Tuesday, January 22, 2008

First Lesson in 2008: Storing Emergency Fund

Already, 22 days into 2008, I am humbled by my mistake of not diversifying. In my previous article, I recognized that I have not been storing my emergency fund correctly because I didn't diversify the maturity dates of the CDs holding the fund.

I stored it in two CDs, the 40% and 60% as I called them. 40% of the fund in a 6-month CD, 60% in a 1-year CD. That had been working great during the economic high prior to late 2007. But, this will be the first economic downturn my emergency fund experiencing.

So, since I had access to the 40% in liquid form (laying around in savings account) earlier today, I put half of it in a 1-year CD, and the other half in a 6-month CD. So, that's 20% each of total fund.

The 60% CD will mature next week. I shall split it of into 3 equal parts, each is 20% of the total fund. The first part will go to a 1.5-year CD, the second to 2-year, and the third to 3-year CDs.

I am hoping to end up with a 3-year ladder with 6 rung, each 0.5 year away from each other. Putting the fund into such ladder makes sense to me. The size on each rung, 20% ($4K), is big enough for many immediate needs and small enough that I can bear the pre-withdrawal penalty.

A longer ladder brings about more rate stability. This bankrate article on CD laddering uses a 5-year ladder with 1-year rung as an example. But with stability, there is also the risk that the fund won't be coping with inflation in an extreme economy.

I think if there is a symbol for living on the edge, and if my generation, gen-X, can speak as one voice, we would have picked that symbol. Our entrance to the world is marked by extreme events. Extreme sports. Extreme weather fluctuation. Extreme economy fluctuation. Extreme job-hopping.

5-year turnaround is too long. Things change much faster nowadays. 3-year is the longest I can talk myself into. There has not been a recession lasting longer than 3 years, and by keeping the turnaround lively enough, I get to stave off the risk of losing its value due to extreme inflation.

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