The basics of cash and cash investments

1. Jane Nowak, CFP® Financial Planner
Tweeting as @MoneyGal2020
Focus on Investment Basics:
Cash and Cash Alternatives 101
When I first learned that cash and cash alternatives were a class of investment, all I
could say was who knew? I always thought that cash was, well, er, cash!
And the term cash alternative was absolutely foreign to me. What could be an alternative
to cash? -Don’t even think about saying credit card!!
Cash
I was right about cash. It is the currency, coins, checks and money orders that we see all
around us in our daily lives. However, you can invest in cash. When you do, you are
investing in a cash alternative or cash equivalent.
What are Cash Alternatives/Cash Equivalents
Cash alternatives are investments that are considered relatively low-risk (notice I did not
say risk free). They are lower risk than bonds. And, cash alternatives are considered
highly liquid because they can generally be converted into cash quickly. Some of the
most common examples of cash alternatives include:
• Savings accounts
• Money market deposit accounts
• Money market funds
• Certificates of deposit (CDs)
• U.S. Treasury bills
The Advantages and Uses of Cash Alternatives and Cash Equivalents
Because of their conservative nature, cash alternatives involve the least risk.
And, cash alternatives can be useful to an investor in many ways including:
• To provide relative stability. While cash alternatives can't assure you of a gain or
protect you from losses, they are generally considered safer than other types of
investments such as stocks or bonds.
• To earn income on cash that would otherwise be idle. Most cash alternatives pay
interest, which may help to reduce the effects of inflation.
• To maintain a ready source of cash to pay for goods or services, such as a down
payment on a home or car, a new washing machine, or a family vacation.

2. • To meet unexpected demands on cash, such as repairing storm damage to your
home or other financial emergencies.
• To serve as a temporary parking place for assets when you're not sure where to
put your money.
The Disadvantages and ‘Gotchas’ of Cash Alternatives
There is a tradeoff for the relative safety of cash alternatives. All investments have risk.
Opportunity cost
The primary tradeoff you accept in return for the relatively safety of cash alternatives is
that their potential return is not as high as higher-risk investments (this is known as
opportunity cost). By playing it safe, you may be limiting your investment income,
especially over longer time periods.
Risks
Because of their conservative nature, cash alternatives are considered the least risky
investment vehicles overall. However, no investment is completely without risk, and
different types of cash alternatives carry different levels of risk. Here are some risks to
keep in mind:
• Because returns on all types of cash alternatives are relatively modest, earnings
may not keep pace with inflation, especially over longer periods.
• While checking accounts, savings accounts, and bank CDs are FDIC insured (up
to a limit), other types of cash alternatives are not. For example, the principal
value of U.S. Treasury bills will fluctuate with market conditions, and may be
higher or lower if you choose to sell before maturity.
• While government savings bonds, U.S. Treasury bills, and U.S. government
securities are backed by the full faith and credit of the United States, other cash
alternatives carry higher default risk.
• Even if a mutual fund invests in cash alternatives backed by the full faith and
credit of the United States, the fund's shares are not guaranteed or insured by
the FDIC or any government agency. Though a money market fund attempts to
preserve the value of your investment at $1 per share, it is possible to lose
money investing in one.
As an investor, you get paid for taking risk. -Less risky investments generally do pay
less. Riskier investments generally do pay more. Nothing is absolutely safe. If you keep
you money in cash, over the long term inflation will make you poor. If you invest, you are
subject to risk. There are no guarantees in the investment world. But, cash and cash
alternatives a generally good places to keep money that you will need in the near future.

3. This information is for general financial education purposes only and is not a
recommendation for buying or selling cash alternatives. Consult your financial advisor
before buying or selling cash alternatives or cash alternative products.
Jane Nowak, Financial Planner and MoneyGal2020 is a Financial Planning and
Retirement Specialist for Women. She works at Kring Financial Management in Atlanta,
GA http://www.kringfinancial.com/about-us/advisors-and-affiliates/jane-nowak.html
Follow her on Twitter at: MoneyGal2020 and read her blog on Wordpress:
http://moneygal2020.wordpress.com/
Quoted in articles that have appeared on line at:
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