Loading the player...

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.

RELATED TERMS
  1. Reserve Ratio

    The portion (expressed as a percent) of depositors' balances ...
  2. Working Reserves

    Reserves held by banks above the required minimum level - or ...
  3. Bank Reserve

    Bank reserves are the currency deposits which are not lent out ...
  4. Primary Reserves

    The minimum amount of cash required to operate a bank. Primary ...
  5. Reservable Deposit

    A bank deposit subject to reserve requirements. Reserve requirements ...
  6. Cash Ratio

    The ratio of a company's total cash and cash equivalents to its ...
Related Articles
  1. Personal Finance

    Explaining the Reserve Ratio

    Reserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
  2. Investing

    Cash: Can A Company Have Too Much?

    Cash is something companies love to have. But if they are not using it there could be problems.
  3. Investing

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
  4. Investing

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  5. Investing

    Calculating Net Cash

    A company’s net cash is its total cash remaining after it subtracts all liabilities.
  6. Investing

    Understanding Short-Term Investments

    These are investments that have a maturity date of less than one year, or will be liquidated within a year.
  7. Investing

    Cash Is King: The Only S&P 500 Sector With Net Cash (APPL, GOOGL)

    Explore the net cash positions of the largest companies in the technology sector, and discover why carrying large sums of net cash may be a thing of the past.
  8. Investing

    Why Cash Management Is Key To Business Success

    Businesses need to generate a healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.
  9. Investing

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
RELATED FAQS
  1. What do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>
  2. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  3. How are bank reserve requirements determined and how does this affect shareholders?

    Learn how bank reserve requirements are determined and how bank reserves affect shareholders through improved bank stability ... Read Answer >>
  4. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  5. Who determines the reserve ratio?

    Understand what the Federal Reserve is and what it regulates in the U.S. economy. Learn about the reserve ratio and how the ... Read Answer >>
  6. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
Hot Definitions
  1. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  3. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  6. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
Trading Center