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?