Cash
Cash is legal tender—currency or coins—that can be used to exchange goods, debt, or services. Cash refers to any money readily available for spending or investing, including savings accounts, money market accounts, and shorter-term certificates of deposit. Unlike other asset classes, cash can be easily accessed and used for any purpose, such as emergency funds or short-term investments. These types of accounts typically offer lower returns than other asset classes, such as stocks or bonds, but they also come with lower risk and increased liquidity. Today, cash remains an important pillar of every economy and plays an important role in most well-balanced investment portfolios.
CASH IN DAILY TRANSACTIONS
Cash represents a tangible asset and serves as a highly favored method of payment worldwide due to several reasons.
Cash allows for direct, immediate payments, granting the freedom to spend without involving third parties.
The use of cash is secure, as it doesn’t necessitate any third-party intermediaries.
Cash is an effective tool for managing one’s budget.
In emergencies, such as medical treatments or situations where internet access is unavailable, cash proves to be invaluable.
Cash eliminates transaction fees and the potential challenges associated with chargebacks that can occur with credit or debit card transactions.
TYPES OF CASH EQUIVALENTS
Treasury Bills (T-Bills).
Short-term securities issued by the US Department of the Treasury, maturing in a year or less.
Commercial Paper.
Unsecured, short-term debt used by large corporations to fulfill immediate financial obligations.
Marketable Securities.
Highly liquid financial assets, including T-bills, CDs, stocks, bonds, and ETFs, traded on public exchanges.
Mutual funds exclusively investing in cash equivalents. They offer stability and liquidity, making them valuable tools for managing funds compared to other types of investments.
Short-Term Government Bonds.
Liquid securities issued by governments to fund projects. They are traded actively, but investors should consider political and interest rate risks.
Certificate of Deposit.
A savings account with a fixed term and interest rate, limiting access to the deposited amount for a specific period.
Banker's Acceptance.
Payment guaranteed by a bank, often used in low-risk transactions, making it akin to cash due to the bank’s assurance.
PROS OF HOLDING CASH
Liquidity.
Cash provides quick access to funds, ensuring you're prepared for unexpected expenses.
Dry Power.
Having cash on hand can be advantageous during market pullbacks, allowing you to have extra money ready to invest when opportunities arise.
Emergency Funds.
Maintaining an emergency fund is essential for financial security, and having cash readily available can provide peace of mind in times of need.
CONS OF HOLDING CASH
Underperformance.
Over time, many asset classes tend to outperform cash, with stocks and other investments typically offering higher returns in the long run.
Low Yield.
Cash typically offers lower returns compared to other investment options, and inflation may erode its purchasing power over time.
Tax Implications.
Dividends earned from cash holdings are taxable, potentially reducing the net returns on your investment.