The emergency reserve should be liquid, insured, and separated. Liquid means available within one business day. Insured means FDIC or Treasury-backed. Separated means not in the operating account where it will be spent by accident. The right home is a high-yield savings account or a short T-bill ladder at a different institution.
- 01Choose a home for the reserve that satisfies the three constraints.
- 02Explain why the reserve should not live at the primary bank.
- 03Design a two-tier reserve — one month cash, five months in higher-yield instruments.
The three constraints
Liquid within one business day. Fully insured or backed by the Treasury. Separated from the operating account by institution or account type. Any solution that meets all three is a candidate; any solution that meets fewer is not a reserve.
The two-tier reserve
One month of expenses in an accessible high-yield savings account, ready today. The remaining months in a T-bill ladder or a government money-market fund at the brokerage. The tier structure keeps the near-term cash instantly accessible while the bulk earns full market yield.
- Liquid, insured, separated.
- Two tiers: instant access for one month, market yield for the rest.