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We are used to hearing plenty of chatter surrounding interest rates: Will they be raised? Be lowered? But behind those interest rate decisions is another integral part of monetary policy: bank reserves.
Bank reserves are funds that big commercial banks hold in accounts at the Federal Reserve. They are a key tool in influencing interest rates. Banks use these reserves to settle payments with one another and manage day-to-day cash needs. Think of it simply as the bank account for your bank.
Most of us don’t care to think about how many reserves a bank holds at the Federal Reserve. But we do care about what happens to interest rates and inflation.
How much cash is available in this system matters because reserves help the Fed maintain control over short-term interest rates. And these short-term interest rates eventually influence the borrowing costs that consumers and businesses see by impacting rates on credit cards, business loans, lines of credit, and other borrowing costs.
To understand how cash reserves influence interest rates, it is helpful to look at three different reserve environments: abundant, ample, and scarce.
An abundant reserves environment is exactly what it sounds like: banks collectively have substantially more reserves than they need to comfortably operate.
Imagine a bank already has far more available cash than it needs. Receiving another dollar is not going to meaningfully change much. Likewise, losing a relatively small amount probably will not cause much concern. This is what makes reserves abundant.
Following the Fed’s large asset purchases during the pandemic (a tactic to keep the economy afloat amid the shutdowns), trillions of dollars of reserves entered the banking system. With such a large cushion of liquidity, banks had little need to compete with one another for additional reserves.
This is where the connection to interest rates comes in.
When reserves are abundant, adding or removing small amounts of reserves has almost no effect on the rate banks charge each other for overnight loans, also known as the Fed Funds Rate. There is already so much cash available that banks do not need to offer significantly higher rates to get more of it. This keeps that fed funds rate stable and close to the rate the Federal Reserve would like to see. But it is important to remember that when there is more money to go around, there is more room for prices to rise.
Over the past several years, the Fed has reduced the enormous amount of excess liquidity created during the pandemic, an attempt to cool inflation. As reserves declined, the banking system moved from an abundant reserves framework to an ample reserves framework.
Ample reserves represent the middle ground. Banks still have enough cash to comfortably meet their needs, but they are no longer sitting on the enormous cushion that existed when reserves were abundant.
Another thing to note is that ample is not a specific dollar amount, think of it as more of a range.
When reserves are ample, there is still plenty of cash available, but every dollar begins to matter a little bit more. Small changes in the number of reserves may cause some movement in short-term rates, but not enough to interfere with the Fed’s control over interest rates.
This is essentially the Fed’s desired middle ground. Enough liquidity to keep the financial system functioning smoothly and short-term interest rates under control, without maintaining much more reserves than the banks need that could ultimately cause other problems.
If reserves were to fall below the ample range, the banking system would eventually become scarce.
The word “scarce” may sound alarming, but it doesn’t necessarily mean banks have run out of money. In fact, the United States operated with a scarce reserves framework before the 2008 financial crisis and it was not what led to the crisis.
Scarce simply means banks hold much smaller reserves relative to their liquidity needs.
With less cash sitting readily available at the Fed, banks must manage their reserves more carefully. A bank that needs additional reserves may need to borrow them from another institution.
And when more banks are competing for a smaller pool of available reserves, the price of borrowing that money, the interest rate, becomes much more sensitive to supply and demand.
Think of it this way: when reserves are abundant, another dollar barely matters.
When reserves are ample, another dollar matters somewhat, but banks still have plenty of available cash at their disposal.
When reserves are scarce, every dollar matters much more.
This is why relatively small changes in reserve supply can produce much larger movements in short-term interest rates when reserves are scarce.
The Fed has spent the past few years reducing the size of its balance sheet and removing some of the excess liquidity that entered the financial system during and after the pandemic.
By late 2025, the Fed determined that reserves had moved from abundant into ample range and stopped shrinking its balance sheet. Today, the Fed’s stated goal is to maintain ample reserves, not intentionally push them into scarcity or bring them back up to abundance.
The aim is to not drain as much cash from the banking system as possible. Instead, the Fed is trying to find the appropriate balance.
The Federal Reserve sets a target range for the federal funds rate. One of the Fed’s main tools for keeping that rate where it wants is the interest rate it pays banks on their reserve balances, also known as the interest rate on reserve balances or IORB.
When reserves are ample, the Fed can change the rate it pays on reserves and influence other short-term rates without having to constantly add or remove cash from the banking system.
But if reserves became too scarce, supply and demand would begin playing a much larger role. Banks needing cash could bid interest rates higher, making it more difficult for the Fed to keep rates where they want. This is why the amount of reserves matters; they help create the environment in which the Fed’s interest rate policy can do what it’s supposed to.
Abundant reserves can put upward pressure on inflation since there is more money available in the financial system. More money moving through the economy can lead to higher spending and higher prices. Over the past several years, we have seen very high reserve levels alongside higher inflation, increased government spending, and growing debt. While abundant reserves are not the sole cause of all these problems, it is a good reminder that more is not always better. We are encouraged to see the Fed moving away from the extremely high reserve levels of recent years towards a more balanced approach.
Summary: In this video, Matt Hudak, AAMS®, CFP®, CEPA®, builds out a sample "Financial Architecture", which is a practical system for organizing your money so that it functions to support your goals. He explains it like a reverse budgeting approach that prioritizes directing income into the right financial "buckets," including cash reserves, debt repayment, retirement savings, flexible investment accounts, and charitable giving. By creating a clear structure for your cash flow, you can spend with confidence, reduce financial stress, and ensure your money is aligned with both your long-term goals and your everyday life.
2026.08.18 Podcast Episode 6
Matt Hudak: Hi, friends. I'm really excited today to talk to you about something that we do with most every one of our clients as they're getting going in their process. And then it really helps us to help them with their cash flow. It's a really effective way to think about budgeting. A lot of times when we're looking at how do you manage your expenses, how do you structure things, how do you set things up?
A problem that we run into is that most people aren't very effective at keeping track of their day to day expenses and keeping track of how to manage each category and all of the details of it. And Christa has done a phenomenal video talking about how you can do this well, how you can manage all of your expenses and understand what you're spending. (Watch that video here.)
But when we get to working with people day to day reality where we're not just simply trying to evaluate for a planning purpose what you're spending in a short term, managing it for the long term is a very difficult challenge for most people. So we've come up with through a lot of trial and error over the years, sort of a form of reverse budgeting.
And that's what we're going to talk about today. It's almost sort of similar to the pay it yourself first methods, if you've heard of that. But we like to call this establishing a financial architecture. And it looks at where you put your money, where you want it to go for the different goals that you have over the course of your lifetime, so that you can live the life that you want and be free to live that day to day.
When you have money in your bank account, it means that it's there for you to use because you've already put it where it needs to go and to the places that matter. And so everything left for you really functions well. So let's dive in. I'm going to get on my whiteboard. We'll spend a lot of time diagramming things out on camera here for you.
This is going to look very different in different contexts. So the example that we're going through, we'll try to make it universal and cover a lot of different pieces of it. Some may apply to you, some may not. As we're getting together and meeting, we're fleshing this out in real time together to collaborate and create something that works for your situation to expedite your actual cash flow management.
So let's dive in. First thing that we're going to do is we're going to create sort of a little timeline for our financial architecture here. And we're going to say this vertical dotted line is age 59.5. And there are a lot of different retirement ages. It’s really absurd. But I mean, Congress negotiates with itself to come up with all kinds of random ages, one of them being 59.5.
Some of you might have seen 66 in six months, or 65 and four months for your full retirement age for Social Security. You can't make this stuff up. But, well, somebody did in Congress. But there are a lot of different retirement ages, 65 is when you can take Medicare, but age 59.5 is for your retirement accounts. This is the age where you can draw without a 10% tax penalty on that withdrawal.
And there are some exceptions and there's some different tools and techniques to deal with that. But let's just say that at age 59.5, that's the age where you can access it, because barring some sort of extenuating circumstance, that's going to be your age. So we'll maybe do another video on that in the future on when you can draw and why and what are those exceptions to that age 59.5.
So you have your retirement accounts and we're going to work backwards here to the present. That's a terrible square. So I'm going to erase that and try again.
So you're going to have some retirement accounts. And if you come into our office and get to know us well, you'll learn that everything that I do, I can illustrate in a box. If you can't illustrate it in a square, it's not worth drawing. So you have your IRAs. We might also have 401k’s. You might have 403b's.
There are all kinds of different names for different retirement accounts that are in sort of this pretax category that we would say. So you put money in and then you don't pay tax on it when you put it in, or you get to deduct it on your taxes that year. And then when you withdraw the money, you pay taxes on it, and it grows tax deferred.
In these types of accounts, you also have Roth accounts which are very similar, but these are post-tax accounts. Your 401k’s often have a Roth option. You have a Roth IRA. And we'll do another video at some point to tell you which one makes sense for you. Basically, they're just flipped and turned over. So a Roth, you pay tax on the money now and then it grows without tax.
And then you don't have to pay tax on it when you pull it out. So it's tax free after that. Both of them makes sense in different circumstances. It's not that one is better than another they're just different. The Roth IRA, you can kind of have some circumstances where you can pull money out before your age, 59.5.
So that's kind of a neat tool when it works and makes sense for certain purposes. So these are the long-term funds. And as we're going we'll put some money in here. We'll show you how we get some money into these accounts for the long term. This we actually want to target in these retirement accounts how much you put in.
We don't want you over saving for retirement. And that's actually one of the biggest mistakes that we see people make when they're good savers. People who are struggling to save enough. We need to get lots of money into those retirement accounts for their security.
But when you have plenty and you have an abundance of resources, oftentimes we lock those up in things that are tax deferred for retirement. We get the tax benefits on them, but then we don't have them available for the things that we need in the interim. There are a lot of other goals that happen. Other than retirement, if you're familiar with our industry, you know that we sell products for three goals.
You know, death, retirement and college. And that's what we talk about in financial planning traditionally across the industry, because those are the things that the products are geared around. But you have a ton of life transitions that aren't involved in those in your financial plan needs to adapt and be flexible so that you can meet all of those different needs.
So we want to target enough in your retirement accounts that you have your basics covered, that you're stable, that you have that income set aside so that you're secure at that stage of life. But we don't want to over save there. So the other thing that we're going to do is we're going to jump over on our diagram to the other side of the spectrum.
You have your immediate needs because you've got to pay your bills and buy groceries and you need to eat and that matters. So you got your paychecks and those come in probably to your checking account most of the time. So you get you have a paycheck coming in. Maybe you have some emergency funds. Maybe you have a savings account.
And by the way, I'm not a huge fan of the term emergency fund. I think as a cash reserve is a better concept than an emergency fund because you don't want to put it in there and say, I cannot touch it ever, unless I'm on my deathbed and trying to figure a way out. Like it's really a reserve to smooth things out as time as you have, irregular expenses, things like that.
You don't want to touch it for random things, but if you need a new roof and you've got to make your deductible like you can, you can use it for that. It's not necessarily just for strict true emergencies. So I like the term cash reserves better than emergency fund for that reason. But your paycheck comes in and depending on where you're at and how you manage your resources, how practiced you are, how stable and comfortable you feel, this may or may not apply to you, but we really like to see people have a floor right in their checking account that's more than zero. You know, if you're having irregular expenses, you want to be able to have some slush fund in that checking account that you don't draw in there unless there's something irregular, so that you're not every single month pulling money in and out of that cash reserve fund. So we want to see maybe depends on who you are.
I'm going to use a round number and say $10,000 in here. And that may be for some of you that may be very far out of reach. For others of you, that might not be anywhere near enough, but we're going to pick some round numbers as we're going so that math is easy if we need it. So we might say $10,000 is the new floor.
So that's zero. And every time you go down, if you're spending one month and you hit $9,000 in your checking account, or $9,500 in your checking account, and we end up looking at that, you know, you've overspent that month more than what you earned. And that's one of the number one rules of finance is spending less than you earn and you'll be successful.
But when you're doing that, if you've spent more than you've earned, you just build that back up to $10,000 the next month or the next two months, or whatever that might be, rather than pulling from your emergency fund or even worse, having to put it on a credit card. Having enough cash is really, really important in your financial architecture and your overall stability, because if you don't, then you have to turn to sources that you don't want to go to for your basic needs, and it just builds up habits that are ineffective for your long-term wealth building.
So the next thing we're going to do on this diagram is we're going to add in some debt. And hopefully you don't have tons of debt. But debt is a tool. But it always mortgages the future. So we want to take it very seriously. When you have debt, we don't want to actively take out debt. That's not productive debt that's unsecured.
We don't want you to be overleveraged. If I use the term leverage, that means debt. Nobody that we encounter that has a significant amount of debt and leverage feels content in life and feels happy. Debt causes stress. It causes a lot of financial challenges. That doesn't mean it's always evil. It doesn't mean it's always bad. But we want to avoid it when we can and find other ways.
And when we do use it, we want to calculate it out and make sure that we're very, very strategic about it. But we want to make sure that we have a place on here to deal with any debt that you have. And then we're going to look at some other types of accounts on here, because, you know, you're going to put some of your paycheck because we're starting to build out a plan where we can put money where it needs to go.
So we're going to say, you know, your paycheck needs to start going into your checking account until you build up this floor. And then we're going to start to route money from your paycheck, maybe into this emergency fund. We'll set a goal, and we might split this out over time into some different, different percentages or different dollar amounts each month.
But we might set a goal in your emergency fund. And I'm going to say just to be random, $30,000. That's probably not a goal that we set, that we just try to tackle that straight away and get you to $30,000 before doing other things, because your financial goals are simultaneous, not sequential. And so we might say, once you get to a floor of 10,000 and $5,000, we'll just start to put a little bit of every paycheck into that emergency fund or that cash reserve fund.
But we're not going to go too crazy on that right away because there are other things to tackle. We're also going to put look at putting some money into your debt repayment. Might be mortgage, might be car payments, your credit cards. We figure out how to do that efficiently and how to maximize your ability to manage that debt well and to be effective in that. We want to pay that off.
Hopefully we want to pay that off eventually before you're retired, if you can. But it's also okay to have a mortgage in retirement. It's just a number that we have to figure out in different ways. But we want to be low debt, so we want to make sure we're figuring out how much can we put there. We'll talk more about how we come up with these numbers as we go.
Just bear with me here. So we're looking at that and then you've got your retirement savings. We want to decide how much do you actually need to save in retirement. So let's say your target is to have $1 million in retirement accounts.
We're going to look at that and say, well, in order to do that you have a certain amount that you need to save. Maybe that's $1,000 a month for that target. That might be a little bit more, might be a little bit less, could be a lot more depending on how close you are to that age. But let's say you want to get to $1 million.
So we're going to say let's shoot for that $1,000 a month. But maybe that's and that can come straight out of your paycheck and come out of your bank account happen automatically. It can happen at will. But, you know, people that do things automatically tend to be more effective and consistent. So when we're looking at that, it might be $1,000 a month, or you might be in a situation where you say, well, I don't have $1,000 a month of room, and the best that you can do is always the best that you can do.
So if you don't have $1,000 a month in your case, whatever that number might be, then we just say, well, where do we start? And we get something moving and we start building your habits of saving. And then we can adjust as time goes on. One of the biggest and most important things that we see people do is there's this big gap.
If you notice it, and I'm not, I'm just going to move my little tiny cursor here around. But this huge gap here where most of your life happens, if you can see that between here at your immediate needs, buying groceries and when you're able to start drawing on your earliest retirement assets, usually that's age 59.5. This is a massive time frame.
Depending on your age, this could be 30 some years for you. And what we want to do is we want to make sure that you have resources to buy homes, to pay for children's weddings, to save, for college, to move across the country to whatever it might be. There are so many different things to start a business.
There might to invest. Make a charitable contribution in your community to do something that you've dreamed about. This is massive and it's overlooked by most everyone that we encounter. Most people, even very, very successful individuals, don't realize that you can save in and invest in accounts like it was a retirement account without locking it up for retirement.
There are some different features of that we call these. You might see the technical term a brokerage account, but we just call these individual accounts, or joint accounts. So depending on whether you're married or how you have ownership of this. Ind.
And these function a lot like a bank account. They're not FDIC insured. They're SIPC insured there. You can invest in them instead of just having it invested in CDs or something like that, that the bank would go out and do or by making mortgages, making loans, which is what the bank is doing and paying interest. These accounts, you actually own things inside of them.
You can buy stocks and bonds and funds and all kinds of different things that are out there and different financial products in these accounts, and they're accessible instead of being taxed deferred, like your retirement accounts are these accounts, you can own things and you pay taxes on the profits of what you own in those accounts as you receive them.
Oftentimes, if you own things for a long period of time, a year or more, or if it's a you'll get long-term capital gains treatment, if it's a dividend you're looking at, if you had it for 60 days, you'll get the same long-term capital gains treatment on that, which is for most people in most situations, significantly tax advantaged.
In some cases, it's even taxed at a rate of 0%. So when we're looking at that, we want you saving here because you can put money, once you hit this $30,000, we might have you start to rout money here because you might want to buy a house. You might want to buy an investment property sometime, someday. And that might be something that you fund with money that's in this account.
It's hard to do that with the money in your IRAs and Roth IRAs. And you can. Yes, you can't own real estate in an IRA, but it's a very, very technical and often problematic process for people where you can get into a lot of trouble. So please call us if you're thinking about that or consult your tax professional on that.
And somebody that's an expert on the prohibited transaction rules with an IRA, so that you don't cause yourself a significant financial setback just by an accidental misstep. So we look at these brokerage accounts and you might have multiples. You might say, I want to save. Maybe you don't want to save for college, which is traditionally a 529 plan account.
A lot of people have heard that term. We can do those, but a lot of times people want to be engaged in saving for college outside of a college account because they might want to buy their help their kids by their first house instead, or start a business, or be more flexible with those funds than just setting aside for college.
So there might be one that we kind of informally title for kids. And these if you don't want to, if you don't want to use these for your kid right away because they're struggling in life or they have a challenge and you want to motivate them, you can hold that back. You can help, you can help them in different ways and be very flexible with that money.
And finally, you might see something on here that we might look at for our clients who give frequently. You might have what we call a donor advised fund, and there are other charitable vehicles. But we're going to keep it simple.
With these donor advised funds, you get to give to these like you give to a charity. You can invest these, but you can deploy out of them. You can use them to give them the funds to a charity anonymously. A lot of people like those features. But we might start to say, well, you know, you hit your target here, you have a home purchase goal.
So we're going to set some money that we're going to decide goes here. We're putting money everywhere it goes right out of your income stream, your cash flow stream. As soon as we can get that money out reasonably so that it's not sitting there because like me or anyone else, if the money's just sitting there, it gets spent.
It's just a law of human nature. And so with these donor advised funds, we can say, you know, give stock to them and accumulate some. Maybe you have a really high income here. Let's say you sold a property or a business or something like that that has a lot of taxes in one year. We can give a big chunk of that to a donor advised fund, or we can even give like fractional interests of those properties or businesses to the donor advised fund and save a ton in taxes that year.
And you can give that out over the next several years. So you can kind of pre give to the donor advised fund and then continue to give that to the organizations you care about at a pace that's appropriate for what you want to do for that organization. And you can get your kids involved in that. There's so many different ways that we can structure these on the savings side.
And then on the distribution side, you have a lot of different if you've done this right, you have a lot of different buckets that you can pull from. And you can be wildly tax efficient in retirement as well. When you're in that distribution phase and drawing on your assets for income. There are places on a financial architecture where we can put your real estate holdings, your business interests.
This just gives you kind of an idea of how we map it out. And what happens is at the end of the line, when we're all said and done, I'm going to make it pick a different color. Just for fun. Let's make it green for cash. Whatever's in here, when you've done this right and you've sent money right away, everything in here if I color this in, is all free for you to use.
It's available money. And what most people naturally do is they check their bank account. If there's an appropriate balance in there, they'll use it. And you're able to do that with this model, you're able to engage in a way that's just natural and how you're going to function just on a day to day basis, just as somebody who's just trying to spend less than they are and isn't super tuned into the details, but you're just going to be exceptionally functional for targeting each one of your goals over the course of your life.
So we're really excited to get to walk through this exercise with you. Building a financial architecture is actually really fun. I love doing it with clients and friends, and I just it's such a fun process to go through and iterate how you put your resources, where they reflect your values and your goals so that you can be effective.
