Demystifying Financial Jargon: Cash Reserves

Cash reserves is easily accessible money if you find yourself in a pinch or are planning to make a purchase in the near future. Cash reserves are typically stored in a savings account, checking account, or money-market fund. Some people do consider a Treasury Bills or Certificate of Deposit (CD) a cash reserve option as they can be used to save for short-term goals and the penalties usually aren’t terribly high if you need to cash out early. Short-term goals may include: down payment on a home, preparing for a baby, buying a new car or planning a dream vacation. Your emergency fund should also be accessible in cash reserves.

You shouldn’t be putting cash reserves that you plan to need in the next year or two or your emergency fund into investments (e.g. index funds, 401(k) or individual stocks). For one, it will take a bit longer to withdrawal the money if your emergency or purchase is time sensitive. You also have no guarantee about how the market will be performing when you need quick access to the funds. Being forced to withdrawal in a down market means you will lose money.

See also: Consumption, Protection

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