If you must have funds readily available for short-term expenses, how should you allocate?

• A. Keep emergency cash and allocate the rest to diversified long-term assets.
• B. Put all money into high-risk growth stocks.
• C. Keep funds in a single illiquid investment.
• D. Avoid any cash and hold only commodities.

Answer: (A)

The main idea is balancing liquidity with growth. For short-term expenses you want funds that are readily accessible, so you keep a cash cushion or cash equivalents you can tap quickly. At the same time, the rest of your money should be invested in a diversified mix of long-term assets to grow your wealth over time. This way you aren’t forced to pull money from investments during a market downturn or when you need funds soon.

Keeping emergency cash ensures you can cover unexpected costs without selling investments at a bad time. Putting the remaining money into diversified long-term assets spreads risk and aims for growth, rather than gambling on one risky bet.

The other options fall short for short-term needs: investing everything in high-risk growth stocks can lead to large losses when you need funds soon. Holding funds in a single illiquid investment makes accessing money quickly difficult. Having no cash and only commodities reduces liquidity and can introduce volatility that isn’t suitable for meeting near-term expenses.