Would you believe that your emergency fund could be working harder for you, even as it sits safely in the bank? Join me, Justin Gaines, alongside John Prover, as we reveal the power of CD laddering—a strategy that can strike an optimal balance between easy access and maximizing your savings potential. We take a magnifying glass to the often-overlooked financial tactic that ensures your hard-earned money isn't just idling away, but actively fighting inflation's bite. With our step-by-step recommendations, listeners will come away with a clear understanding of how to keep their financial safety net both robust and responsive to their needs.
Let's be honest, managing an emergency fund isn't the most thrilling of topics, but with the right approach, it can be incredibly rewarding. Throughout this episode, we'll explore how to establish a monthly investment rhythm with CDs that promises a consistent income stream and discuss how to smartly integrate raises into your savings without succumbing to lifestyle inflation. We also tackle the practical side of emergency funds, offering advice on using credit cards strategically as a stopgap during those unexpected life moments. So, if you're ready to transform your approach to saving and infuse your financial plan with both growth and liquidity, you won’t want to miss the insights unpacked in this episode.
Would you believe that your emergency fund could be working harder for you, even as it sits safely in the bank? Join me, Justin Gaines, alongside John Prover, as we reveal the power of CD laddering—a strategy that can strike an optimal balance between easy access and maximizing your savings potential. We take a magnifying glass to the often-overlooked financial tactic that ensures your hard-earned money isn't just idling away, but actively fighting inflation's bite. With our step-by-step recommendations, listeners will come away with a clear understanding of how to keep their financial safety net both robust and responsive to their needs.
Let's be honest, managing an emergency fund isn't the most thrilling of topics, but with the right approach, it can be incredibly rewarding. Throughout this episode, we'll explore how to establish a monthly investment rhythm with CDs that promises a consistent income stream and discuss how to smartly integrate raises into your savings without succumbing to lifestyle inflation. We also tackle the practical side of emergency funds, offering advice on using credit cards strategically as a stopgap during those unexpected life moments. So, if you're ready to transform your approach to saving and infuse your financial plan with both growth and liquidity, you won’t want to miss the insights unpacked in this episode.
Welcome to the Balanced Blueprints podcast, where we discuss the optimal techniques for finances and health and then break it down to create an individualized and balanced plan. I'm your host, justin Gaines, here with my co-host, john Prover. In this week's episode, John, we are going to talk about how to ladder CDs, why you ladder them and why the interest rate on those CDs isn't the most important thing to consider when you're doing it. So I sat down with a client this week and we were working with setting up their retirement plans, setting up their emergency funds and just planning on how to put themselves in a firm position to be able to retire successfully and not have any concerns.
Speaker 1:
But part of the issue that comes up when we start doing that is determining how much money can we put towards retirement and how much money do we need to have liquid so that if we have an emergency now pet gets sick, kid gets sick, car breaks down you know you lose your AC in your house or the heater, you know the furnace goes how do you make sure that you have enough money to cover that and at the same time, not make it so that money's not working for you? There's a few different ways to do this depending on the individual's financial intelligence. You know I you know, financial iq score determines which route we go. So somebody who's very familiar with money and knows how to turn lumps of money into income streams, you just take the money, put it into a high yield savings and roll with it. And what we're talking about here is your six month savings money your liquid assets.
Speaker 1:
So we're not talking about what you're putting into your Roth, annuities, life insurance, all your other investment vehicles. We're strictly talking about. We know how much money we need to have liquid. Generally speaking, at a minimum is six months of liquidity. How do we make sure that that money is not just sitting there and losing value because of inflation? So, if you have a high financial IQ, you can just put it into a high yield savings. You'll be getting a solid interest rate. Let it sit there as you have things come up. You can just take a loan against that money and I say a loan because you don't want to take the money out and then never put it back. You want to take the money out, continue to put it back, so you can take that loan out against that money, spend it and then put the money back.
Speaker 1:
Most people, though, don't know how to take their six-month savings and, if they lose their job, turn it into monthly income. There are a lot of people, a lot of clients that I see, that lose their job. They start to think okay, I don't really need to think about work right now, because I got fired through no fault of my own. I have unemployment money coming in. I have a six-month savings, so realistically I could just not do anything relax, recharge. I have six months of money sitting here.
Speaker 1:
The problem is that if you have full access to that, it's just a true nest egg. Sitting there, you may deplete that faster than six months. The other thing to think about is, if you are depleting that, you had to work really hard to get it there and you don't want to just deplete it for the sake of depleting it. You want it to be there for a future event, if the future event happens. And so what we do with individuals that haven't been taught as much about money is we'll do what's called CD laddering, and all that means is you buy a CD, you buy several CDs and eventually what you're going to end up with is six CDs that come due. One comes due every six months and what does the ladder?
Speaker 2:
What's a CD?
Speaker 1:
Oh, what's a CDd?
Speaker 2:
fair enough, fair enough because I keep thinking of uh videos. Yeah, okay, okay, yeah fair enough.
Speaker 1:
Slow my roll here a little bit. So, cd certificate deposit. Okay, all cd is is it's a effectively an account with the bank that is tied up for however long that cd. So in this case we're going to be talking about three and six month CDs, which means they're tied up. You don't have access to them for three months or six months and in exchange you're given an interest rate from the bank. It's typically going to be a higher interest rate than the high yield savings or the.
Speaker 1:
You know just a standard savings account, your standard savings account, money market accounts are typically below 1%. A lot of times they're below even a half of 1%. So with inflation at two and a half 3% lately, you're losing money on the money that's in those accounts, but you need to have a six month savings the money that's in those accounts, but you need to have a six-month savings. So how do you make sure that you're not losing money to inflation but that you have a six-month savings? And that's where the CD laddering goes. And the reason it's called laddering is you want to think of it like a ladder and at each rung of the ladder another CD is going to come due.
Speaker 1:
And what this does is if you buy and we'll, just for simple terms, I'll explain how you would go into the buying process. But if you have six, six months, six, six month CDs, you're going to have one CD coming due every month but you'll have a fully funded six month savings account because you'll have six of these, one month each of value. So altogether your CDs will add up to your six-month savings. But, like we said, you're getting better interest rate than a money market or a high-yield savings typically. So you're getting a higher interest rate than what the current market's giving you. So you're beating inflation maybe not by much, but you are beating inflation.
Speaker 1:
So the money is still staying there and then every single month you're able to determine do I need this money, yes or no? The answer is no, which most likely the answer will be no, Then you just go and buy another six-month CD.
Speaker 2:
If you want to do this, just two questions. So you just walk into a bank and you can buy them there, and what is the rate of return usually?
Speaker 1:
So you would go into a bank and, like you can buy them there and what is the rate of return usually? So you would go into a bank. You would, you know, talk to the banker, tell them that you want to open a cd. You're typically not gonna. You know, you might tell the teller that you're gonna open, that you're looking to open a cd and you're looking to get information on that. They're typically going to move you over to, you know, a branch manager or somebody in one of the offices. It's not something something you're gonna do right there with the teller, because it is a specialized product and there's conversations that need to happen with it.
Speaker 1:
Cd rates right now I'm just gonna pull them up quick Again. The CD rates are always gonna fluctuate based on prime rate and what's going on in the market. But CDs right now are anywhere from three and a half to 5%, depending on the length of term. So you know we're talking about a six month, which is a shorter term length, versus a 10 month, a one year, two year and so on and so forth. But I'll get into why the interest rates don't actually matter that much.
Speaker 1:
But for building the process here, you know, each rung of the ladder is that dollar amount. The reason I do six months with my clients instead of using, like, a 12-month cd, is if you have a, if you have an emergency account that is funded for 12 months of funding, then you would use 12-month CDs. But if you only have six months of funding, or you're between six months and 12 months, then you'll divvy that up into six chunks and have six-month CDs, and the reason being is that you're going to have, however long the term is, that's how many CDs you're going to have. However long the term is, that's how many cds you're going to have, because it's going to end up coming due every six months or every 12 months in order for you to have monthly income, which, again, the primary concern that we're addressing here is not knowing how to turn a lump sum of cash into an income stream. This allows us to turn it into an income stream automatically without having to think about it other than the initial setup period. So by doing this, you have monthly income out of that and every single month, around the same time, you're making that decision Do I need money right now for an emergency or not?
Speaker 1:
Yes or no? You say no, then you just go and buy another six-month CD. At this point, you have a good relationship with your banker. Your banker is going to call you every six months and just say are we buying another one or what are we doing Now? You don't have to think about interest rates, and the reason you don't have to think about interest rates is this isn't one of your primary investment vehicles for your retirement. This is your emergency account. This is money that we have set aside. We know that we're not being super aggressive with it. We're actually being super conservative with it, because we need this money here in case of emergency.
Speaker 1:
This is our rainy day fund, and so what we want to do is we want to make sure that our rainy day fund isn't losing money due to inflation. It's keeping pace with it by buying CDs, and what drives the CD rates? Inflation has a large playing factor in that, and so typically it's very rare for a CD rate to be lower than the rate for inflation. Typically, cds even at six-month CDs will beat the inflation rate, and so we're at least beating inflation. We're making sure that our NASDAQ is maintaining its asset growth and asset value, but we're not being super aggressive with this, so the interest rate doesn't matter as long as the interest rate is above inflation.
Speaker 1:
What drives CD rates is partially inflation, inflation, and so that rate is typically always going to be above that. So we don't have to have the conversation with the banker saying, oh, what are the rates, what are this? The banker's going to have to tell you because of legislation and what they have to say. But you don't have to worry about that in your decision making process, because where we're actually worried about rates of return and growing our money is in separate vehicles where we'll have that conversation. This is just for the.
Speaker 2:
This is just the rainy day fund that we're talking about okay, so the the only other thing that I was a little unclear on. So am I buying six individual six month ones, so they come up on each month?
Speaker 1:
so what you're going to do is and this is where you get into the buying piece is you're going to buy these over the course of three months, and what you're going to do is the first month when we start setting this up, and this is where you'll typically work with somebody.
Speaker 1:
You can do it on your own and I'm going to give you the whole layout on how to do that but you'll typically work with somebody who knows how to do this to explain it to you.
Speaker 1:
But if you want to do it yourself, this is how you would do it the first month that you start and for easy sake we'll just call this January. So January is when you're starting you figure out what your six-month savings is and what your six-month savings requirements are. So if you live after-tax dollars off of, say, $5,000 a month, tax dollars off of, say, five thousand dollars a month, your six month savings needs to be thirty thousand dollars. It's that five thousand dollars a month times six months gives you thirty thousand dollars, which means you have six, five dollar chunks of money and that's what we're going to go and buy the cds with, because that's you know. You're basically just taking the calculation on what you need for six months and you're reversing it to then break it up so that it's now monthly income again. So in January you're going to buy a three-month CD for $5,000. And you're going to buy a six-month CD for $5,000.
Speaker 2:
So you can't touch that money until the three months is up, right?
Speaker 1:
The three months and the six months, the three-month one yeah, right, the three-month one you won't be able to touch for three months. Six-month one you won't be able to touch for six months. Again, this isn't a concern, because every point of this ladder you're going to have a full month's worth of money sitting aside.
Speaker 2:
Because this is an emergency fund.
Speaker 1:
This isn't for planning vacations, this isn't for fun, exciting things. This is for the car broke down. I need this, I need that and breaking those pieces up. So in February you're going to buy again a three-month and a six-month CD. So at this point you will have purchased four $5,000 CDs. You have two three-months and two six-months, but you're already a month into the ones that you bought in January. In March you're going to do the same thing a three-month and a six-month CD.
Speaker 1:
And the reason we do the three-month in here we're going to get to the real punchline on this. But the reason we do the three-month is so that we can get into this and get this set up as quickly as possible. Because now we're at month four and so in in month four, now we're only buying six months accounts, because at this point, at the end of march, beginning of april, you've already bought, you've already taken your full six month account and you've put it into six different cds. So they have six, five thousand dollar chunks of money at this point. The cd you bought in january, that's a three month, has come due and your banker's calling you hey, what are we doing with this three month cd that just just came due and you're going to tell them. From this point forward, we're going to buy six month cds, because now you buy the seat, they take the three-month that came due. You buy the six-month-er in April. Now in May your three-month-er that you bought in February comes due and you buy a six-month-er.
Speaker 2:
Yeah.
Speaker 1:
In June the three-month-er that you bought in March comes due and you buy a six-month-er. And then July you're going to take your six-monther from January and buy a six-monther. And now at this point, come July, you have a six-month CD coming due every six months and you just continue to buy a six-month CD every month. Every month you're going to have one CD come due and you're going to buy another six-month CD. What this allows you to do is you're slowly building that account with the rate of inflation and if you want to increase the amount of money in the account or you have a surplus in your budget that you want to put, maybe you've got a raise at work and now you're making another $5,000 a year. $5,000 divided by six brings you into think. That's four hundred fifty dollars, I believe. So now that means we're divided by twelve. You would do five thousand dollars. Divided by twelve it's two hundred fifty dollars a month. Times six, that gets you thirteen thousand five hundred. So now you need to increase your six month savings by that. But you're not going to just be able to do that in one month's sum, so you'll take each month, when the six-month CD comes due, that increase in income. You'll just put that for six months your first six months, that increase in income. Just put that into the CD and add it to the value when you buy the new CD.
Speaker 1:
Now, after six months, you can actually take and enjoy your raise that you received, because now you've put away six months savings for it and you've prepared yourself so that you can live the same lifestyle if you lose your job in the future, because you've already set yourself up for it and every every single month you have the option of either just buying another cd or, if you have an emergency that has come up, you can say, okay, I have an emergency, let me, let me take some money out of the cd and then your your goal is is that in six months you will have paid yourself back for whatever that emergency was and then be able to put that money back into the CD.
Speaker 1:
The CD comes due and now you have a six-month savings that isn't just sitting there as one large sum that is tempting to just dip into and borrow against and pay it back later, which you'll never do. You have it there and it's coming due just like regular monthly income, and you're just making the decision once on do I touch it or do I not, once a month.
Speaker 2:
So that's kind of the advantage, I guess, over the high yield saving account is. It's not as tempting, just take it out whenever.
Speaker 1:
Correct. It's not as liquid, so it's not as tempting. It has the right amount of liquidity because it's a six month savings and you're breaking it up into monthly income. Do you have the right amount of liquidity there at any given point? You know, if you, if the day you decide, okay, I'm going to buy the six month CD, I don't need the money, and the next day you end up in a car accident and your car's totaled, the most amount of time that you're going to be waiting is 30 days to get that money. Most emergencies you can last 30 days on most. And so you know, there's the nuanced scenarios where you can't last 30 days.
Speaker 1:
And what I would tell you is, if you listen to some of our other podcasts where we talk about, you know, emergency credit cards and that sort of stuff. If you have an emergency credit card, you can put the emergency onto the emergency credit card, get the points for that and then, when the six month cd comes due, you then take that money and pay off the six months. You pay off the emergency credit card and at this point you've not caused any interest on your credit card. You're not paying any interest there because you're just paying it off within the you know statement period and you've now made it so that you're perfectly okay. You've taken care of the emergency, you've paid it off and then in six months, hopefully, you'll be able to pay back yourself and and bring that cd back up to its full, appropriate value.
Speaker 2:
Yeah, that was going to be one of my other questions. I was thinking you'd probably use a credit card because that would buy you 30 days.
Speaker 1:
Right, that's why the latter works. If you have the emergency credit card, you have the 30-day wait period and you have a CD coming due in 30 days. That is in the scenario where you have the accident. It's like worst case scenario. That's the accident that happens the day after you decided to put the money back into the CD.
Speaker 2:
Yeah, I would imagine there's probably rarely emergencies that would exceed a full month's pay, because you would obviously have healthcare, hopefully, and if you lose your job it's just a month. So I guess that's my question, because if, say, your emergency was like two months pay, but that's probably rare.
Speaker 1:
Well, even if your emergency is two months pay, it's because you lost your job and you've lost your income.
Speaker 2:
Right.
Speaker 1:
Because you got to remember, you're still bringing in your monthly income, so as long as you're living within your means, your emergency in order for it to be over a month expense would have to be a scenario where you lost your job.
Speaker 2:
And if you lost it from a car accident, you're on disability.
Speaker 1:
Right, well, if you have disability insurance.
Speaker 2:
Yeah.
Speaker 1:
You'd have to have been in a car accident while working in order for you to be on workers' comp or your work's disability policy, so you'd have to have disability insurance for that. But most of those scenarios it's going to be a case of you lost your income. That's going to put you into the multi, multi-month scenario. But again, because of the way this is structured, you're going to get that paycheck yeah, because xcd is going to come due and you're just going to take that money and then let it roll and continue to continue to roll the money that way.
Speaker 2:
That makes sense and I imagine, like you said at the beginning, the very important part is you lose your job. You're getting that monthly income. You better be finding a new job pretty soon.
Speaker 1:
Right. And what this does is it forces you into just having the same level of monthly income that you had while you were working. So you're not going to be tempted to say, oh, I finally have some free time on my hands, let me go do something I normally wouldn't do.
Speaker 2:
Yeah.
Speaker 1:
It allows you to. You know, have that consistency, that then when you go and get the new job, then you can take from that income stream the ability to replenish. But also, you know, if you're tempted to have a vacation or something, get the job, use the income stream to pay for the vacation. Don't use your retirement account or your not retirement account, your six month savings account, your emergency fund, your rainy day fund, in order to fund those things, because that's just going to put you in a world of hurt in the event that you have emergencies in the future.
Speaker 2:
Right, right. Yeah, that's a cool option other than a high-yield saving account that I didn't know about Anything else you have on it.
Speaker 1:
No, I mean. The main reason to do this over a high-yield savings is you're locking in the rate for a longer period than a high-yield savings is, so potentially you could end up with a higher rate when rates come down.
Speaker 1:
But, the primary reason because, again, you really shouldn't be worried about rates in this situation. The rate isn't the concern. The financial consistency is the concern here, and so this is just a reason to put it there. Allow it, so you only have to make a decision once a month about it. It turns into income if you need it and you're beating inflation every single time. So that about wraps it up. I hope you enjoyed the episode and thank you for listening.
Speaker 2:
Thanks for listening to our podcast.
Speaker 1:
We hope this helps you on your balance freedom journey.
Speaker 2:
Please share your thoughts in the comments section below.