Comments on: Laddering Your Emergency Fund

By: Ken

Ken — Fri, 23 Oct 2009 15:43:18 +0000

When you only have $1000 in 6 different CD’s, it is tough to see how the CD ladder is worth the effort. However, imagine having six 6-month CD’s in six different banks, each with $250,000, each earning 4% a year. Now, every month a CD matures, you skim-off the $5000 in interest and drop the principal back into another 6-month CD. I can live off the $5000/month and still will the SAFE principal to my dog ( or whomever ). Sure, I may have to win the lottery to get to that point but I think it adds perspective to the discussion.

By: Jim

Jim — Wed, 19 Aug 2009 12:15:49 +0000

If you think rates are going to increase, the six + 1 method is good because you can then lock in better rates later.

By: Rob

Rob — Wed, 19 Aug 2009 11:40:32 +0000

Two thoughts:

Laddering is a terrific way to go once interest rates are competitive again. Isn’t it possible that rates will have to rise here very soon as the debt load takes effect or are my ECO 101 factors backwards?

We like the 6 month plus 1 method. Six months laddered or safe and conservative plus one month MM fund for those unplanned emergencies.

By: Diego

Diego — Mon, 04 May 2009 16:20:19 +0000

Yes, the interest rates are lousy, but I don’t hear any suggestions from the whiners about a better vehicle.

Cocoa futures? Lottery tickets? Cases of vodka? Partner in a meth lab?

Think, McFly, THINK!

The whiners probably have all their money in the mattress, and they dream of how they’ll clean up when interest rates reach APYs of 50%. Nice dream.

By: dave

dave — Mon, 07 Jul 2008 04:55:03 +0000

Forgot to mention: with many banks, you can have them automatically roll-over the CD shortly after it matures, so the only work involved is the initial startup.

By: dave

dave — Mon, 07 Jul 2008 04:53:01 +0000

You can start this at any time – the key is to buy CDs such that only one matures in any given month.

Start with a 3-month CD ever month for 3 months, and let them roll over until you can afford 3 more.

Then, when you can afford three more, buy a 6-month CD in the first, second, and third months. In those same months, roll your 3 month CDs back into 3 month CDs. In the 4th, 5th, and 6th months, roll your maturing 3 month CDs into 6 month CDs. If you’ve done it right, you should have 6, 6-month CDs, with one maturing every month.

Returns on CDs are better than those on savings accounts, but really, they suck. I might try this with 3 month CDs, to give me a little time to liquidate other investments, but 12 cds earning crap rates? Thanks, but I’ll pass.

By: Jeanne-Erin

Jeanne-Erin — Wed, 30 Apr 2008 17:38:32 +0000

I have to say, this was VERY clear. I’ve read about laddering before and had not understood it. The step-by-step was perfect and I plan on setting this up once I’ve saved the necessary cash. Thanks!

By: foreclosurefish

foreclosurefish — Mon, 21 Apr 2008 16:23:03 +0000

I think this is a good idea, and it’s one I’ve been somewhat familiar with for at least a few years. Having an emergency fund in a somewhat liquid position like this while earning interest can really help to keep up with inflation and put the emergency fund to work.

By: Amanda @ Me vs Debt

Amanda @ Me vs Debt — Sun, 20 Apr 2008 15:06:57 +0000

Well thought out post. Once the interest rates go back up I’ll be looking to implement a very similar plan.

By: Miller

Miller — Fri, 18 Apr 2008 17:25:48 +0000

Gotta agree. Maybe I am out of touch with the numbers, but the effort doesn’t seem worth the money. Can you give us a rough estimate of the net money gained each year?

By: Ken Clark - CollegeSavings.About.com

Ken Clark - CollegeSavings.About.com — Thu, 17 Apr 2008 19:58:04 +0000

I talk about this all the time in seminars… but I also question the effort / reward of the whole thing.

You can spend a lot of time only to gain a small incremental return. I guess it depends on how much money you are laddering and what your ability to create other income with that time is.

Thanks for the article!

-Ken

By: Anonymous

Anonymous — Thu, 17 Apr 2008 18:48:22 +0000

a great idea except for the fact that rates on CDs are lousy.

By: My Daily Dollars

My Daily Dollars — Thu, 17 Apr 2008 13:49:39 +0000

Nice idea! I agree, if the interest difference is worth it, this is a really clever way to put your emergency fund to work for you!

By: fred@opc

fred@opc — Thu, 17 Apr 2008 12:22:48 +0000

FWIW, I think your explanation is pretty good. The big thing to consider here is whether you can earn an interest rate on a money market that would be close to the same rate as a CD. You don’t have to actively manage the money market like you do this laddering program, and particularly with some credit unions, savings rates are very close for short-term CDs and money markets. If you’re only making an extra .25-.5%, this could be a lot of work.