The world of finance and investments is notorious for its extensive use of jargon. With a goal of enhancing financial literacy and making the finance world more transparent, we are committing to a “monthly jargon” post that focuses on debunking various financial terms that are continuously used sans explanation. This month, we are addressing the oversimplified and mistakenly one-dimensional term “cash.”
We all know what cash is – those bills in your wallet, right (well, for those of us that still carry cash around these days)? In its simplest form, cash is a physical, legal tender of currency or coins often referred to as money. Although we mostly use the word “cash” to refer to these tangible bills and coins, the term can also be used to denote a type of investment that is easily accessible and liquid, meaning it can be easily turned into physical cash. When cash is referenced as an investment, the term refers to a short-term obligation that provides a return in the form of interest. Investors leverage cash vehicles as safe investments that will preserve their capital securely. Although cash investment vehicles typically offer a lower return in comparison to other investment options, choosing a cash investment means assuming less risk, which is a welcomed comfort by many investors during times of unstable market behavior. That being said, cash investments are typically used by investors as a place to keep or hold their cash as they wait for a better entry point into the markets or take time to research the better long-term investment options available. By using cash vehicles, investors take advantage of low-risk, highly-liquid investment options, while still being able to earn some interest on the investment.
The main way to leverage cash investments is through the money market. A money market investment refers to a short-term security that typically has a maturity of fewer than six months, and this investment tends to have a slightly higher interest rate return than a cash savings account. An individual can invest in the money market via a money market fund, by buying a Treasury bill (a short-term security backed by the U.S. Treasury Department), or by opening a money market account. Through these investment options, an investor earns a return in interest on his or her initial investment. Another way an individual may invest in the money market is through certificates of deposit (CDs), which act like bonds because periodic interest payments are made to investors throughout a specified time period. A CD is offered by a bank or credit union, and an investor puts his or her money into a CD for a predetermined period of time, knowing exactly what he or she will receive upon the CD’s maturity.
All in all, “cash” is a dynamic term that goes beyond the lose bills and coins in one’s wallet, as the term also encompasses the investment vehicles that involve cash. To put it simply: You earn cash in the concrete sense of the definition, turn those assets into the intangible sense of the term via cash investments, and then can easily liquidate those investments back into the physical greenbacks, copper, and nickel that you started with.