Three-Tiered Cash Reserves
You don’t need a financial advisor to know you need a cash reserve. But how that is assembled profoundly affects your chances of success. Optimally, you should use three tiers and assemble a special kind of budget in order to estimate how much cash to place in each. You will need this structure regardless of whether you are young, approaching retirement, or long-since retired.
Tier 1 is the type most people think of: totally liquid cash. Resign yourself to scant return because you keep moving money in and out, and no institution will pay much on that. The purpose is to place money there for a month or two, tops— money that is actually spent on monthly expenses, then replenished with earnings or other income. Keeping this down to known expenses for two months is important because the return will be so low. Use a checking account and perhaps also a money market fund. Often a fine deal can be had with a money market fund that earns enough interest to cover checking fees or get them waived. Even if you use a credit card for groceries, this fund pays off the charges before interest is applicable. Be sure to read the credit card terms to know when interest is actually applied! This fund is for known, repeating expenses, plus an extra month’s worth for modest discretionary expenditures….
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