Cash Generator Classification
Cash generators are grouped into 5 general classifications based on yield, risk, reward, and liquidity. These classifications and their characteristics are listed in the following tables.
|
Short-term
cash generators |
Annual
yield (interest) |
Ownership
|
Risk/reward |
Liquidity |
|
Simple interest (bank
savings account, money market) |
0.5-5% (fluctuates with
discount rate) |
no |
low/low |
high |
|
Cash equivalents (CD,
treasury bill)* |
3-6% (fluctuates with
discount rate) |
no |
low/low |
low |
|
Bonds* |
5-7% |
no |
low to medium |
low |
|
Long-term
cash generators (7-30 years) |
Annual
yield (interest) |
Ownership
|
Risk/reward |
Liquidity |
|
Stocks |
12.7% **to ? |
yes |
high/high |
not
(7years) |
| Intellectual Capital | Hard to define significant ($40,000 - > $150,000) | N/A | low! | N/A |
|
Real estate |
Negative to 20% (region
specific) |
yes |
low/medium to high |
low |
The classifications are broken down based on the risk/reward proportionality, liquidity, and yield. The lower the risk, the lower the reward. For example, a federally insured bank savings account exposes you to no risk; however, the yield or interest is probably less than the rate of inflation. The low yield is somewhat compensated by the high liquidity. High liquidity means you can remove your cash from the cash generator at any time without penalties.
Cash equivalents offer a higher yield because you agree to lend your money for a set time, normally more than a month. Money markets offer higher yields, however, money markets normally require a minimum balance of a couple thousand dollars. Cash equivalents carry a lower liquidity. Cash equivalent interest rates or yields are changing all the time, however, they are indirectly tied to the federally controlled discount rate.
 |
Neither the simple interest accounts nor cash equivalents expose you, the lender, to market risks or credit risks. |
Eventually, you will receive the entire amount of money you lent plus earned interest. The long-term cash generators require investing your money for at least 7 years!
 |
When you buy a share of corporate stock or a house, you are buying things that are subject to market conditions. This exposes you to short-term market risks, but it also exposes you to a much higher potential return. |
Cash generators will help you obtain your financial goals, whatever they may be. For the short-term, everyone should have liquid cash reserves, equivalent to three months of expenses, on hand in case of emergencies. This money should be in a money market account earning at least 2 to 3 percentage points above the inflation rate. Do not store money under your bed!
 |
If your investment time horizon is in the 7 to 30 year range, you should consider buying stocks. Compounding high returns over the long-term can produce a tremendous amount of money. |
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