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.