Cash equivalents are low-risk financial products that offer higher interest rates than traditional checking accounts. They are highly liquid assets that can be quickly converted into cash without penalty. Examples include short-term CDs, money market funds, and Treasury Bills with maturities of three months or less.

Cash and cash equivalents differ in accessibility and stability. Cash is physical currency or money in demand deposit accounts, while cash equivalents are short-term investments that may require an extra step to access. Cash equivalents provide stability and security for short-term financial needs, offering a sense of opportunity and growth despite lower yields.

While cash equivalents have advantages, they also come with disadvantages like lower returns, potential fees, and the impact of inflation on purchasing power. It’s important to balance cash equivalents with other asset types to maximize savings and minimize risk. Examples of what are not considered cash equivalents include stocks, bonds with longer maturities, mutual funds, ETFs, real estate, and retirement accounts.

Read more at Yahoo Finance: What are cash equivalents, and should you be using them?