What are Cash Reserves
Cash reserves can refer to the money a business 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, 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.
One reason a business may 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 cash reserves because of their high liquidity and short maturity dates. Large corporations, such as General Electric, Alphabet and Apple, have cash reserves in the range of $50 billion to $150 billion.
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 deposit liabilities (called the net transaction accounts). The reserve ratio on net transactions accounts depends on the amount of net transactions accounts at the depository institution. For example, a depository institution must hold in reserve 10% of liabilities if it holds more than $122.3 million of net transaction accounts. 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 in reserve to last at least three to six months in case of an emergency. 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 emergency 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 certificates of deposit (CDs). Individuals and businesses that lack sufficient cash reserves can resort to credit or, in extreme cases, may be forced into bankruptcy.