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.