Cash management means how you manage cash and other liquid assets to meet your personal financial goals. Cash is important; it provides needed protection because of its liquidity. Liquidity means that your funds are immediately accessible; having liquid funds protects you from having to sell less-liquid, long-term investments at substantial discounts.

There are three main trade-offs regarding cash management. The first is the risk-return trade-off: higher liquidity means lower returns. Generally speaking, the more liquid the financial asset, the lower the return you can expect to receive on the asset.

The second trade-off is the spending/investment risk: cash on hand is easier to spend than other financial assets. Nonliquid financial assets generally require time and effort to convert to cash, and cash is just easier to spend.

The third trade-off is the return/time expended risk: since returns are smaller with existing cash management assets, the time you spend on managing those assets should be much less than the time you spend managing other types of financial assets.

However, in spite of these three trade-offs, you can still impact your portfolio in a significant and positive way by using your liquidity wisely. The key to using your liquidity wisely is relating cash management to your personal goals.

What goals do you want to accomplish? Let cash management help you. For example, do you want to save more money? Automate your savings account and pay yourself first at specified intervals. Arrange for your bank or financial institution to transfer a specific amount of money each week or month into your savings or mutual fund account. Contribute to your company retirement plan each month with a specific amount that goes directly to that account.

Do you want to cut down on the time you spend working on your personal finances? Use cash management software, such as Intuit’s Quicken or www.mint.com; when they are properly set up, these programs can substantially reduce the amount of time necessary to manage your finances.

Cash management is an essential part of your emergency fund. Your emergency fund should be a resource that can be used to meet your unexpected needs for cash. The rule of thumb for an emergency fund is to have sufficient liquid assets to cover three to six months of expenses. I recommend that you substitute the term “income” for the term “expenses” because your income should be higher than your expenses. Three to six months of income should be kept in your emergency fund so there is a greater chance you will not need to tap into long-term savings to meet short-term cash needs.

Is it still wise to have an emergency fund in this world of credit cards and home equity lines of credit? The answer is yes, absolutely! It may even be more necessary than it was in the past. Credit cards and home equity lines of credit may be cancelled if you should lose your job or have a debilitating accident. Secure, available funds that can be accessed quickly provide peace of mind in a troubling world. In the priesthood session of general conference in October 1998, President Gordon B. Hinckley stated:

May the Lord bless you, my beloved brethren, to set your houses in order. If you have paid your debts, if you have a reserve, even though it be small, then should storms howl about your head, you will have shelter for your wives and children and peace in your hearts (“To the Boys and to the Men,” Ensign, Nov. 1998, 51).

Shelter for our families and peace in our hearts are great goals for cash management.