I needed to make my liquid investments start earning at least inflation rates, so I’ve embarked on a quest to organize my emergency savings fund. The idea behind an emergency savings is that at a given time one has enough money available to cover 6 months of living expenses. This money doesn’t need to be uber-liquid (i.e. under a mattress), but it should be accessible with little to no hassle and preferably little to no economic loss.
Running slightly counter to this idea is that there is some benefit to a touch of hassle when dealing with emergency funds. After all, it is good for one to really have to think about whether or not one is drawing money from an emergency account for a true emergency. A small penalty on drawing emergency funds naturally keeps one in check.
So, I’ve decided to start building a staggered Certificate of Deposit (CD) structure to account for my emergency fund. Say my day-to-day needs required $4k (numbers are fictional) for any 6-month time period. I will have a 12-month CD expiring every 3 months of the year (say January, April, July, and October). To facilitate this, I signed up for two $1k CD’s today, 1 lasting 6 months and another 12 months. In April I will do the same thing. In July and October I will renew the 6-month CD’s as 12-month CD’s. Generally speaking I will be getting about a 4% APR on these CD’s. Much better than my 1% APY on my savings account. Why did I wait so long?
The penalty for early withdrawal from these accounts is 180 days of interest. The penalty can eat into your principal if it must. This is why I chose not to put all my eggs in one basket by opening 4 CD’s at once. This is also why I chose not to open one single big CD. Staggering the CD’s means at any given time I will be able to draw $1k early and still walk away with some interest. Additionally, the chances are much better of using a credit card for a month to wait out the maturation of a CD.
I built a spreadsheet quickly to analyze this, just using a simple I = Prt formula. It was fun, though I’m guessing the formula should be more complicated if I wanted to be completely correct in my calculations.
Additionally I am dumping my savings account into a money market (I’m assuming it is a fund, but not real sure - my credit union is pretty informal about these things). I will typically be getting about a 2% yield on this account. Not great, but I’m going to focus on minimizing the cash in this account. As the account grows to $x, I will try to contribute $y to other long term investments. Of course, I could also contribute $y to things like home improvements or what not.
I’m not overly pleased with the rates on this money market, but it was very easy to open so it will do for the time being. I may decide to move to a TD Waterhouse money market which provides a better rate. I just need to see how much money actually sits in the account and whether it’s worth my time to work with TD Waterhouse. After all, these aren’t retirement level decisions here. Saving time to get things flowing conveniently is most important. Time spent dallying about 1% interest gains on basically liquid investments is time not spent concentrating on 7% interest gains possible in long term investments.
What do you think about this setup? Any other suggestions? On a somewhat related note, what amount of money are you planning to have for your retirement (thinking in terms of you or you and a spouse)? When are you hoping to retire?
Comments (4)
That’s a creative solution with your staggered Certificates of Deposit. Nice thinking.
I’m drawing a blank on your final question. Not good. I’ve saved a ton of money so far, but I don’t have a specific goal in terms of when I hope to retire and how much money I expect to have at that point. Bettter give that some thought.
The staggered CD’s idea was developed while going back and forth with my brother. I decided 12 CD’s was overkill, so quarterly sounded good. 12 CD’s would probably also result in a loss of interest, not that it matters that much with such low level, low yield investments. The work involved nixed that idea.
I suppose I should tip my hand a bit here. Using the calculators you shared with me, MEG, I found that I was more than on target with my retirement planning. Ah, I guess I won’t mention too many numbers yet because I don’t think I remember them correctly.
I will say I was thinking $2 million would probably be necessary for the both of us to retire comfortably. Yet I don’t remember a target age for the $ amount, so it’s kind of a useless number. I believe my investment track is right on line with that number, but when monkeying with the calculators I found that, due to inflation, it wasn’t going to last me long. Especially considering the likelihood that one or both of us will live longer than our grandparents and parents tend to nowadays.
Yet, I really can’t believe how inflation effects things. I just can’t put my head around us needing, say, $350k to live comfortably. It doesn’t really register. And I seriously don’t anticipate that I could quit working cold turkey. And when we’re older maybe 55 or 65 won’t seem as old as it does today (functionally speaking). Etc, etc, etc.
Finally I always go back-and-forth on what the value of saving all this money is. I mean, yeah, get some money out there (as early as possible kids) accruing interest. But let’s not go overboard. [extreme example] Why save $20k for your deathbed when you and your family could have been swimmin’ in a pool for the last 30 years?
Thanks, but you don’t have to go through all of that hassle just for me. I’ll be fine. Still, sounds like a good plan.
Over the life of The Wife’s Roth IRA she has gained 63% when compared to the cash she’s contributed. I’m guessing we’re coming upon the 4-year anniversary of the account, though it could be 5 years. In either case, that is excellent. Especially when you consider that the cash placed in the account was not a lump sum upon opening the account. In fact, she probably hadn’t contributed half of the total cash until 2 years ago.
A difficult choice we have is determining the risk level we want to take. This year we’d like to send a larger contribution to The Wife’s Roth than previously. I must admit I’m tempted to put it all in this Dodge & Cox International that she already has a little but of money in. Greater than 35% gain over each of the last two years is just too tempting. Especially while Mr. Bush remains in the executive.
I’m also intrigued by the idea of throwing the money at some sort of mixed international investing mainly in China.
Again, even if you are poor you need to find a way put $5k away in something very aggressive (assuming you’re young).