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Cash-management strategies

Good cash management means making optimal use of your liquid resources. You should have enough money on hand to cover your living expenses and any short-notice emergencies you might face. At the same time, you want to make sure your money is working as hard as possible, not just collecting dust in a no-interest chequing account.

An effective cash-management strategy is just one part of your overall financial plan. It depends on your individual circumstances, financial habits and short- to medium-term objectives. Fortunately, there are cash-management products available to suit your needs and goals - from money-market and interest-bearing chequing accounts, to credit cards and lines of credit.

If your income and expenses are predictable, and you have no major expenses coming up, your cash-management needs will be straightforward. A chequing account that pays a staggered rate of interest depending on your balance may be a good choice for handling your living expenses, provided that the minimum balance required to earn interest is reasonable.

Alternatively, consider using your credit card. As long as they are paid off promptly, credit cards are an excellent transaction tool. Your monthly statement will tell you exactly where your money is going. Remember, though, that this is a good strategy only if you are extremely disciplined and can avoid impulse or unnecessary purchases when using your credit cards.

Financial advisers often recommend keeping approximately two to three months' salary available for emergencies, such as an illness or major home repair. That's a lot of money to park in a chequing account, so investigate alternatives that provide better returns.

A money-market account with chequing privileges is a good option - just look for one with reasonable fees. Cashable guaranteed investment certificates are another option, as long as the interest penalty for redeeming them early is not too great.

If you are anticipating a major expenditure, such as paying a child's university fees or buying a new car, another option is to keep funds in a term deposit or other short-term fixed interest vehicle that matures when you need the money. A money market fund is a good way to finance something like a home addition or renovation, where large amounts of cash are required on a regular basis.

Alternatively, consider a line of credit. If you are willing to use your home equity or term deposits as security, you can usually obtain a line of credit at or below prime rate and then convert the debt to a mortgage when the project is finished.

A line of credit - secured or unsecured - is also a useful product if your income fluctuates. If you are self-employed or own a seasonal business, a line of credit can be used to cover your living expenses when incoming cash is low.