Understanding Cash And Liquid Investments: Quick Access To Funds

Cash and liquid investments are assets that can be easily converted into cash. Cash is the most liquid asset, while other liquid investments include stocks, bonds, and mutual funds. These investments are considered liquid as they can be sold quickly and their value is not significantly affected. Liquid assets are important for individuals and businesses as they help to manage short-term obligations and unexpected expenses.

Cash on hand

Having cash on hand is important for both individuals and businesses. For individuals, it can help them stay afloat during financial emergencies. For businesses, it can help them weather financial challenges, secure credit, and settle liabilities with short notice.

While cash on hand is the most liquid asset, it is important to have a combination of liquid and non-liquid assets. Non-liquid assets, such as real estate and equipment, can provide long-term gains and financial security.

Cash equivalents

There are several types of cash equivalent investments, including:

• Treasury bills, also called T-bills, are short-term U.S. government debt obligations backed by the Treasury Department with maturities of one year or less.
• Commercial paper is an unsecured, short-term debt instrument issued by corporations and financial institutions with maturities of less than 270 days.
• Marketable securities are financial instruments that are liquid and tradable on public exchanges or over-the-counter markets.
• Money market funds are a type of mutual fund that invests in highly liquid, low-risk securities.
• Short-term government bonds are considered by some to be cash equivalents because they are very liquid, actively traded securities.
• A certificate of deposit (CD) is a type of savings account with a financial institution where the saver's capital is locked in for a specific period in return for a fixed rate of interest.
• A banker's acceptance is a short-term credit investment created by a non-financial firm and guaranteed by a bank to make payment.

Money market accounts

MMAs generally provide higher interest rates than regular savings accounts, and they may come with additional benefits such as debit cards and limited check-writing privileges. These accounts are well-suited for individuals who want to earn more interest than what a typical savings account offers and are suitable for short-term financial goals.

While MMAs offer higher interest rates and some flexibility, they also come with certain restrictions. There are usually minimum balance requirements, and account holders may be limited in the number of transactions they can perform each month to avoid fees.

MMAs are a good option for those who want to save for a specific purpose, such as a vacation or a down payment on a large purchase. They can also serve as an emergency fund, providing easy access to funds when needed.

• They offer higher interest rates than regular savings accounts, and these rates tend to be variable, fluctuating with market conditions.
• They often come with debit cards and check-writing privileges, providing the accessibility of a checking account.
• There are typically minimum balance requirements, and banks may impose fees if the balance falls below the minimum.
• They are suitable for short-term financial goals rather than long-term planning.
• They provide federal insurance protection through the FDIC or NCUA.
• They may have restrictions on the number of transactions to encourage saving behaviour.
• They are a good option for saving for specific purchases or building an emergency fund.

Marketable securities

The liquidity of marketable securities makes them very popular among individual and institutional investors. They are easily accessible to individual investors, and there are usually minimal limitations outside of a simple brokerage account needed to invest.

However, marketable securities are subject to market risk, and their value can fluctuate, leading to potential losses for investors. Buying and selling marketable securities also typically involves transaction costs such as brokerage fees and commissions, which can reduce overall returns.

Short-term bonds

A short-term bond fund provides the least amount of risk exposure to changing interest rates, so rising or falling rates won't affect the price of the fund too much. The bond fund will pay interest on a regular basis, typically monthly. Short-term bonds are highly liquid and can be bought and sold on any day that the financial markets are open.

However, it's important to note that short-term bonds carry a greater degree of risk depending on the issuer. Additionally, investors could lose money if interest rates go up, as they may have the opportunity cost of having their money tied up in the bond rather than invested elsewhere.

Frequently asked questions