Cash and cash alternatives, including CDs (Certificates of Deposit)

In daily life, cash is all around you — in the form of currency, bank account balances, negotiable money orders, and checks. In the world of investing, however, the term “cash” often extends beyond physical money to include what are known as cash alternatives. These are investments that are considered relatively low-risk and can be easily converted into cash when needed. Examples of cash alternatives include savings accounts, money market deposit accounts, money market funds, certificates of deposit (CDs), guaranteed investment contracts (GICs), government savings bonds, U.S. Treasury bills, Eurodollar certificates of deposit, and commercial paper.

Because of their conservative nature, cash alternatives typically involve the least amount of risk compared to other investment options. However, this safety comes with a tradeoff: their potential returns are generally lower than those offered by riskier investments. By focusing only on playing it safe, you might limit your overall investment income, particularly over longer periods of time.

Cash alternatives can serve several valuable purposes. They offer a measure of stability, which is especially important during periods of market volatility. Although they cannot guarantee gains or protect completely against losses, they are generally viewed as safer than assets like stocks or bonds. They also provide a way to earn some income on money that would otherwise sit idle. In addition, they offer a ready source of cash to cover expenses or make purchases when needed. For instance, money set aside for a down payment on a home or for a family vacation can be safely preserved using cash alternatives. Readily available cash can also be a critical lifeline during financial emergencies. Furthermore, cash alternatives provide a convenient temporary parking place for your money when you are uncertain about where to invest next.