Stocks vs. Cash

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Cash, in financial terms, refers to any type of investment that is extremely liquid. A money market account, for example, is considered cash because the account holder can withdraw his or her money with relative ease, including drawing on the account with a personal check. Cash can also refer to the money in your checking and savings accounts or the money hidden under your mattress.

TIP

Investing in stocks will almost definitely provide a higher return than allowing your money to remain in cash or investing it in a cash investment. However, cash has a degree of liquidity not offered by stock.

The biggest problem with a cash type of "investment" is that it really isn't much of an investment. Putting your money under your mattress is not going to produce a dime regardless of how long you leave it under there. Checking and savings accounts are certainly necessary accounts to have these days, and they are excellent for what they are; but they are not investments, nor are they geared to behave as such. Any profit-making ability they may have, such as interest- bearing checking, will be absolutely minimal.

The least-offensive cash investment is the money market account. The money market account combines the best aspects of cash investments and mutual funds to create a hybrid that provides a higher return than anything you could get from your mattress or checking account, yet it keeps your money absolutely safe. Fortunately, stock and cash are not rivals for your money. They each carry very specific and different functions, so you can easily and quickly decide where your money should go. An investment should always be made with money you can afford to lose. If you need that money, it should stay in cash. Almost anyone involved in finance will agree that a person needs to have three to six months worth of living expenses in cash before considering any investment.

Plain English

A money market fund is a mutual fund that purchases absolutely safe investment such as treasury bills backed by the full faith of the U.S. Government.

What it boils down to is this: First make sure you have sufficient cash on hand for any emergency. Cash accounts, used this way, should take priority over investing in stock. Once you have collected what you consider to be sufficient cash, however, don't let future income just laze around in your cash accounts; put it to work in the stock market.

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