Multiple Tier Savings plans
The Royal Mail has laid out his concept for a multiple tier plan, and hopefully he'll post an outline here of it again.
The problem that I see with the 3 tier savings plan as outlined by Royal Mail is that it doesn't take into consideration the needs to save for your wants. I think this is something that trips up a lot of people when explaining it. I think the rest of it is close.
To start the plan put 80% of your savings into your TFSA until you get about 6mth worth. At that point take 3mths worth out and you can start your miniature GIC ladder. With only a single GIC just do 90days(ING does a 90day). Repeat this a few more times, timing the GIC so they are evenly spaced apart. There's more info in Tier 3.
Tier 1 - Cash HISA - ~20% of your savings amount - saving for stuff - TV, down payment on house, new Couch, trip, whatever. If you're saving $1000 a month put something like $200 into this account. The key here is to give an amount low enough to allow lots of savings in other areas, but high enough to not make you feel deprived of things. This is like your seat belt, it keeps you in the seat and doesn't let you fly around.
Tier 2 - Cash TFSA - Emergency fund 3 mth all expenses - This is to cover you in case of a short term emergency. Job loss, big car repair, NOT to buy 'stuff'. This is a TFSA so money should not be removed without definite need. This is your air bag, if you have an accident, it will save your face from smashing into bankruptcy.
Tier 3 - GIC ladder - Emergency fund 6-12 mth all expenses. If tier 2 holds 3 months worth of expenses, a GIC's should be coming due every 3 months. If it holds 6 months you can extend the time to 6 months between GIC's. When a GIC comes due it should provide enough cash to get you to the next GIC coming due. So 12 mths of expenses covered in GIC's = 4 GIC's each have 3mths worth of expenses and come due every 3mths. Basically: Value of GIC = months between GIC. The idea here is that even if you did have to cancel a GIC early, you would only lose 1 before another would be coming due. If your TFSA is getting low, (due to an emergency remember) look at when the next GIC will expire, can you wait till then or should you cancel one early? This is your jaws of life, it'll save you when things start to settle a month or two in, but you realize you are stuck.
Tier 4 - Retirement Savings - Everything else. After Tier 2 & 3 are met, the rest goes here. This is the air ambulance. You only call on it when all other options are exhausted.
This is just my concept of the multiple-tier savings plan. If you do have to take from any of the tiers above 1 than do your best when things get 'back to normal' to refill them as quick as possible.
Don't bother with 90 day GICs. Any decent HISA will pay more interest.
I don't think it's necessary to keep a years worth of expenses in cash/highly liquid investments. In fact, I'd say it's not worth the opportunity cost in lost investment return for the insurance. You should have access to enough cash to ensure liquidity through emergencies such as large unexpected expenses or job loss. A year of expenses is overkill and probably detrimental to your financial health. Keep perhaps 3 - 6 months fairly liquid in HISA, cashable GIC or bond funds, and invest the rest. If you need to draw on your investments, that's fine. They are your insurance. Keeping a huge pile of cash in unproductive investments just treading water wrt inflation is a really bad idea.
I'm not even counting access to credit. Most people have even more insurance in the form of credit lines to drawn on that give them time to liquidate investments. You can't guarantee that credit to be there, so I think it is sensible to have some cash, as credit cards and LOCs can be cancelled at any time at the lender's discretion. It's unlikely to happen, but could happen, and the risk is probably correlated with events that would see you needing to draw on your savings.
Remember people--credit isn't evil. It's a tool like any other. Quite useful when used carefully and responsibly, and a disaster waiting to happen in the hands of the careless.
Great thread - my signature has a link to a detailed explanation of my savings concept.
Glad to see dilbert adopting a savings plan. I think as long as there is a plan in place, everything will be good. It is true that the 3-tiers themselves don't really allow for the non-essentials. I guess perhaps a 4th tier would be good for non-essentials like trips to the sunny south, new computer or digital camera purchase, stuff like that. In my previous thread comments I have always addressed the point of savings for wants, by urging people to FIRST fortify buckets 1 and 2. I kept the question of wants aside, because I didn't want people saving for a trip to the south (and then spending all that money) before saving for a rainy day.
However, I do have to take strong exception to andrew's comments about "lost investment return" and inflation when it comes to these funds. I also strongly disagree with the assertion that saving more than 3-6 months of expenses is "detrimental to your financial health".
Most people these days are getting meagre returns on their investments and inflation is 1-2%. These are hardly things to worry about when the bank is about to reposses your house and car, and you have no credit available after your wife left and the bank called your line of credit. I don't think anyone should be willing to accept the risk of becoming homeless merely to ensure they receive meagre returns on investments and protect from 1-2% inflation. C'mon.
What's detrimental to anyone's financial health is short to long term debt servicing, where every last extra penny of their extra income is going to pay off debts (how many times have we read about that here) and fortifying money raided from RRSP accounts (that are supposed to be for retirement, NOT life's emergencies) during bad times. This can take years. In my own case, I've spent the last 3 years picking myself up from near financial devastation even after having a good base of CASH in tier 1 PLUS using up my entire LOC was scarcely enough to stay afloat. That experience was very scary and I don't wish it on anyone. It taught me that most of us really live in glass houses and can lose it all anytime.
Implement a realistic personal savings plan and save your money - you never know when real adversity will strike you. Protect your future first and worry about wants, second.
Tier 1 seems like simple budgeting or forced budgeting for those who can't.
Tier 2 - it is great to have an emergency fund. But IMO holding it in a TFSA is foolish. Why would you hold it in an account, that is tax free. Think of the TFSA as a TFIA (Tax Free Investing Account)
Tier 3 seems a little redundant for those who have a good emergency fund.
Tier 4 - too few are realistically saving for retirement, many need to asses where they are at in this regard.
>Why would you hold it in an account, that is tax free.
Emergency fund money MUST be there in case of an emergency. It is not money to take risks with and needs to be fairly fluid and available on short notice. Right now my tier 1 money is in maxed out TFSA and I am waiting for the New Year when I can max it out for 2011. It is pure cash for simplicity. The TFSA currently pays about 1.25% year interest, subject to increase when interest rates go up. That is about the best that most people can expect these days unless you want to lock your money away and pay penalties (at the worst time in your life) to access it when you need it most.
I'm curious how you managed to have an emergency that brought you to the brink of financial disaster. You don't need to share details, but I'd ask you this question: was the problem that you didn't have a huge enough pile of cash to weather that disaster, or that your financial arrangements left you exposed to a high degree of risk.
You can keep amassing more insurance (which is what the enormous pile of cash is), and the cost of that insurance each year is the difference in what you could get from profitably investing that money vs holding it in cash. This is probably about 3% of the total, year in and year out, if not more.
Would you have been better off reducing your hazard rather than getting more insurance, in the form of a giant pile of cash?
The hazard was not preventable - it all went in the category of sh-t happens. I was already saving $ well beforehand (I've been comfortable with this my whole life really) but sometimes we don't have any control over many of life's situations. The only thing we can control is how well prepared we are for the stuff that happens.
Colour me skeptical.
Critical illness can trash your finances, but that's what critical illness insurance/lt disability is for. Divorce can be mitigated with prenuptial contracts.
You can insure against almost anything except job loss. And that is what one should primarily be saving for.
Further question: why does it need to be cash, and not other investments? In case your children get ransomed and you need to come up with a quarter million by noon tomorrow?
Risk! I'm going to risk typing out another response - the last one was eaten by a "server too busy" message.
I guess I am where AndrewF is. I cannot imagine an emergency that would devastate me financially. The sole exception is one of my kids (or both, G-d forbid) becoming seriously ill, but I actually have that covered financially.
Become ill or disabled? My husband and I have disability insurance.
Lose our jobs? Hardly a financial emergency. We've always been able to generate sufficient income through our decades of labour market involvement, in good and bad times alike.
I'm just struck by, in reading through your posts, the degree of absolutism - i.e., such-and-such account MUST be in place, otherwise you will need to withdraw and face penalties (what penalties?) at "the worst time in your life." This seems like overkill to me.
I know that (apparently) most Canadians live paycheque-to-paycheque, but my household is not in that category. And it isn't because I've been extraordinarily well-compensated for my labour market efforts, or because I've been extra lucky in the markets: it's purely a function of keeping spending very low.
Do I just not fit in your model?
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