Squeezing More Out of Your Bank: Using a Money Market Account for Cash Flow Management

With savings account and money market rates still relatively low, one way to earn more interest is to increase your average balance in these accounts. This doesn't mean having to magically produce an extra chunk of cash for deposit--it simply means managing your money so that it spends as much time as possible in higher interest-producing accounts. This means learning from the cash management techniques that businesses use--and money market accounts are ideal for this purpose.

Money Market Rates Are Higher: Use Them

Even if you have an interest-bearing checking account, chances are that money market rates are higher than what you would earn on that account. Still, money market accounts have transaction limits, so you can't use one as a substitute for a checking account when it comes to paying individual bills. A money market account can be used in tandem with a checking account to make money available while keeping it productively earning interest until it is needed.

This is similar to the challenge that businesses face. Cash is the fuel that keeps a business running. It must be used as productively as possible, yet it must be readily available when needed to meet expenses. This is why corporations pursue active cash management techniques. To try something similar with your household budget, you need to understand the basics of those techniques, and how to apply them to your situation.

Fundamentals of Corporate Cash Management

The trick with corporate cash management is to never have money sitting idly. It should either be used to meet expenses, invested productively, or at least earning interest. This can get tricky, since corporations have money coming in and going out all the time.

A corporation's money comes from several sources, principally:

• Receipts from sales of products or services
• Asset sales
• Earnings from investments

Meanwhile, money is going out to pay for:

• Operating expenses
• Long-investments
• Loan payments

All of this is managed essentially by creating a schedule. Corporations plan to the precise day when money is expected in, and when it needs to go out. This way, they can use the money for investments or to earn interest right up until it is needed for something else.

Applying Cash Management at Home with a Money Market Account

You may not think your household finances resemble those of a corporation, but there are similarities. Your regular salary is like routine business receipts. You may also occasionally receive larger lump sums, in the form of a bonus or from the sale of a possession. Also, you may have some money coming in from interest and investments.

Meanwhile, your everyday household expenses--the monthly bills--are like operating expenses. You may also make some longer-term purchases, and make periodic loan payments.

Go with the (Cash) Flow

All of these expenses can be scheduled. Once you know that schedule, you can have incoming money flow into a money market account, and move funds to checking only when needed--not on a check-by-check basis because of transactions limits, but in reasonable increments. This way, your money will spend more time earning money market rates.

As you try to optimize your average money market balance, you will also benefit more from shopping around for the best money market rates. After all, the more you have on deposit, the more you have to gain.

Source:

Pam Newman • A Basic Lesson in Cash Flow Management • May 01, 2006 • http://www.entrepreneur.com/money/moneymanagement/financialmanagementcolumnistpamnewman/article159784.html • http://www.entrepreneur.com/money/moneymanagement/financialmanagementcolumnistpamnewman/article159784.html