Friday, 27 November 2009

CDs, Savings and Money Market Accounts

The big attraction of the choices in this group is their safety of principal.  In fact, they are considered so safe that they are generally lumped together as an asset class called "Cash/Cash Equivalents."  For the purpose of this article, let's call them all "cash".

The main attraction of cash is simple - the value of the principal does not fluctuate and may even be guaranteed depending on the amount of the investment.  Put a dollar in, and you'll get a dollar back, plus interest.  In addition, the assets in cash group can generally be "cashed in" at full value on short notice (although CDs may have meaningful early surrender penalties).  No matter what gyrations the stock market or interest rates are going through , the value of these assets stays the same.  Most financial planners will recommend that you have enough money salted away in cash/cash equivalents to cover three to six months' living expenses, plus an amount to cover any known major outlays you'll have to make in the next year or two.  This group of assets can also add stability to your portfolio because their value is stable.  All in all, cash plays a key role in building a portfolio as a sound foundation for funding emergencies or contingent expenses - but not for income!

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