Investing

Types of Investments: Cash

Cash investments are generally used to meet short-term goals and needs.

Description

Cash investments are low-risk, low-return and highly liquid investment options. When an investment is liquid, it means the investor can easily withdraw or redeem their money in a very short period of time (e.g., the same day). The most common type of cash investment is a savings account at a bank or credit union. The money you deposit in this account may be FDIC insured, offers a low rate of interest, and can be withdrawn at any time.

The most common type of cash investment is a savings account. Cash investments are generally used to meet short-term goals and needs.

Primary purpose

Cash investments are generally used to meet short-term goals and needs of three years or less. Common uses of savings accounts are to create an emergency fund for unexpected expenses or save for a known short-term expense planned within the next three years.

Other common types of cash investments are short-term certificates of deposit and short-term government securities. Securities can be bought and sold and are investments where you have a record of your proof of ownership. Cash investments may provide a slightly higher interest rate for committing your dollars for a specific investment term. Additionally, they are typically very safe investments.

Risk-return profile

The primary risk associated with cash investments is inflation. Because cash investments can provide safety of principal and liquidity, they offer a very low rate of return, often lower than the rate of inflation. Using cash investments for longer-term investments means your money will not likely keep pace with the rising cost of living.

Cash investments have had an average rate of return of 3.40% over the last 30 years ending December 31, 2017 (source: Chart Source). Inflation has averaged 2.6% over the same period (source: Calculator.net).

Note: As of 2018, cash investments are experiencing much lower returns than this 30-year average due to very low interest rates. Inflation is also much lower than the historical norm.

Taxes

The interest you earn on a savings account or similar cash investment is taxed as ordinary income at the state (if you are required to pay state taxes) and federal levels. Ordinary income is income you earn through wages and interest on savings and investments. Refer to the tax course for more detail on tax rates.

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Disclosures