In finance, cash reserves primarily refers to two things. One is 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. The other type of cash reserves refers to the money a company or individual keeps on hand to meet its short-term and emergency funding needs.

Watch: Building An Emergency Fund

The commonly recommended eight-month emergency fund that individuals are advised to have is a type of cash reserves. Individuals hold their cash reserves in bank accounts or in short-term, stable investments that are not likely to lose value so that 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, and 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.