Emergency Fund

Last weeks declining stock market is a timely reminder of why we should be maintaining emergency funds. I’ve spent the past year making regularly scheduled stock market investments in addition to my retirement savings but have not been building my emergency fund as quickly as possible because of that (I’ve only been putting $100/paycheck into my emergency savings). Last week left me wishing I had a lot more cash on hand because it will be some time now before I can rely on selling those extra investments.

Your emergency fund should have several months living expenses in it. If you have a budget it’s easy to determine how much you need – you can just multiply your monthly expenses by at least 3 months (eventually build up to 6 or even 12 months worth). If you don’t maintain a budget, I’ve seen recommendations for $10,000 for single people and $20-30,000 for people who own homes and/or have children.

I keep my emergency fund at ING. My plan once I have 6 months saved in my emergency fund is to start keeping portions in CDs so that every 3 months one of those CDs will be up for maturity. I’ll keep the first 3 months emergency cash in my standard high yield savings account and every 3 months after that have a CD scheduled to mature so that I can maximize the interst I’m earning on that cash. While poking around on the ING site I noticed that they even have an automated way to set up CDs with rolling maturity dates like this – they call it a CD ladder.

So here’s the strategy for setting up these CDs:
monthly expenses * 3 in a high yield savings account
monthly expenses * 3 in a 3 month CD
monthly expenses * 3 in a 6 month CD
monthly expenses * 3 in a 9 month CD

So start building your emergency fund and maximizing your interest while maintaining the ability to access that cash as needed.