What is a multi-tier cash reserve?
A single-tier cash reserve is one in which the entire cash reserve is one sum of money held in a single account (for example, a basic savings or money market deposit account). The single-tier approach is most appropriate for a smaller cash reserve (i.e., one that is equivalent to three or four months of routine expenses). When the cash reserve amount is larger, a multi-tier approach is more beneficial.
What are the benefits of a multi-tier cash reserve structure?
The primary benefit of a multi-tier structure is that it offers an opportunity to earn more interest on a portion of the cash reserve that is less likely to be in immediate demand. You can deposit that portion in higher interest bearing accounts as long as it will be available for intermediate-term needs (e.g., within three to six months).
The first tier is always the immediately accessible cash
The first tier of a multi-tier cash reserve is the money placed in an account where it will be immediately available (without penalty) to meet an emergency need. This tier should contain the equivalent of three months worth of routine living expenses, as discussed under the 3-6 months rule. Assure prompt access to this part of your cash reserve by placing it in an ordinary savings or money market deposit account, separate from savings you hold for liquidity and other purposes.
Avoid commingling cash reserve money with other types of savings to prevent inadvertent use of the cash reserve.
How to create a multi-tier cash reserve structure
The following table illustrates how a multi-tier cash reserve might be structured. If you include credit, always make it the last tier.
| TIER | DESCRIPTION | ACCOUNT TYPE |
| 1 | 3-4 months of living expenses immediately available | Ordinary savings or money market deposit accounts |
| 2 | 4-6 months of living expenses | Money market savings or mutual fund*, CDs, or Treasury bills |
| 3 | 6-12 months of living expenses | CDs |
| 4 | Preapproved credit | Personal credit line |
Caution: *A money market mutual fund, even one sold through a bank, is not federally insured as a money market savings account is. It’s possible to lose money in a money market mutual fund, even though fund companies will go to great lengths to prevent a money market fund’s share price from falling below $1. Obtain and read a fund’s prospectus (available from the fund) to find out about a fund’s investment objectives, risks, charges, and expenses. Consider them carefully before investing.
Maintaining the multi-tier cash reserve
When you review your cash reserve needs, you may find it appropriate to increase or decrease the total amount. If so, be sure to make any changes with the original structure in mind. This will assure that you have enough cash readily available in an emergency.
