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What are 'Cash Reserves '

Cash reserves can refer to the money a company or individual keeps on hand to meet short-term and emergency funding needs. Cash reserves can also refer to a type of short-term, highly liquid investment that earns a low rate of return (perhaps 3% annually), such as investment company Fidelity's mutual fund called Fidelity Cash Reserves; this is where some individuals keep money that they want to have quick access to.

BREAKING DOWN 'Cash Reserves '

Having significant cash reserves gives an individual, group of individuals or company the ability to make a large purchase immediately.

The reason for a company to hold cash reserves is to have the necessary liquidity to meet the cost of all expected and unexpected costs in the short-run and also to have cash on hand for potential investments. Cash is the most liquid form of wealth, but short-term assets, such as three-month Treasury bills, are considered as cash reserves because of their high frequency of exchange and near-maturation date. Large corporations, such as General Electric, Alphabet and Apple, have cash reserves of anywhere from $50 billion to $150 billion. As of the first quarter of 2016, Alphabet had $75.3 billion worth of cash reserves, allowing the company to make purchases, such as its acquisition of Nest for $3 billion in 2014.

Banks, which are considered to be especially vital to the health of an economy, are subject to requirements on the amount of cash reserves they must hold, as mandated by the U.S. Federal Reserve. This amount is determined as a percentage of liabilities (net transaction accounts). The amount in cash reserves that a depository institution with more than $110.2 million worth of net transaction accounts is 10% of those liabilities, effective as of Jan. 1, 2016. These reserves must be held in the form of either vault cash or deposits in a Federal Reserve Bank. However, non-personal time deposits and eurocurrency liabilities are not subject to any cash reserve requirement.

Cash Reserves for Individuals

Individuals should have enough cash to last at least three to six months in case of an emergency. This emergency fund is a type of cash reserve. Individuals hold their cash reserves in bank accounts or in short-term, stable investments that are not likely to lose value. That way, they can withdraw these funds or sell these investments at any time without losing money, regardless of how well the stock market is performing.

An individual's cash reserves might consist of money in a checking account, savings account, money-market fund or money-market account, as well as short-term Treasury Bills and CDs. Individuals and businesses that lack sufficient cash reserves can resort to credit or, in extreme cases, may be forced into bankruptcy.

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