What are cash equivalents, and should you be using them?

Core Insights - The article emphasizes the importance of understanding cash equivalents in personal finance, highlighting their role in managing short-term savings and emergency funds [1][2] Definition and Characteristics - Cash equivalents are defined as highly liquid assets that can be quickly converted into cash without penalty, typically earning lower interest than stocks but providing stability to a portfolio [3][5] - A key feature of cash equivalents is their short maturities of three months or less, offering flexibility for short-term financial obligations [4] Differences Between Cash and Cash Equivalents - Cash includes physical currency and money in demand deposit accounts, providing immediate access, while cash equivalents require a small extra step to access [5][15] - Cash equivalents include financial products like short-term CDs, money market funds, and Treasury Bills, which are designed to maintain a stable value [6][11] Examples of Cash Equivalents - Common examples of cash equivalents include short-term certificates of deposit (CDs), money market funds, and Treasury Bills, all of which can be liquidated within three months [7][11] Pros and Cons of Cash Equivalents - Advantages of cash equivalents include accessibility for short-term spending, stability in value, security during emergencies, and the potential for modest growth compared to cash [14] - Disadvantages include lower yields compared to higher-risk investments, potential fees, and the risk of inflation eroding purchasing power over time [14]