniques that businesses use can help individuals enhance their overall financial wellness.
Cash Management Strategies
The concept of cash management is straightforward, but implementing it can become a bit more complex as individuals deal with financial ups and downs. These five strategies can help you adopt an efficient cash management process worthy of any corporate Chief Financial Officer.
1. Create a Realistic Budget
Think of your budget like a personal cash flow statement, which is a financial statement businesses often use to monitor income and expenses each month. Your personal budget can work the same way, becoming your personal cash flow statement.
If you’re often wondering at the end of the month where all your money went, that’s likely a sign it’s time to create a realistic budget. This can give you a clear picture of your monthly cash flow (money you earn) and your monthly cash outflow (money you spend).
From there, you can take the necessary steps to manage your cash flow to help you avoid too much debt, set financial goals, and save for the future. Once you accomplish that, you’ll be enjoying a good example of cash management. And it’s easier than you might think! Creating a budget isn’t difficult. You’ll simply need to gather some of your financial information and do some calculating. Let’s explore what financial info you’ll need below.
Income includes your salary, bonuses, self-employed income, rental income, and all investment income including interest, dividends, and returns.
For the purposes of cash flow budgeting, you want to work with after-tax income, or the money that’s actually available to you instead of pretax gross numbers. So, this means take-home pay, not your gross salary.
Any extra money — such as bonuses, tax returns, or money from side gigs — should be factored in, as they are earned and with taxes owed in mind.
Essential expenses should include things like the following:
• Housing and utilities
• Medical expenses
• Insurance premiums
• Car payments and maintenance
• Public transportation costs
Expenses can also include discretionary spending. This includes the things you want but don’t necessarily need, such as entertainment, travel, and other non-essential items.
Then there’s debt. Do you have student loans, credit card debt, or any other debt? If so, this is the liability side of your cash flow statement. You’ll need to take a close look at that.
2. Accurately Estimate Costs
Just like a business, the more accurate your budget is, the more efficient your finances will be.This is where tracking expenses comes in. You may find it makes sense to track your expenses for one to three months so you can determine exactly where your money is going. You can do this using your own spreadsheet or budgeting apps such as SoFi Relay.
Here are a few common living expenses that can help you create your own list. Once you have a finalized list, you can then use it to determine how much you’re spending on living expenses.
◦ Car payments
◦ Gas and tolls
◦ Public transportation costs
◦ Taxis and ride shares
◦ Auto insurance
◦ Day care
◦ After-school programs
◦ Summer camp
◦ College tuition
◦ Health insurance premiums (if not deducted from your paycheck)
◦ Auto and home insurance premiums
◦ Life insurance premiums
◦ Disability income insurance premiums
◦ Takeout and restaurants
◦ Deductibles, copays, and coinsurance
◦ Prescription drug costs
◦ Over-the-counter (OTC) drugs
◦ Eyeglasses and contacts
◦ Concert, theater, and movie tickets
◦ Paid streaming and podcast services
◦ Flea and tick prevention/other medications
◦ Vet bills
◦ Pet insurance
◦ Haircare and other grooming
◦ Gym membership
3. Be Mindful of Cash Flow
You can use your income and spending data to better manage your cash flow. One approach to consider: Separating your income into different “buckets” using a percentage system.
With the 70-20-10 rule, you aim to put 70% of your income into essential and discretionary spending, 20% toward savings or paying off debt, and 10% toward investing and charitable giving.
These “buckets” can help you prioritize and achieve your financial goals. If your spending exceeds 70% of your income, you can find ways to reduce discretionary spending. How, exactly? Cutting back on takeout and restaurant meals, streaming services, and clothing purchases can all add up to more savings.
You may also find you need to make more drastic cost-cutting moves, such as finding less expensive housing or transportation. This can be especially important if you are paying off debt. If you are carrying heavy student loans and/or credit card debt, you may find you need to devote even more than 20% of your income to paying that down so you can avoid the high-interest payments and make way for other savings. This could include an emergency fund or health savings account (HSA).
The 10% investing allocation is where you focus on long-term financial goals, such as saving for retirement or future education expenses. It also offers a place to give back with charitable contributions.
Ready for a Better Banking Experience?
Open a SoFi Checking and Savings Account and start earning up to 4.50% APY on your cash!
4. Invest Extra Cash
Successful companies invest extra cash back into the business so it can grow. The same notion works for personal finances. Where you invest your extra cash that’s destined for short- and long-term savings is an important aspect of cash management.
For short-term savings, high-yield savings accounts, money market funds, certificates of deposit (CDs), and cash management accounts may all pay more interest than a traditional savings account.
Funds earmarked for long-term savings are usually best made as contributions to the following kinds of accounts:
• Self-employed retirement savings plans
• Other long-term tax-advantaged accounts
This isn’t money you need soon, so it can be invested more aggressively than your short-term savings.
5. Avoid Bookkeeping Inaccuracies
With any cash management or budgeting process, being fluid and staying on top of your finances is key. There are times when you may need to allocate more toward debt payment and other expenditures, as well as times when you can focus on saving.
Regularly tracking expenses and adjusting your buckets accordingly will help ensure no inaccuracies creep in and keep you on track for your financial goals. Also, regularly checking your account balances and reviewing statements (online, in an app, or on a hard copy) is vital too. Accurate bookkeeping enables you to stay on top of cash management while balancing short-term needs with long-term financial planning.
As you’ve seen from these examples of cash management, it’s a process that need not be complicated. By adopting these cash management concepts, you’ll be able to manage your cash flow, create a budget, and stay on top of your finances. What’s more, they’ll also guide you towards meeting your long-term goals as well by helping you manage debt and save for tomorrow.
Bank Better With SoFi
Cash management strategies work as well for individuals as they do for businesses. But it can help a person along to have a partner in growing your money. A SoFi Checking and Savings bank account can be just that. We offer eligible accounts a super-competitive APY, plus we don’t charge you minimum balance or monthly fees. What’s more, you’ll have access to a network of 55,000 fee-free ATMs. All of this means you’ll have more money to manage!
Photo credit: iStock/ptasha
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 8/9/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.