Magazine article USA TODAY

Cashing in on Cash Equivalents

Magazine article USA TODAY

Cashing in on Cash Equivalents

Article excerpt

Cash equivalents are shortterm, interest-earning instruments or investments with high liquidity (easily and quickly converted to cash) and high safety. In general, they earn more than a bank checking or passbook savings account, but with little additional risk.

Cash equivalents serve two basic purposes: as a place to store emergency funds to help meet living expenses in the event of a sudden drop in income or to pay for large, unexpected expenses such as a medical or legal bill; and as a parking place for investment money until one is ready to put it into more attractive assets such as stocks, real estate, or long-term bonds. If short-term interest rates are high, cash equivalents might be good investments themselves, but historically, most short-term investments barely keep ahead of inflation.

According to the Institute of Certified Financial Planners, the major cash-equivalent options are:

Money market mutual funds. These are not Federally guaranteed against loss of principal, but, because of their diversification, strict regulations, and investment in high-quality short-term debt, their risk is very low. Money market funds typically fall into two general categories--those that invest in high-quality commercial debt along with some government securities, and tax-exempt municipal bonds.

Bank money market accounts. These are Federally insured up to $100,000. They often require higher investment and have more withdrawal restrictions than non-bank money market mutual funds, and their interest rates tend to be a bit lower. …

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