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Cash reserves are assets that can be accessed within a very short period of time when the need for cash arises. The term is actually used to refer to two different types of financial assets. Cash reserves may refer to balances in checking and savings accounts or other short-term bank deposits that can be accessed immediately. The term can also include any short-term investment that has a high rate of liquidity, such as money market instruments.
Most businesses operate with at least some cash reserves. This is important, since those reserves make it possible to meet ongoing expenses with relative ease. It is not unusual for a business to maintain reserves in special funds, such as an emergency or contingency fund, effectively creating a resource that can be utilized in the event of some unforeseen expense incurred by the company. For example, the cash reserves maintained in a contingency fund may be used to continue paying salaries to employees while a facility damaged by a natural disaster is repaired, or to aid in the cost of the repairs.
Even individual households can benefit from having cash reserves on hand. Many financial counselors recommend that a household have enough reserves to manage for at least six to eight months, without the need for generating any income during that time. One of the most basic ways to begin building reserves of this type is to open a simple savings account and have a certain amount direct deposited into that account each pay period. A financial cushion that equals six to eight months of average household expenses can help alleviate worries in the event of an extended illness or the loss of a job, allowing the household to focus on overcoming the temporary obstacle and restoring a flow of revenue at some point before the reserves are depleted.
In most cases, cash reserves are held in accounts where there is little to no penalties or loss of value incurred as a result of withdrawing the funds. Both businesses and individuals may choose to place the funds into a bank account that bears no interest, or that is structured to not penalize the account holder for early withdrawal by deducting the accrued interest generated by deposits made to the account. In the United States, Treasury bills and certificates of deposit are also excellent ways of building cash reserves over time, and avoiding much in the way of penalties when and if the funds are withdrawn for use in dealing with an unanticipated expense or financial reversal.