The Three-Tiered Savings Reserve – Make Your Savings Work For You
It is unfortunate that many personal finance sources imply that lucrative investments are the only way to make money Buying a second property and the often-volatile stock market are only one way of getting a return from your money.
Making money is not confined to long-term investments. And one great way of making money is by saving it. The three-tiered savings reserve is a plan that can help anyone make the most of their savings.
The First Tier – Your Primary Checking Account
In this strategy, the first tier is your foundation for your finances. You already use this in regards to your money. Your primary checking account(s) should serve all of these functions:
- Where your income and expenses travel from/to
- Provide a small buffer zone
While you probably don’t need much help with the first point, the second is where this not-too-uncommon strategy starts to become effective. The reasoning is simple: if you have too much of a buffer, you’re probably not earning (enough) interest on your cash. What you have is a nice piggy bank!
So, how much money should you keep in your primary account? At least 50% of your monthly expenses is advisable, at least for a starting point. You should consult your budget to see how much money comes in and goes out, though; if you write several cheques beyond your “normal” monthly expenses, a bit more of a buffer might be nice.
The Second Tier – Fluid Money Market/Savings Account
The next tier occupies a unique position: it’s the money that you don’t necessarily need, but which you’ll want to have if you need it. Sound confusing? Let’s call it “emergency money.” You’ll want to put it in an account that can:
- Offer a reasonable interest rate on your money
- Be very fluid (transfer money to checking account quickly, if needed)
- No/limited fees and requirements
Take a look at what options might be available at your bank. Or, an easier option may be to take advantage of an online savings account. There are some banks that offer no minimums, fees, and a reasonable rate; that’s what we’re looking for.
The beauty of this level is that you have easy access to your emergency money. If you go over budget, or reach a point where you can invest some (or repair the house, for example), this money can easily go up or down on the tier – or to some other place that works for you.
The Third Tier – Deposits and Other Liquid Investments
At the top of your savings scheme is where investments come into play. Note that you can use this in conjunction with other investments, such as stocks – you can even create a fourth tier if you’d like! For the upper echelon of your savings, this tier serves two purposes:
- Offers maximum interest
- Limited but present element of liquidity
Term deposits are a perfect example of where you want your savings – the savings that you won’t need unless something drastic happens, financially. You will typically receive a considerably higher interest rate than more flexible savings accounts. Term deposits and other types of “safe” investments (bonds, etc.) give you a higher rate with the protection that is not found in volatile types of investments.
Also, if worse comes to worst, you will have access to your money. As there are a number of types of deposits and other options, you should be clear on these terms.
With this strategy in place, you can create a system that can easily transform your savings into extra money. Filter as much money as is reasonable and comfortable upwards, in order to realise easy gains in your finances. With or without other, more dangerous investments, this is one effective strategy to optimize your finances.
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