‘Tower of champagne glasses’: Money expert explains why you might benefit from having 10 savings plans — here’s why his ‘trickle down’ technique makes sense for savers
If you’re unsure of what to do with your cash, British money-saving expert Martin Lewis offers a clear strategy. On BBC Radio 5, he likened savings to a tower of champagne glasses with your income as the champagne.
Lewis advises filling the "first glass," or the savings account that provides the most bang for your buck. Once that's done, let the money trickle down to the next tier of accounts. He suggests that your tower be a big one; with as many as 10 different accounts for optimal results.
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If that seems overwhelming, Lewis also recommends a simpler approach with just two to four accounts.
Here's how to build a tower of savings accounts
Lewis uses the champagne glass metaphor to emphasize the importance of making strategic choices about asset allocation. Specifically, your savings should always go into “the glass” where it benefits you the most.
This means starting with a tax-advantaged savings account. If you contribute to retirement plans like an IRA or 401(k), you get a tax deduction. Since the government is subsidizing you, your take-home income doesn't go down by the full amount of your contribution.
Depending on what state you live in, if you contribute $6,000 to an IRA, this could save you around $1,320 on your taxes if you're in the 22% tax bracket. Your contribution only costs you $4,680. If you're following the approach suggested by Lewis, you'd take full advantage of these tax breaks and max out accounts like your 401(k), IRA and health savings account first.
Then, you might move down to the next tier — which could include CDs, money market accounts or high-yield savings accounts. If you look at how much money these different accounts pay, choose the best ones and fill them up first before moving to the next tier down.
Taking this approach means you'd have multiple accounts at any given time. For example, you might have a 401(k), IRA, HSA or CD for money you could tie up. You could also have several savings and money market accounts if that limits how much you could invest at the highest rates.
This would require some effort on your part, but it would also mean every dollar was optimized to perform as well as possible.
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Keep on top of your account management
Lewis said he not only believes you need multiple accounts, but he also believes you need to stay on top of each one, making sure you're always getting the best ROI available.
"The biggest sin in savings is that most decent rates only last for a year or so and then you have to be on top of it to ditch and switch when it ends," he told BBC 5.
Lewis is right that you'll need to be much more hands-on if you want to get the very best return at all times. After all, CDs often pay higher rates than high-yield savings accounts (although that's not the case in today's market). They have limited terms, though, and when your CD matures, you'd need to find a new one paying the current best rates.
Savings account rates are also variable and can change over time, so the account paying the best rate today may not pay the best rate tomorrow. You'd want to research account options regularly and switch when needed.
Of course, Lewis admitted this tactic isn't for everyone given the amount of work involved. But if your goal is to build wealth as quickly as possible and you want to explore every avenue possible to do that, following his suggestion may just be the right move for you.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
