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First, the rate of return on investments for reserves is irrelevant! Say that five times. What is KEY is that your money must be safe, safe, safe. Did I say it had to be safe? Thus, it can’t be subject to stock market fluctuations, penalties upon withdrawal, or interest rate fluctuation. Finally , it must be very liquid! This means that you can get access to the funds within a few days notice. Here are the possible places for reserve funds:
* Safe or hidden trap doors or mattresses (just kidding)
* Checking accounts
* Savings Accounts
* Money market accounts
* Treasury bills whose duration is less than or equal to 30 days IF you have other funds to tide you over for the 30-day wait.
What is not good for reserves is anything that involves penalties on withdrawals or is not liquid or has any risk element such as stocks, bonds, annuities, life insurance cash value, IRAs and qualified pensions or real estate. Series EE government bonds aren’t good for reserves either because they have a 6-month waiting period. In addition, you are taxed on all accrued interest.
Tomorrow’s post will involve the conclusion of our reserve topic and cover the important concept of the best way to save money for these reserves. Stay tuned.