How liquid is cash in a cash management account?
A cash management account is a way to manage all of your cash transactions via a single platform or portal, through a single umbrella account. It gives you an overview of all of the cash flowing in and out of your investments, with the ability to oversee multiple investment accounts in cash terms at any one time.
This makes it a powerful tool to monitor your overall cash flow, consolidating relatively complex investment portfolios and simplifying them into a single stream of money.
By bringing together all of your cash income into a single account, it gives you a centralized port of call when you need to pay a bill or other expenses. You can cover expenses more easily and more reliably using liquid cash without falling prey to having too many of your assets locked away in illiquid investment instruments.
Generally speaking, the cash in a cash management account is very liquid — but why is this and how does it compare to the liquidity of assets?
What is liquid cash?
You can think of liquid cash as your immediately disposable finances at any one time — essentially, it is the money in your pocket.
In business, this is similar to the petty cash used in an office or other clerical organization, or the till float in a retailer.
This cash reserve means you can cover immediate costs and bills without having to dispose of illiquid investments and, crucially, without delay. By definition, liquid cash is highly liquid. When you need it, you can spend it immediately. You don't need to sell any assets in order to make it available to spend.
What are liquid assets?
In contrast to liquid cash, liquid assets are those that can be disposed of relatively quickly when you need to raise some spendable funds, but they are not cash itself.
Any investment has a degree of liquidity. This depends on how easy and how fast you can sell it when you want to and is one of the factors investors take into account when deciding on what they want to buy.
Highly liquid assets are those for which there is always a market demand, and for which there is always an available mechanism to sell at short notice and at almost any quantity. They include investments such as money market funds and government money funds.
Illiquid assets are less quick and easy to sell. A common example of this is real estate, for which you need to find an individual buyer at your desired market price in order to raise the value of your property as cash. Selling an individual property might be relatively easy in a healthy real estate market, but high-value and high-volume liquidations of commercial real estate takes much longer.
Liquidity is about how fast you can dispose of an asset, but it also has a bearing on the value of that asset when it sells. If you need to dispose of an illiquid asset quickly, you may be forced to accept less than the full market value; in contrast, liquid assets can usually be sold in the same period of time without losing value.
Liquid cash vs. liquid assets
You might hold a good proportion of your portfolio in highly liquid assets. This is a common technique among risk-averse investors who prioritize liquidity over net capital gains, dividends and interest.
Doing so is a good way to improve your ability to release funds from your portfolio when you need cash at short notice to cover unexpected costs or bills.
Holding liquid cash — literally a reserve of cash that you can spend no matter what your investment portfolio is doing — is a way to hedge against any severe economic shocks such as these.
At the same time, liquid assets are still relatively disposable compared with other investments, so a spread of liquid cash, liquid assets and illiquid long-term investments can balance short-term risks with long-term gains.
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