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Cash Equivalents

Cash equivalent is a financial term used to describe deposits in liquid accounts - readily available - that do not fluctuate in absolute dollar value. These accounts can be considered the same as cash in your pocket. Cash equivalent accounts have very short-term holding periods, ranging from 0 days to 90 days. Because of their liquidity, they usually earn the lowest rate of interest, if any.

From an investor’s perspective, cash equivalents are -

  • Checking or savings accounts.
  • Money market accounts.
  • Short-term securities maturing within 90 days - CDs, Treasury Bills.

Advantages of cash equivalents -

  • Liquid - readily convertible into cash.
  • Maintains absolute dollar value.
  • Useful for money needed in the short-term; paying of bills and anticipated near-term obligations.
  • Convenient account to park money for future investment commitments.

Disadvantages of cash equivalents -

  • Usually does not earn enough interest to keep up with inflation; declines in relative value to general prices of goods and services.

Also, see Asset Allocation.

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Investing for Retirement - Surviving a Financial Tsunami by John Benson

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A step-by-step guide to goal setting and implementation of an Investing for Retirement plan. How to be a successful investor and the mistakes to avoid.

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