Tiered Cash

Saving & investing, frugality & simple living. They're all part of the wealth equation.
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bill o
Posts: 107
Joined: Fri Mar 16, 2012 7:33 am

Tiered Cash

Postby bill o » Tue Apr 24, 2012 6:42 pm

I came across the attached "article/plug" on the Pimco website regarding "liquidity tiers" and higher returns on cash balances. I've spent the past two weeks trying to define my cash goals and this article really helped me out, particularly the chart called "Investors' Cash Demands." I have modified, defined and expanded the chart for the average individual:

Tier 0:
I added this tier and it consists of my primary checking account. This is a no fee, no minimum balance account where I keep as little money as possible. Access is instant via checks, atm, debit card, etc. Most monthly income and expenses flow through this account. While there is no minimum balance I keep a $500 minimum balance for safety.

Tier 1:
This is my linked savings account at the same bank as my checking. Interest is only around .05%, access is instant via transfer to my checking account but limited to 6 withdrawals per month. I call this my "checking overflow" which holds funds to pay irregular bills like auto insurance, water bill and overdraft protection for checking. Also, very short term savings like next month's birthday part for my daughter as an example.

Tier 2:
Savings account at Ally. Interest is 0.84%, access is instant via checks or 3 days via ACH to checking but limited to 6 per month. This is where I keep my prop tax/insurance escrow funds, future vacation fund, car replacement fund, etc. And, until I read this article, my emergency fund.

This is where you can beat a big institution. An individual can open a savings account at an online bank and earn decent interest with no risk on the loss of capital. While a small business or corporation would need to invest in ultra-short corporate bonds or commercial paper to get close to the interest at Ally. And those of course have credit, interest rate and market risk (loss of capital).

Tier 3:
This will be the future home of my emergency fund held at my brokerage account. My goal is to find a bond fund or ETF with a yield close to 2% and a duration of less than 3 years. Access would be instant via checks or wires, but subject to margin interest while the sale of shares settles. Of course, there is credit, interest rate and market risks.

This goes against the common belief that your emergency fund needs to be 100% safe and liquid. Tiers 1 and 2 are always available in the short term to cover cash needs while Tier 3 settles from a trade. Tier 3 is harder to access to it will only be used for a true emergency.


Posts: 5605
Joined: Wed Sep 23, 2009 9:01 am

Re: Tiered Cash

Postby DoingHomework » Wed Apr 25, 2012 6:14 am

That makes perfect sense to me. Note that many funds firms will let you write checks against a short term bond fund just like you can a money market account. I don't know if Vanguard does but T. Rowe Price will.

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