How to build an emergency savings fund and CD ladder

There are several ways in which you can save money to prepare in the eventual case of job loss, medical emergencies, car and home repairs, and even the loss of a family member. This article will explain how you can effectively build both an emergency savings fund and a CD ladder at the same time, for maximum liquidity and a steady source of income.

Things You'll Need

• Savings account
• Multiple CD (Certificate of Deposit) accounts
• Maybe a checking account to transfer funds

Instructions

1. To start, assess your savings goals. How much money do you need to save up for an emergency? It is strongly recommended that you save up six months worth of expenses to cover the necessities. This is especially important if you lose your job and are unable to find another for months. For the purpose of an example, I will use my goals for this article.

   My goal is to save $20,000 total, by dividing $10,000 into a savings account and $10,000 in five CD accounts ($2,000 in each). I can afford to save $250 a month. At this rate, it will take me 80 months to reach my goal (interest not included). Don't worry if you cannot immediately reach your savings goal, a good emergency savings fund usually takes a while to build. Usually, there are debts to pay, which is as equally important to reduce and can be done simultaneously.

2. After identifying your goals and how much you can save per month, we can open a savings/money market account. Research www.bankrate.com or www.bankingmyway.com for a bank that suits your needs. It is best to go with a bank that offers a high APY (annual percentage yield) as this will increase your savings over time. If it can be avoided, choose a bank without fees or high minimum balance requirements per month.

   So now I will start putting $250 per month into this savings account. Once I have $1,500, I will proceed to the next step - a CD account.

3. So after 6 months, I have $1,500 in my savings account. My rule is that every time I save $1,500, I will put one third into a CD account. The reason for this is because CDs lock in a interest rate that is usually higher than savings/MMA accounts, although there will be a penalty for withdrawing early before the maturity date. Set your own rules for when you want to put money into a CD account. Basically, I want to always have twice as much money in a savings account (until I've reached my savings account goal of $10,000).

   Once again, check the websites from Step 2 to look for a CD account that offers a great APY. For my purposes, I will select a 6 month CD (you can do other CD lengths such as 3/6/9 mos., 1, 1.5, 2, 3, 4, 5 year CDs). With a CD ladder, I ultimately want to have five CDs with five year long maturity dates each because 5 yr. CDs offer the highest interest rates. The purpose behind a CD ladder is that you usually have a CD maturing every year that you can cash out if needed, or you can revolve it into another 5 yr. CD. To start, we are building a CD ladder that matures every six months (however, you can start with five year CDs right off the bat).

4. So right now, I have $1,000 in savings and $500 in a 6 mo. CD. In another 6 mos. I will have another $1,500 saved and my CD has matured. Take your entire CD and revolve it into another 6 mo. CD. Take $500 from your savings account again and put that into a new CD with a 1 yr. maturity. Do you see what we are doing here?

   In another six months, you will have saved an additional $1,500 and your 6 mo. CD has matured. Repeat the process, however this time we are putting our money into a 1 yr. CD and a 1.5 (or 18 mos.) CD. Each six months we are increasing our maturity date until we reach a 2.5 yr. CD.

   At that point, we will have $5,000 in the savings account, and five CDs that are maturing every six months.

5. Keep this process going, but what you are doing now is each six months, you are adding $500 to each CD that is maturing, bringing each CD total up to $1,000 (interest not shown).

   Pretty soon you will be at $10,000 in your savings account and $5,000 in revolving CDs. Although, this does not have enough interest earning power as the stock market or other investments, this method IS safer and the only "losses" would be from withdrawing a CD early. However, withdrawing from a CD should be your last resort after emptying your savings account during an emergency.

6. The next step is to now add $1,000 to each of the CDs maturing every six months and moving that CD towards building a CD ladder that matures every year (but revolves at 5 yr. maturity dates for maximum profit).

   So, six months later you have another $1,500 saved up and your $1,000 CD has matured. Your furthest CD is now two years away. You want to move into one year between each CD maturing rather than 6 months each. You're going to have to "borrow" from your savings account to do this.

   Taking the $2,500 you have available for CDs, borrow $1,500 from your savings account, bringing your total to $4,000. Put $2,000 into a 3 yr. CD and the other $2,000 into a 4yr. CD.

   Another six months later you have a CD maturing and an additional $1,500 saved. Take the $1000 from this CD and "pay it back" into your savings account, along with the $1,500 saved, bringing the total to $11,000. Do not get another CD as you are now on the one year maturity periods. Wait another six months.

   It is six months later, and you have another $1,500 and a CD matured. At this point you have 3 CDs that will mature at 1 yr. ($1,000), 2yr. ($2,000), and 3 yr. ($2,000).

   You have $3,500 that you can roll into CDs so now you will "borrow" $500 from your savings again so you can get two more CDs. Roll those two $2,000 CDs into a 4 yr. and 5 yr. CD. Your CD ladder is almost complete.

7. A whole year later you have another $3,000 saved and a CD ($1,000) just matured. Take $2,000 and put it into a new 5 yr. CD. Your ladder is now complete, all you have to do is roll your CD that expires every year into another 5 yr. CD. This method will give you great returns with liquidity every year in case you need to withdraw money at maturity.

   What you do with the spare savings you have after your goal has been reached is up to you. You can either build an even bigger CD ladder or savings account, pay off debts, put the money into a "Wants" fund in case you want to save up for that car or big screen TV, or other investments. Good luck, I hope you are well prepared to save for that rainy day.