How to Use a Tiered Cash Reserve Strategy to Save for Short-Term Goals

Maura Schauss |

The CFP® Team at Washington Wealth Advisors

If you’re like many of our clients, you probably have competing financial goals. It seems like no matter how much you make, there is always something else to spend it on: buying a second home, a new car or a boat, making a home renovation, or going on vacation. It can be hard to determine which goals to prioritize and how to save for all of them. The good news: there are ways to save for multiple goals without sacrificing what you want.

A tiered cash reserve strategy is one approach that’s been growing in popularity as interest rates remain historically low and inflation continues to rise. If you’ve been wondering what to do with your excess cash and how you can put it to work for your short-term goals, a tiered cash reserve strategy may be right for you.

What Is a Tiered Cash Reserve Strategy?

A tiered cash reserve strategy can be thought of as buckets stacked on top of one another. The first bucket is your cash on hand. It overflows into the second bucket (reserves), which then overflows into the third bucket (surplus). Each bucket is tailored to a different time frame or goal, meaning they each utilize a slightly different investment strategy.

With this approach, you will always have funds when you need them, but you won’t be missing out on potential returns in the meantime. It’s the best of both worlds—security and growth all rolled into one cohesive strategy!

Here’s how having a tiered cash reserve strategy works.

Categorize Your Goals

The first step in a tiered cash reserve strategy is to group your goals into time-specific categories, each with a different asset or account tailored for that time horizon.

Tier 1: Cash on Hand

This is the cash-on-hand bucket, and it should be filled with funds used for both everyday expenses and goals with a time frame of 6 months or less. These funds should be kept in very safe, FDIC-insured accounts that are liquid and easily accessible. High-yield savings accounts or money market funds are good options. You won’t get the highest return, but your money will be there when you need it.

Tier 2: Reserves

Once you’ve built up a sufficient amount of cash in your first bucket, you can begin flowing funds into your second reserve bucket. This should include money you may need in 6 to 12 months. Certificates of deposit and short-term bond funds are better options for this tier.

These assets will offer a greater return, which is especially important as inflation continues to rise. Holding only cash will drastically erode your purchasing power over time. Keep in mind that these assets are not as accessible as cash in the bank, so they should only be used for goals you will not need to fund right away.

Tier 3: Surplus

The last bucket is for surplus funds geared toward longer-term goals that are 12+ months away. The type of asset you choose to fund these goals will depend on your specific time frame (one year versus multiple years).

Generally, the longer your time frame, the more risk you can afford to take. For instance, funds for a goal that is 5+ years away can be more heavily invested in stocks, whereas funds for a goal that is only 2 years away should be in safer investments with a larger allocation toward bonds.

Start Saving & Investing

The next, and perhaps most challenging, step is to actually start saving and investing toward your various goals.

Keep in mind that you don’t have to fund tier 2 before tier 3. Those buckets can be funded interchangeably depending on your unique goals and time frames. As long as your cash on hand is sufficiently funded and able to keep up with your day-to-day expenses, the other buckets can be tailored to your specific needs.

Understanding when you will need more liquid assets versus when you can invest is key to successfully utilizing a tiered cash reserve strategy. Reviewing your specific situation with a financial professional is one way to get started.

You can also start by identifying how much money you can afford to save each month using 20% of your pre-tax income as a general guideline. Then allocate a percentage of that total amount to each goal.

Automating these contributions is a great way to stay consistent in your savings.

Talk to a CFP® of Our Wealth Advisory Team

Given the low-interest, high-inflation market, this is a great time to rethink your cash strategy. If you have multiple competing goals, or an excess amount of cash on hand, consider reaching out to a member of our wealth advisory team.

At Washington Wealth Advisors, we can help you clarify your cash reservice strategy and set you on a path towards your own financial peace of mind. Call our office at 703.584.2700, email or book time with us using our online scheduling tool to get started today.






Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our unbiased advice, independent approach, and proactive investment management help to support our clients’ overall financial peace of mind.