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.