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.
Showing posts with label emergency fund. Show all posts
Showing posts with label emergency fund. Show all posts
Tuesday, January 22, 2008
Quick, Stash that Emergency Fund
The Fed just made a surprise cut on its short-term interest rate by 0.75%. This will likely bring about inflation as well, and I want my emergency fund to keep up with the inflation, at least.
This also means that Savings and CD interest rates will shortly fall at least by that amount too. How soon? Who knows. But when they do fall, they will certainly fall behind the inflation rate. According to inflationdata.com, the inflation rate in Dec 2007 is 4.08%. Meanwhile, the average 6-month CD rate is 4.66% (4.75% APY) according to bankaholic.org. Fed's cut will likely bring that to under 4%.
60% of my emergency fund is already in CD. 40% was laying around in savings accounts. To keep up with inflation, I need to consolidate them to fixed-rate CD accounts immediately. I don't think there will be enough time to shop around for good deals on CDs and transferring the money there in time before the rate adjusts. I just have to settle for whatever CD rates my current banks offer.
Lucky for me, I've been preparing for this for a while. Back in November, I've setup accounts in ING and E-Trade. I've been banking exclusively with HSBC. My primary account was there. Yet, HSBC had this outdated and slow online account opening mechanism that required you to mail/fax in documents and took weeks (days if you were lucky) to open. With ING and E-Trade, the account opening and funding procedure takes 5 minutes to complete (with ING, it took only 10 seconds!).
I did that and now I have 40% of the emergency funds that was laying around in savings accounts locked away in a 6 months 4.35% APY CD. They were in savings accounts because I had a trip to Las Vegas last December, and preferred to have them in liquid form while I was away. So, when the CD that was holding them matured last November, I simply transferred it to the savings account.
Unfortunately, the other 60% is in a CD that will mature next week. I am pretty certain that by then the rates would have adjusted. I don't know yet where I'm going to put that.
I think I'm going to ladder it. Having my CDs maturing at short intervals from each other exposes me more to bad CD rates. During uncertain economy periods, like we are in now, the bad CD rate may not keep up with the inflation rate.
This also means that Savings and CD interest rates will shortly fall at least by that amount too. How soon? Who knows. But when they do fall, they will certainly fall behind the inflation rate. According to inflationdata.com, the inflation rate in Dec 2007 is 4.08%. Meanwhile, the average 6-month CD rate is 4.66% (4.75% APY) according to bankaholic.org. Fed's cut will likely bring that to under 4%.
60% of my emergency fund is already in CD. 40% was laying around in savings accounts. To keep up with inflation, I need to consolidate them to fixed-rate CD accounts immediately. I don't think there will be enough time to shop around for good deals on CDs and transferring the money there in time before the rate adjusts. I just have to settle for whatever CD rates my current banks offer.
Lucky for me, I've been preparing for this for a while. Back in November, I've setup accounts in ING and E-Trade. I've been banking exclusively with HSBC. My primary account was there. Yet, HSBC had this outdated and slow online account opening mechanism that required you to mail/fax in documents and took weeks (days if you were lucky) to open. With ING and E-Trade, the account opening and funding procedure takes 5 minutes to complete (with ING, it took only 10 seconds!).
I did that and now I have 40% of the emergency funds that was laying around in savings accounts locked away in a 6 months 4.35% APY CD. They were in savings accounts because I had a trip to Las Vegas last December, and preferred to have them in liquid form while I was away. So, when the CD that was holding them matured last November, I simply transferred it to the savings account.
Unfortunately, the other 60% is in a CD that will mature next week. I am pretty certain that by then the rates would have adjusted. I don't know yet where I'm going to put that.
I think I'm going to ladder it. Having my CDs maturing at short intervals from each other exposes me more to bad CD rates. During uncertain economy periods, like we are in now, the bad CD rate may not keep up with the inflation rate.
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