The Hoarding Dragon An Introduction to Advanced Cash Management By Master Adept The Lord DSJ Within our delightful

syncretism of Objectivist philosophy and Sumerian mysticism, I fondly recall propounding the virtues of planning ahead. The entire purpose for being financially successful is to free your time and effort for other purposes... to focus on your own growth and development, rather than on the compulsory resource scarcity and artificial competition suffered by the herd of humanity. Havent you ever wondered where it all goes... the energy people expend worrying about their rent payments, stressing over their finances? (Hint: its not towards their own self-realization) So, this years Post of the Year, or POTY (and yes, that is a poo joke -- I can still work my old schtick), will focus on an inabrogable Law of the Financial Universe: Cash is King. Nothing kills stress and breeds success like sitting on a pile of cold, hard cash. Most financial advice that I see... is focused primarily on making money (what to invest in) and secondarily on risk management (what level of risk/reward is appropriate). What is more rarely discussed, however, is the foundation of Cash Management necessary to support your investment goals. A good cash management system automates most financial chores, such as maintaining adequate cash reserves, processing monthly income and expenses, and directing excess cash toward gainful projects... all while your liquid cash is earning the highest return possible. Good cash management ensures you will never have to live paycheck-to-paycheck, and money will cease to be a cause of worry and stress. It may be true that money itself doesnt make you happy... the correct management of it does. First, you absolutely must use the right banking structure. If youre like most people, you probably bank with one of the large consumer brick and mortar firms (Bank of America, Wells Fargo, Chase, etc.). Stop! Retail banks are for poor people who bounce checks and live paycheck-topaycheck -- the service, interest returns, and cash management features are abysmal. You want to use a rich persons bank -- you want to bank with an investment firm. By using an investment firm, you have access to deeply liquid capital markets, and many more places to park your cash reserves. A few good examples would be Fidelity, Charles Schwab, and Morgan Stanley, which all offer similar services. Youll first notice that the customer service is vastly superior to retail banks. After all, their customers are not calling to whine about being charged bounced check fees. I like being able to talk to an actual banker (who speaks English) 24/7 in less than five minutes. Retail banks offer four basic accounts: checking, savings, money market, and certificate of deposit. These can be substituted for the capital market equivalents of sweep accounts, money market funds, and bond funds. The basic idea, is that you make higher returns than a bank CD, but without having to tie up your money. The downside, say the retail bank loyalists, is that investment products are not FDIC insured. However, investment products are covered by SIPC, which guarantees your ownership of the investments if your brokers business fails; a brokers business operation and the funds it manages, must also be strictly segregated. So, though it is technically possible for a money market fund to lose money... and, technically, its possible for treasury bonds to become worthless --

if that happens, the dollar itself will be fairly worthless, and thus FDIC would be paying your claim in worthless dollars. So, for practicalitys sake, there isnt any meaningful difference between FDIC insured savings and SIPC insured money market funds. If the money markets and treasury bonds become risky places to park money... wed be in a catastrophic economic and civil collapse anyway. And that isnt going to happen anytime soon. And no, the world is not going to end on October 21, 2011. Heres an example of a simple system, starting with four distinct accounts: 1. Cash Management -- Checking a. Called an FDIC sweep account, because each night, it sweeps your money into a bank money market account which is FDIC insured. In some systems, this can be transparently spread across multiple depository banks, increasing the FDIC insurance limit. b. This account should have a constant balance of at least one months regular expenses. The balance is automatically maintained at that level by drawing from the Core and Money Market Fund each night. It will also automatically draw from the Core and MMF if it becomes overdrawn. 2. Brokerage Core a. An SIPC insured sweep account, which can sweep your money into a short term money market. The Core account is for cash used to buy various stocks/funds. It also receives dividends and proceeds from the sale of stocks/funds. It normally shouldnt have much money in it, since it is only used for clearing transactions. 3. Money Market Fund -- Cash Reserves a. An SIPC insured high-yield money market fund. This is liquid money which can be drawn immediately. It will be used to fund the Brokerage Core and maintain the balance in the CM account. b. This account should have 2-3 months of fixed recurring expenses (bills, rent/mortgage, etc.). c. Your regular sources of income will be direct deposited into this account -- thus, all money which is not needed for regular monthly expenses or investments, is always sitting where it will make the highest return and still be liquid. 4. Bond Fund -- Savings a. An SIPC insured investment grade bond fund -- i.e., a GNMA (Ginnie Mae) bond fund, aggregate bond fund, or government bond fund. Since this is supposed to be very low risk, look for bond funds with very low standard deviations in price. For example, Fidelitys GNMA fund didnt have any significant drawdown during the various market crashes in the last 10 years. b. This is where you park your cash when you can part with it for more than 30-90 days. Its like a CD, but with a much higher return. Unlike a CD, if you absolutely must have your money, it can become liquid in 3-5 business days. c. This would be a good place to have what personal finance writers call an emergency fund, or 36 months of projected expenses. Now, I must admit, I am writing this to be durable advice, which will be true under a variety of market conditions. However, under the current conditions of May 2011, you can skip the Money Market Fund and keep your cash reserves in the Brokerage Core or Cash Management account -the interest rates are so low, that the difference is almost negligible. Such a system can be setup incrementally... starting with the CM account, and maintaining a savings target where the balance exceeds 30 days of expenses. Then, you can begin to save for the MMF minimum balance... then the Bond Fund minimum balance, etc. By the time you are finished setting up this system, youll probably have at least $10k of cash making the highest risk free

returns possible. The bill pay features on the CM accounts are quite powerful, as is your ability to automate internal and external transfers. Youll simply never have to bother thinking about paying bills or bouncing checks. No joke, it literally runs itself. You are what we, in finance, call a going concern -- even if your income was shocked for a period, you could continue to operate until normal income resumes, without any special action needed. You can be more selective of your employment, for example, since your employer doesnt have the power difference over you, by your own monthly dependence on a paycheck. These benefits are the same basic virtues of the standard personal finance savings mantra the sort of thing youll hear at Get Rich Slowly. However, using investment-grade cash management makes it easier, more powerful, and far more profitable. Once you have positive cash flow, and your cash management is squared away, you can start looking at longer term investment and retirement accounts. Ordinarily, I might end here, but I do want to illustrate some more advanced things you can do, once you start building up wealth within this sort of system. 1. You can have multiple Cash Management accounts, for a variety of purposes, and with different rules on how and when they replenish themselves or automatically fund overdrafts. a. Have problems spending too much at Starbucks with your debit card? Make a Cash Management account to automatically give yourself a petty cash allowance every month, and use only that debit card around town. In a real emergency, you can call 24/7 and transfer in money from your other accounts. b. The above is also a good way to prevent fraud and theft -- if an evil doer figures out your account information and PIN, youre only down your allowance while the bank investigates. In a mugging, you can freely give away your card and PIN, without worrying about the bad guy tapping your pile of cash before you call the bank to shut it down. c. A CM account could be created, and linked to an external Bank Line of Credit; in dire emergency, if it cannot be replenished from your usual funding hierarchy, it will automatically initiate a transfer from the line of credit. A quick note on the above, consumer credit cards are not mentioned anywhere in this cash management scheme. Granted, it might not be a bad idea to have a couple, keep them active, and pay off the balances... but with a Bank Line of Credit, we really have transcended the need for consumer credit for emergency purposes. 2. You can have multiple Brokerage Core accounts, with different margin credit options. a. You can have a Brokerage Core that is cash only for this cash management system, and another that is enabled for margin borrowing. b. On margin credit, you can borrow up to 50% of the value of your assets, at a low interest rate, and no specific due date. Most people think of margin borrowing with respect to using it to speculatively buy stocks, or short-sell stocks (forms of leverage), but the margin line can be used for any purpose. A useful, and responsible example, is if you need to make a large purchase (car, major appliance, whatever), and your money is tied up while waiting for your bond fund sale to settle. Using margin to cover it, the only interest expense youd pay is for the three days, at the margin rate (on the order of 6-9%)... or about 0.05% of what you borrowed to cover that purchase. If the purchase was $5k, you would have paid a quarter to have it covered by your margin; people currently pay more than 10 times that to withdraw $200 from an ATM. In other words, margin can make all assets highly liquid, very

cheaply... and can be a very useful cash management tool. Good luck with your financial future!