What do banks do with their cash? Well if you look at the assets on the Bank of America balance sheet you will see a summary of their assets and liabilities.
You can find Bank of America’s balance sheet at Morningstar.com.
The balance sheet of any company is a snapshot at a moment in time showing the assets of a company, the liabilities of that company and what is leftover for shareholders, also known as shareholders’ or owner’s equity.
Assets are everything the company owns or controls that has economic value. Liabilities are everything a company owes or is obligated to pay, the opposite of an asset. When everything that’s owed is subtracted from what’s owned, retained earnings are left for the shareholders. You have the ability to create your own balance of liabilities and assets. Managing your cash flow wisely will allow you to have more assets and fewer liabilities, leaving more for retained earnings. The bankers know the formula. Let’s see how we can manage our money just like them.
Any bank still in business is able to cover all of their liabilities with assets. For example, if the asset to liability coverage is about 1.12, that means they have about one dollar and twelve cents in assets for every dollar in liabilities. Your goal should be to do the same. If you drowning in debt then you need to reduce your liabilities. Your goal should be to continually reduce your liabilities and increase your assets. Your net worth is a measure of assets to liabilities. Positive net worth is the first step to financial freedom.
The assets that Bank of America owns are spread over various asset classes. There are lower risk federal funds, riskier trading account assets, bonds and debts owed to them in the form of loans & leases. Diversification is important to lower the overall risk of your financial portfolio. For example, I invest in mutual funds, individual stocks, and Exchange Traded Funds, as well as hold cash to diversify my sources of liquidity.
The liabilities owed by Bank of America are not all due at once. They have various maturities also known as due dates. Deposits are typically checking accounts that see lots of transactions each day, federal funds and trading accounts typically have maturities within the range of a few days. Commercial paper due dates will vary but are typically longer term and long term debt is, well, long term. You can do the same for your own liabilities by timing the due dates of your monthly bills or long term loans. Spreading the due dates out during the month can positively affect your cash flow situation. Some creditors will allow you to move your due dates. Perhaps your insurance company will allow this as well. By arranging your due dates to coincide with your income, you can manage your cash flow more efficiently.
Try out the free services at Mint.com that will help you get control of your cash flow.
Most Americans will say that the banks were the cause of our recent financial crisis, but there is plenty to be learned from them. Take the tips from what they do well and apply it to your own finances to manage your money like a banker.
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