Considering Cash Equivalents

Cash equivalents are any investments that you can quickly convert to cash
without cost to you. With most checking accounts, for example, you can
write a check or withdraw cash by visiting a teller — either the live or the
automated type.
Money market mutual funds are another type of cash equivalent. Investors,
both large and small, invest hundreds of billions of dollars in money market
mutual funds because the best money market funds produce higher yields
than bank savings accounts. The yield advantage of a money market fund
over a savings account almost always widens when interest rates increase
because banks move about as fast as molasses on a cold winter day to raise
savings account rates.
Why shouldn’t you take advantage of a higher yield? Many bank savers sacrifice this yield because they think that money market funds are risky — but
they’re not. Money market mutual funds generally invest in ultrasafe things
such as short-term bank certificates of deposit, U.S. government-issued
Treasury bills, and commercial paper (short-term bonds) that the most creditworthy corporations issue.
Another reason people keep too much money in traditional bank accounts
is that the local bank branch office makes the cash seem more accessible.
Money market mutual funds, however, offer many quick ways to get your
cash. You can write a check (most funds stipulate the check must be for at
least $250), or you can call the fund and request that it mail or electronically
transfer you money.
Move extra money that’s dozing away in your bank savings account into a
higher-yielding money market mutual fund! Even if you have just a few thousand dollars, the extra yield more than pays for the cost of this book. If you’re
in a high tax bracket, you can also use tax-free money market funds.