High and low risk

Money flows naturally to some areas.  There is a high-risk and low-risk area where the flow of money may be directed.  It takes a good degree of planning to channel the flow to either the high-risk or low-risk area, away from where it naturally tends.

The reserve account

This is in the low-risk area, with a lid on it.  Money does not evaporate like it does when it flows to the high-risk area.  The reserve account serves as a protector for investments in the high-risk area.  It may also be used as a source of funds in retirement, or the funds may be used for a capital project.

Access to capital

Is there a perfect way to time the liquidation of an investment when access to money is needed?  Inaccessibility to capital causes strain on an organization’s model.  Therefore, easily accessible capital is a requirement of the reserve.

Uninterrupted compound interest

Although many financial instruments can be used as a reserve account, some are better than others.  A desirable trait is the ability to have your money working for you.  This is accomplished with uninterrupted compound interest.

uninterrupted – Funds are growing without interruption, even when in use.

compound – The longer the timeframe allowed for growth, the more the interest you’ve already received has been allowed to compound and grow.  It takes time for compounding to happen.

interest – Your reserve account should be working for you, which means it is receiving an acceptable level of interest on the entire principal plus interest, every year compounding that interest in a tax-advantaged manner.

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