# Multiple Tier Savings plans



## dilbert789 (Apr 20, 2010)

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.

General notes:
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. 

Thoughts? Comments?


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## andrewf (Mar 1, 2010)

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.


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## the-royal-mail (Dec 11, 2009)

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.


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## Cal (Jun 17, 2009)

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.


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## the-royal-mail (Dec 11, 2009)

>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.


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## andrewf (Mar 1, 2010)

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?


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## the-royal-mail (Dec 11, 2009)

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.


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## andrewf (Mar 1, 2010)

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.


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## andrewf (Mar 1, 2010)

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?


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## MoneyGal (Apr 24, 2009)

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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## MoneyGal (Apr 24, 2009)

The financial impact of divorce can be mitigated with frickin' common sense. If you as a couple are not living beyond your means and do not have excessive amounts of debt, the impact of divorce is minimal. BTDT.


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## dilbert789 (Apr 20, 2010)

> Tier 1 seems like simple budgeting or forced budgeting for those who can't.


Aren't all savings plans just some form of budgeting? A savings plan should be part of your budget... and everyone should have at least an idea of a budget. If your saving for something worth $5000, what do you do if you don't 'budget'? Do you put the money into another account? Or do you just remember that you are $1000 in to your $5000 required, but wouldn't that be like a separate account, but just in your head? 



There are lots of different ways to save money, do what works for you. One of the idea's behind the separate tiers is that it sets flags. If you lose your job or get laid off (talking from personal experience here) it's easy after that first month or so to get into a routine and not really notice if you are just chewing away at this big pile of savings. However if you have a structured approach, where every 3 months you are moving money from a GIC into your account because you are running out is a helpful wake-up call. 

The TFSA may be better used as an investment account and use a normal HISA instead.


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## R.O.V. (May 16, 2010)

For now we are foregoing the saving of cash just for the purpose of having access to cash...(except small amount for xmas). I feel we both have secure jobs (government and health care) We are instead getting out from under the burden of debt. I'm not entirely sure if that's the best plan, but I must say it sure feels good!


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## Jungle (Feb 17, 2010)

Everyone has a different risk tolerance. I believe there is a balance between cash hoarding vs paying debt vs investing. Long term inflation risk is (around) 3%. I do believe a few months emergency fund is smart, but be sure to pay your debt off and invest too.


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## HaroldCrump (Jun 10, 2009)

the-royal-mail said:


> >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.


But that's no reason to waste your TFSA with that.
I agree that emergency cash should be in a liquid and zero risk holding.
It can easily be a regular, vanilla savings account or a HISA.
Don't waste the benefits of a TFSA by stuffing cash in there.


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## the-royal-mail (Dec 11, 2009)

Meanwhile back on track...a substantial multiple tier savings plan is a very wise thing for people to do. I disagree with several of the comments above but do not wish to argue. I'm here to participate in the forum and offer the benefit of what real life experience has taught me. Point is, how many times have we read about young people starting a thread wanting to buy a house or have a baby when they're currently mopping up a financial mess (debt servicing) created by them? I feel it's good advice to have people get their own financial house in order, including saving for a rainy day, *before* creating a new life, buying an expensive new house or spending big bucks on non-essentials. Saving your own money is what gives you true freedom and protects you from adversity.


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## andrewf (Mar 1, 2010)

I don't think there is much disagreement over whether it is wise to save, but rather how one holds those savings.


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## MoneyGal (Apr 24, 2009)

the-royal-mail said:


> I feel it's good advice to have people get their own financial house in order, including saving for a rainy day, *before* creating a new life, buying an expensive new house or spending big bucks on non-essentials. Saving your own money is what gives you true freedom and protects you from adversity.


I doubt anyone here would disagree with you! But as I am done creating new lives, and will never buy an expensive new house or spend big bucks on non-essentials, I am left to conclude that I don't fit your model. 

Yes, I save. No, I don't save in the form you prescribe. I was curious about your model to see if there was anything for me in it, but apparently no. But no worries about how many could benefit! You just have to read the news to figure that out.


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## the-royal-mail (Dec 11, 2009)

That's a good point actually. I have some friends who are in a similar situation to your own. Granted, this advice tends to be more appropriate for younger people who have these big-ticket things ahead of them. While there seems to be no doubt about the value of saving, I know that one of my older retired friends favours GICs as a way to keep what little money he has safe and accessible and he enjoys meagre returns.

Keep in mind that most of the time in CMF when I advocate the 3-tier savings plan I am usually responding to a thread started by someone in the under-40 crowd.


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## the-royal-mail (Dec 11, 2009)

And TFSA's are great for a lot of people too!


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## MoneyGal (Apr 24, 2009)

I'm just over 40.  But have been working full-time from the age of 20.


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## Square Root (Jan 30, 2010)

I think the key point about emergency cash reserves should be to assess what the worst financial event with a small but conceivable likelihood of happening would do to your specific financial situation. For some people it would be unemployment for 6-12 months (keep 6-12months cash in reserve). For others it might be a severe market downturn like 2008-2009 ( assess your need for cash for a period of 12-18 months) For many it might be a contested divorce or illness(sometimes difficult to predict or insure against). You should plan to reduce these risks to the best of your ability (like MG) then top up your risk mitigation with emergency cash. I don't think one size fits all in this regard. In my case I think a reasonable level of cash might be to cover two years of reduced(by half) dividends plus a little more for lumpy expenditures ( cars or another place). Too often commentators quote rules of thumb which often don't apply to some(most).


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## BETTYVEE (Dec 23, 2009)

*where to go from here then?!?!*

Ok…. so I'm 27 and have been trying to do this tier/bucket thing for the past yr. Saving buckets worth of inevitable expenses (car insurance/repairs, dog, xmas, donations) and luxurious spending such as a nice vacation so I can borrow from myself instead of from a cc. Should I not be doing this and try investing instead... but i don't know where to start :s 

iv tried tackling some of the recommended reads but must confess i get bored and never get past halfway ("Investing for Canadians for Dummies," "Smart Women Finish Rich," ..) I always read MDJ though, religiously! ahaha does that count lol and regularly check in here and other pf blogs (maybe its my self-diagnosed ADD) I was planning on starting to invest after the buckets were full but andrewf and moneygal ur right!! that is an awful lot of money to just have sitting there doing pretty much nothing..daaaarrghh

I inherited my home which has several rental suites so bills and other expenses are taken care of with the money coming in from the property and mortgage was paid of by insurance. I have decent municipal gov job (we are all watching this mayoral race very carefully and it looks like a rough road ahead) I paid off all my yucky consumer debt and have considerably cut my reckless spending (as painful as it still is to have to restrain myself). Max my TFSA, get a headstart with ING TFSA kickstart and try to max my RRSP but with a DB pension I'm still trying to figure out what exactly my max is (accountant is suppose to get back to me on that one, I just got a notice of a pension adjustment!?!? No clue..). 

I have no idea how to calculate how much emergency money I should try and save for because my expenses are almost non-existent, cell, groceries, travel…fun stuff? I was thinking maybe save for a second property as an investment seeing as how I have been a landlord for more than 10yrs..but I plan on taking off for a year when I turn 30 (my work has an earned deferred leave program to help me save my money) so that might not be a good idea..

i dunno..don't know where to go or what to aim for which only makes things worse. I know my situation is somewhat unique and despite the circumstances that gave rise to having my home I am certainly blessed to not have to worry about a roof over my head. Having said that though I want to be smart about what to do next and that’s why I am here..to learn…but feel lost 

I want to thank everyone that post and shares their ideas and experiences on forums such as these. I have learnt so much from other ppls perspectives, opinions and from other ppl mistakes.


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## Jon_Snow (May 20, 2009)

My wife and I have taken the term "emergency fund" to an extreme... technically we could last 5 years without any income. This has happened more as a result of not knowing what to do with our savings than any particular desire to hold this much cash. Comforting to know the funds are there, but also frustrating knowing this money is barely growing at 1%.


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## Cal (Jun 17, 2009)

I think inflation is at 1.8%....so technically your money is losing buying power for you every month.

Talk to a few planners, make a plan, and get started. The hardest thing for most people is starting to save, and you already have that under control.


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## Larry6417 (Jan 27, 2010)

Jon_Snow said:


> My wife and I have taken the term "emergency fund" to an extreme... technically we could last 5 years without any income. This has happened more as a result of not knowing what to do with our savings than any particular desire to hold this much cash. Comforting to know the funds are there, but also frustrating knowing this money is barely growing at 1%.


Expenses for 5 years is extreme even on this forum, and that's saying something. _**** economicus_, the completely rational being described in economics textbooks, doesn't exist. It doesn't require Sigmund Freud to discern that you're worried about something. As has been stated on this thread before, an emergency fund is meant to carry you through those unavoidable, temporary setbacks life has to offer.

You may want to rationally examine the risks in your life and mitigate them as best you can. Are you worried about your job? If so, then upgrading your job skills (preferably at your employer's expense) might be the best option. Are you worried about illness or disability? If so, then disability or critical illness insurance may be a good option. If you can't get insurance, then self-insuring is a reasonable option, but it doesn't sound as if you're doing this deliberately. 

Have you considered something like CLF, a 1-5 year laddered gov't bond ETF from Claymore, instead of cash? The safety of principal is high because it comprises federal and provincial bonds only. The yield is 4.4%. The MER is only 0.15%. Arguably, it's as liquid as a GIC; a click of a mouse turns it into cash. As interest rates rise bond prices fall, but this product protects you because all the bonds are 5 years or less, and the product is laddered (expiring bonds are replaced with newer bonds).

See www.claymoreinvestments.ca/en/etf/fund/clf


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## the-royal-mail (Dec 11, 2009)

Lots of excellent comments in this thread. Keep them coming!

Betty, welcome to the forum! I am glad to hear you've taken the most important step and that is to actually SAVE the money. For my purposes, mission accomplished! Where exactly to put the funds in question is of course fodder for a lot of discussion. So in response to your post, all I'll say is that tier 1 really should be in actual cash in an account, even if it's a savings or TFSA account. That means it is accessible, which is the whole point. What we don't want to see is for people to start sticking their rainy day money in their RRSP, defeating the whole purpose of the savings! Rainy day savings are NOT to be intermingled with RRSP money. One of the reasons I say this is psychological. When you're in dire straits and need money now, you need easy access to it. Having it locked up in your RRSP is NOT easy access as that money is taxable and you will likely also have other fees to pay when you do this. This will cause people to "not want to touch" that money and instead start hitting up their friends or family for $ help at the worst of times. Bad, bad idea and once again, defeats the purpose of rainy day cash.

Tier 2 money can be less fluid and you could consider investing it in a safe investment. You don't want to take too much stock market risk here either as your need for tier 2 money tends to be fairly immediate (roof or foundation sprung a leak, car was in a wreck). Not to be confused with tier 1 which is something more serious such as a prolonged job loss, disability or other.

Don't rely on disability insurance to protect you against that. I know people who have tried to collect from these insurance plans and they are invasive to say the least, requiring copious amounts of doctor documentation on a regular basis before they release funds etc. They are sharks. Don't trust or rely on them. Don't waste your money giving it to these people. Save it in your own account and protect yourself. Those companies protect themselves by their absurd profits and policies and you need to protect yourself with your own policies.

Love the link supplied with Larry's excellent post. Those are excellent returns. I'll look into this fund once I get my tier 2 money re-established


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## Jon_Snow (May 20, 2009)

Thanks for the info, Larry. Its because of great posts like that this is one of my favorite hang outs...

That Claymore fund you mentioned really is right up my alley... I think my holding excessive cash boils down to the fact I am really risk adverse.


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## Larry6417 (Jan 27, 2010)

I'm glad you found the post useful. The risk of holding this ETF really is no greater than that of holding cash.


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## slacker (Mar 8, 2010)

@Larry6417: I also find this ETF interesting, and I'm considering utilizing it for short term savings (down payment). But the risk is definitely greater than cash, in particular interest rate risk.

Here's a quote from the CLF web page:

_An investment in the Fund will be subject to certain risk factors, including: there can be no assurance that the Fund will be able to achieve its distribution or total return objectives; risk of error in replication the DEX 1-5 yr Laddered Government Bond Index; equity risk; Index investment strategy risk; rebalancing and adjustment risk; tracking error; calculation and termination of the DEX 1-5 yr Laddered Government Bond Index; risk that the constituent securities may cease trading; fluctuations in NAV; illiquid securities risk; use of derivative transactions; counterparty risks associated with securities lending; trading price of units; potential conflicts of interest; changes in legislation, including tax legislation; taxation of the Fund; absence of an active public trading market for the Units; lack of an operating history; changes in dividend policies, foreign investment risk and interest rate risk._


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## Larry6417 (Jan 27, 2010)

I think it depends on what risk you're looking at. In terms of the risk of capital loss, it's a wash. The bonds in CLF are guaranteed by gov't. As interest rates rise, bond prices do fall, but the risk is marginal in this case because the bonds have a maximum maturation of 5 years (short-term bonds are less affected by interest rates) and are laddered; 20% of the bonds mature each year and are replaced with new (higher interest bonds if interest rates rise) issues. GICs (CAD, < 5 year term) are guaranteed up to $100,000 in the event of a catastrophic financial failure, but it may be a while before you get your money back. Not all cash equivalents are insured: Bankers' acceptances and money market funds are not insured via CDIC. The coupon rates of the bonds within CLF are in the 4%-5% range. Even if the bond prices declined, then you would still receive the coupon minus the MER of 0.15%. If you look at the index CLF replicates, the theoretical yield to maturity is 1.93% i.e. higher than most HISAs. Again the ETF is laddered, so this is a theoretical YTM.

In terms of inflation risk, cash and cash equivalents are far riskier. The chance of negative after-tax, real returns is 100% with cash (in a non-registered account).


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## cardhu (May 26, 2009)

The Royal Mail said:


> Those are excellent returns. I'll look into this fund once I get my tier 2 money re-established





slacker said:


> I also find this ETF interesting, and I'm considering utilizing it for short term savings (down payment).


Be careful ... past performance is not indicative of future results ... CLF is OK for what it is, and it does offer certain advantages in some situations, but don’t be misled into thinking that you’re certain to get higher returns with CLF than with a decent cash-equivalent, for an investment made now or in the very near future ... especially if these savings are targeted for use within a relatively short time frame (ie. new roof, new car, down payment for a home) ... it is a bond fund, and it will do what bond funds do ... the swings will be less dramatic than for a fund holding longer term bonds, but swings there will certainly be. 

And don’t be lulled by the seemingly fat distribution yield, which at first glance might appear attractive ... the inevitable capital erosion inherent in this sort of fund works against the distribution yield to some varying degree ... the only way that this inherent capital erosion can be curtailed is if rates (yields) fall during the time that you own the fund ... during periods of falling rates, bond funds are great to own ... during periods of rising rates, not so much. 

CLF is subjected to unfavourable tax treatment in a non-registered account, so is really only suitable for holding inside an RRSP or TFSA. 



Jon Snow said:


> That Claymore fund you mentioned really is right up my alley... I think my holding excessive cash boils down to the fact I am really risk adverse.


If you have a large amount of cash, and no short-term use in mind for it, then you can pretty easily assemble your own ladder, using either bonds or GICs.


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