The three main trade-offs regarding cash management are the following: (1) the risk-return trade-off, (2) the spending-investment risk trade-off, and (3) the return-time expended risk trade-off.
The key to using liquidity wisely is relating cash management to your personal goals. By doing this you are able to choose the investment vehicles that will help you achieve your goals faster.
An emergency fund is a resource that can be used to meet unexpected needs for cash. You should have one so that you have sufficient liquid funds available in the case of an emergency, job loss, and so on. The amount of the emergency fund should be equal to three to six months of expenses. Your emergency fund should be a resource that can be used to meet your unexpected needs for cash.
Six account characteristics that can be used to analyze different cash management alternatives are the following: (1) liquidity, (2) minimum balances, (3) interest rates, (4) safety, (5) costs, and (6) benefits.
The four key areas used to compare cash management alternatives are the following: (1) interest rates, (2) after-tax returns, (3) inflation, and (4) safety.
