Cash Equivalents

Emergency cash is safer when it's a cash equivalent

While it's smart to have a few months' worth of expenses readily available to deal with unexpected situations, it's not a good idea to actually have it in cash. Money kept around the house can be misplaced, damaged or stolen quite easily. That's what cash equivalents are for: giving you easy access to your money, while also providing safety and some growth through interest. What are your choices in cash equivalents?

Money Market Accounts

All of these choices provide safety and relatively easy access. CDs generally charge a penalty for withdrawal before the maturity date. And Money Market accounts and funds may limit the number of withdrawal transactions per month, but not the dollar amount. You may earn higher rates in interest in return for the slightly lower accessibility of your money, though. You can also purchase overlapping CDs that mature at different times to ensure you're never too far away from money being freed up (known as laddering your CDs).

With FDIC or SPIC insurance on deposits, cash equivalents are quite safe. However, if the interest rate is lower than the rate of inflation, your money loses purchasing power while in the account.

Additional reading you may want to do:

Risks & Rewards

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

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