May 19, 2024 • 22 mins
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.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to the Balanced Blueprints podcast,
where we discuss the optimaltechniques for finances and
health and then break it down tocreate 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 ladderthem and why the interest rate
(00:23):
on those CDs isn't the mostimportant thing to consider when
you're doing it.
So I sat down with a clientthis week and we were working
with setting up their retirementplans, setting up their
emergency funds and justplanning on how to put
themselves in a firm position tobe able to retire successfully
(00:45):
and not have any concerns.
But part of the issue that comesup when we start doing that is
determining how much money canwe put towards retirement and
how much money do we need tohave liquid so that if we have
an emergency now pet gets sick,kid gets sick, car breaks down
you know you lose your AC inyour house or the heater, you
know the furnace goes how do youmake sure that you have enough
(01:06):
money to cover that and at thesame time, not make it so that
money's not working for you?
There's a few different ways todo this depending on the
individual's financialintelligence.
You know I you know, financialiq score determines which route
we go.
So somebody who's very familiarwith money and knows how to
(01:29):
turn lumps of money into incomestreams, you just take the money
, put it into a high yieldsavings and roll with it.
And what we're talking abouthere is your six month savings
money your liquid assets.
So we're not talking about whatyou're putting into your Roth,
annuities, life insurance, allyour other investment vehicles.
We're strictly talking about.
We know how much money we needto have liquid.
(01:51):
Generally speaking, at aminimum is six months of
liquidity.
How do we make sure that thatmoney is not just sitting there
and losing value because ofinflation?
So, if you have a highfinancial IQ, you can just put
it into a high yield savings.
You'll be getting a solidinterest rate.
Let it sit there as you havethings come up.
(02:11):
You can just take a loanagainst that money and I say a
loan because you don't want totake 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 againstthat money, spend it and then
put the money back.
Most people, though, don't knowhow to take their six-month
savings and, if they lose theirjob, turn it into monthly income
(02:35):
.
There are a lot of people, alot of clients that I see, that
lose their job.
They start to think okay, Idon't really need to think about
work right now, because I gotfired through no fault of my own
.
I have unemployment moneycoming in.
I have a six-month savings, sorealistically I could just not
do anything relax, recharge.
(02:55):
I have six months of moneysitting here.
The problem is that if you havefull access to that, it's just a
true nest egg.
Sitting there, you may depletethat faster than six months.
The other thing to think aboutis, if you are depleting that,
you had to work really hard toget it there and you don't want
to just deplete it for the sakeof depleting it.
You want it to be there for afuture event, if the future
(03:18):
event happens.
And so what we do withindividuals that haven't been
taught as much about money iswe'll do what's called CD
laddering, and all that means isyou buy a CD, you buy several
CDs and eventually what you'regoing to end up with is six CDs
that come due.
(03:38):
One comes due every six monthsand what does the ladder?
Speaker 2 (03:43):
What's a CD?
Speaker 1 (03:44):
Oh, what's a CDd?
Speaker 2 (03:46):
fair enough, fair enough because I keep thinking
of uh videos.
Yeah, okay, okay, yeah fairenough.
Speaker 1 (03:52):
Slow my roll here a little bit.
So, cd certificate deposit.
Okay, all cd is is it's aeffectively an account with the
bank that is tied up for howeverlong that cd.
So in this case we're going tobe talking about three and six
month CDs, which means they'retied up.
You don't have access to themfor three months or six months
(04:14):
and in exchange you're given aninterest rate from the bank.
It's typically going to be ahigher interest rate than the
high yield savings or the.
You know just a standard savingsaccount, your standard savings
account, money market accountsare typically below 1%.
A lot of times they're beloweven a half of 1%.
So with inflation at two and ahalf 3% lately, you're losing
(04:39):
money on the money that's inthose accounts, but you need to
have a six month savings themoney that's in those accounts,
but you need to have a six-monthsavings.
So how do you make sure thatyou're not losing money to
inflation but that you have asix-month savings?
And that's where the CDladdering goes.
And the reason it's calledladdering is you want to think
of it like a ladder and at eachrung of the ladder another CD is
(05:00):
going to come due.
And what this does is if you buyand we'll, just for simple
terms, I'll explain how youwould go into the buying process
.
But if you have six, six months, six, six month CDs, you're
going to have one CD coming dueevery month but you'll have a
fully funded six month savingsaccount because you'll have six
(05:22):
of these, one month each ofvalue.
So altogether your CDs will addup to your six-month savings.
But, like we said, you'regetting better interest rate
than a money market or ahigh-yield savings typically.
So you're getting a higherinterest rate than what the
current market's giving you.
So you're beating inflationmaybe not by much, but you are
beating inflation.
So the money is still stayingthere and then every single
(05:44):
month you're able to determinedo I need this money, yes or no?
The answer is no, which mostlikely the answer will be no,
Then you just go and buy anothersix-month CD.
Speaker 2 (05:57):
If you want to do this, just two questions.
So you just walk into a bankand you can buy them there, and
what is the rate of returnusually?
Speaker 1 (06:04):
So you would go into a bank and, like you can buy
them there and what is the rateof return usually?
So you would go into a bank.
You would, you know, talk tothe banker, tell them that you
want to open a cd.
You're typically not gonna.
You know, you might tell theteller that you're gonna open,
that you're looking to open a cdand you're looking to get
information on that.
They're typically going to moveyou over to, you know, a branch
manager or somebody in one ofthe offices.
It's not something somethingyou're gonna do right there with
the teller, because it is aspecialized product and there's
(06:25):
conversations that need tohappen with it.
Cd rates right now I'm justgonna pull them up quick Again.
The CD rates are always gonnafluctuate based on prime rate
and what's going on in themarket.
But CDs right now are anywherefrom three and a half to 5%,
depending on the length of term.
So you know we're talking abouta six month, which is a shorter
(06:47):
term length, versus a 10 month,a one year, two year and so on
and so forth.
But I'll get into why theinterest rates don't actually
matter that much.
But for building the processhere, you know, each rung of the
ladder is that dollar amount.
The reason I do six months withmy clients instead of using,
like, a 12-month cd, is if youhave a, if you have an emergency
(07:14):
account that is funded for 12months of funding, then you
would use 12-month CDs.
But if you only have six monthsof funding, or you're between
six months and 12 months, thenyou'll divvy that up into six
chunks and have six-month CDs,and the reason being is that
you're going to have, howeverlong the term is, that's how
many CDs you're going to have.
(07:35):
However long the term is,that's how many cds you're going
to have, because it's going toend up coming due every six
months or every 12 months inorder for you to have monthly
income, which, again, theprimary concern that we're
addressing here is not knowinghow to turn a lump sum of cash
into an income stream.
This allows us to turn it intoan income stream automatically
(07:57):
without having to think about itother than the initial setup
period.
So by doing this, you havemonthly income out of that and
every single month, around thesame time, you're making that
decision Do I need money rightnow for an emergency or not?
Yes or no?
You say no, then you just goand buy another six-month CD.
At this point, you have a goodrelationship with your banker.
(08:17):
Your banker is going to callyou every six months and just
say are we buying another one orwhat are we doing Now?
You don't have to think aboutinterest rates, and the reason
you don't have to think aboutinterest rates is this isn't one
of your primary investmentvehicles for your retirement.
This is your emergency account.
This is money that we have setaside.
We know that we're not beingsuper aggressive with it.
(08:40):
We're actually being superconservative with it, because we
need this money here in case ofemergency.
This is our rainy day fund, andso what we want to do is we want
to make sure that our rainy dayfund isn't losing money due to
inflation.
It's keeping pace with it bybuying CDs, and what drives the
CD rates?
Inflation has a large playingfactor in that, and so typically
(09:10):
it's very rare for a CD rate tobe lower than the rate for
inflation.
Typically, cds even atsix-month CDs will beat the
inflation rate, and so we're atleast beating inflation.
We're making sure that ourNASDAQ is maintaining its asset
growth and asset value, butwe're not being super aggressive
with this, so the interest ratedoesn't matter as long as the
(09:32):
interest rate is above inflation.
What drives CD rates ispartially inflation, inflation,
and so that rate is typicallyalways going to be above that.
So we don't have to have theconversation with the banker
saying, oh, what are the rates,what are this?
The banker's going to have totell you because of legislation
and what they have to say.
But you don't have to worryabout that in your decision
making process, because wherewe're actually worried about
(09:53):
rates of return and growing ourmoney is in separate vehicles
where we'll have thatconversation.
This is just for the.
Speaker 2 (10:00):
This is just the rainy day fund that we're
talking about okay, so the theonly other thing that I was a
little unclear on.
So am I buying six individualsix month ones, so they come up
on each month?
Speaker 1 (10:13):
so what you're going to do is and this is where you
get into the buying piece isyou're going to buy these over
the course of three months, andwhat you're going to do is the
first month when we startsetting this up, and this is
where you'll typically work withsomebody.
You can do it on your own andI'm going to give you the whole
layout on how to do that butyou'll typically work with
somebody who knows how to dothis to explain it to you.
(10:42):
But if you want to do ityourself, this is how you would
do it the first month that youstart and for easy sake we'll
just call this January.
So January is when you'restarting you figure out what
your six-month savings is andwhat your six-month savings
requirements are.
So if you live after-taxdollars off of, say, $5,000 a
month, tax dollars off of, say,five thousand dollars a month,
your six month savings needs tobe thirty thousand dollars.
It's that five thousand dollarsa month times six months gives
(11:02):
you thirty thousand dollars,which means you have six, five
dollar chunks of money andthat's what we're going to go
and buy the cds with, becausethat's you know.
You're basically just takingthe calculation on what you need
for six months and you'rereversing it to then break it up
so that it's now monthly incomeagain.
So in January you're going tobuy a three-month CD for $5,000.
(11:31):
And you're going to buy asix-month CD for $5,000.
Speaker 2 (11:36):
So you can't touch that money until the three
months is up, right?
Speaker 1 (11:39):
The three months and the six months, the three-month
one yeah, right, the three-monthone you won't be able to touch
for three months.
Six-month one you won't be ableto touch for six months.
Again, this isn't a concern,because every point of this
ladder you're going to have afull month's worth of money
sitting aside.
Speaker 2 (11:53):
Because this is an emergency fund.
Speaker 1 (11:55):
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 andbreaking those pieces up.
So in February you're going tobuy again a three-month and a
six-month CD.
So at this point you will havepurchased four $5,000 CDs.
(12:24):
You have two three-months andtwo six-months, but you're
already a month into the onesthat you bought in January.
In March you're going to do thesame thing a three-month and a
six-month CD.
And the reason we do thethree-month in here we're going
(12:45):
to get to the real punchline onthis.
But the reason we do thethree-month is so that we can
get into this and get this setup as quickly as possible.
Because now we're at month fourand so in in month four, now
we're only buying six monthsaccounts, because at this point,
at the end of march, beginningof april, you've already bought,
(13:08):
you've already taken your fullsix month account and you've put
it into six different cds.
So they have six, five thousanddollar chunks of money at this
point.
The cd you bought in january,that's a three month, has come
due and your banker's callingyou hey, what are we doing with
this three month cd that justjust came due and you're going
to tell them.
From this point forward, we'regoing to buy six month cds,
(13:32):
because now you buy the seat,they take the three-month that
came due.
You buy the six-month-er inApril.
Now in May your three-month-erthat you bought in February
comes due and you buy asix-month-er.
Speaker 2 (13:47):
Yeah.
Speaker 1 (13:48):
In June the three-month-er that you bought
in March comes due and you buy asix-month-er.
And then July you're going totake your six-monther from
January and buy a six-monther.
And now at this point, comeJuly, you have a six-month CD
coming due every six months andyou just continue to buy a
(14:09):
six-month CD every month.
Every month you're going tohave one CD come due and you're
going to buy another six-monthCD.
What this allows you to do isyou're slowly building that
account with the rate ofinflation and if you want to
increase the amount of money inthe account or you have a
surplus in your budget that youwant to put, maybe you've got a
raise at work and now you'remaking another $5,000 a year.
(14:32):
$5,000 divided by six bringsyou into think.
That's four hundred fiftydollars, I believe.
So now that means we're dividedby twelve.
You would do five thousanddollars.
Divided by twelve it's twohundred fifty dollars a month.
Times six, that gets youthirteen thousand five hundred.
(14:55):
So now you need to increaseyour six month savings by that.
But you're not going to just beable 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 sixmonths your first six months,
that increase in income.
Just put that into the CD andadd it to the value when you buy
(15:16):
the new CD.
Now, after six months, you canactually take and enjoy your
raise that you received, becausenow you've put away six months
savings for it and you'veprepared yourself so that you
can live the same lifestyle ifyou lose your job in the future,
because you've already setyourself up for it and every
(15:37):
every single month you have theoption of either just buying
another cd or, if you have anemergency that has come up, you
can say, okay, I have anemergency, let me, let me take
some money out of the cd andthen your your goal is is that
in six months you will have paidyourself back for whatever that
emergency was and then be ableto put that money back into the
(15:58):
CD.
The CD comes due and now youhave a six-month savings that
isn't just sitting there as onelarge sum that is tempting to
just dip into and borrow againstand pay it back later, which
you'll never do.
You have it there and it'scoming due just like regular
monthly income, and you're justmaking the decision once on do I
(16:20):
touch it or do I not, once amonth.
Speaker 2 (16:22):
So that's kind of the advantage, I guess, over the
high yield saving account is.
It's not as tempting, just takeit out whenever.
Speaker 1 (16:30):
Correct.
It's not as liquid, so it's notas tempting.
It has the right amount ofliquidity because it's a six
month savings and you'rebreaking it up into monthly
income.
Do you have the right amount ofliquidity there at any given
point?
You know, if you, if the dayyou decide, okay, I'm going to
buy the six month CD, I don'tneed the money, and the next day
(16:51):
you end up in a car accidentand your car's totaled, the most
amount of time that you'regoing to be waiting is 30 days
to get that money.
Most emergencies you can last30 days on most.
And so you know, there's thenuanced scenarios where you
(17:12):
can't last 30 days.
And what I would tell you is, ifyou 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 creditcard, you can put the emergency
onto the emergency credit card,get the points for that and
then, when the six month cdcomes due, you then take that
(17:32):
money and pay off the six months.
You pay off the emergencycredit card and at this point
you've not caused any intereston your credit card.
You're not paying any interestthere because you're just paying
it off within the you knowstatement period and you've now
made it so that you're perfectlyokay.
You've taken care of theemergency, you've paid it off
and then in six months,hopefully, you'll be able to pay
(17:54):
back yourself and and bringthat cd back up to its full,
appropriate value.
Speaker 2 (17:59):
Yeah, that was going to be one of my other questions.
I was thinking you'd probablyuse a credit card because that
would buy you 30 days.
Speaker 1 (18:08):
Right, that's why the latter works.
If you have the emergencycredit card, you have the 30-day
wait period and you have a CDcoming due in 30 days.
That is in the scenario whereyou have the accident.
It's like worst case scenario.
That's the accident thathappens the day after you
decided to put the money backinto the CD.
Speaker 2 (18:29):
Yeah, I would imagine there's probably rarely
emergencies that would exceed afull 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, butthat's probably rare.
Speaker 1 (18:52):
Well, even if your emergency is two months pay,
it's because you lost your joband you've lost your income.
Speaker 2 (18:58):
Right.
Speaker 1 (18:59):
Because you got to remember, you're still bringing
in your monthly income, so aslong as you're living within
your means, your emergency inorder for it to be over a month
expense would have to be ascenario where you lost your job
.
Speaker 2 (19:16):
And if you lost it from a car accident, you're on
disability.
Speaker 1 (19:21):
Right, well, if you have disability insurance.
Speaker 2 (19:24):
Yeah.
Speaker 1 (19:25):
You'd have to have been in a car accident while
working in order for you to beon workers' comp or your work's
disability policy, so you'd haveto have disability insurance
for that.
But most of those scenariosit's going to be a case of you
lost your income.
That's going to put you intothe multi, multi-month scenario.
(19:45):
But again, because of the waythis is structured, you're going
to get that paycheck yeah,because xcd is going to come due
and you're just going to takethat money and then let it roll
and continue to continue to rollthe money that way.
Speaker 2 (20:00):
That makes sense and I imagine, like you said at the
beginning, the very importantpart is you lose your job.
You're getting that monthlyincome.
You better be finding a new jobpretty soon.
Speaker 1 (20:12):
Right.
And what this does is it forcesyou into just having the same
level of monthly income that youhad while you were working.
So you're not going to betempted to say, oh, I finally
have some free time on my hands,let me go do something I
normally wouldn't do.
Speaker 2 (20:27):
Yeah.
Speaker 1 (20:28):
It allows you to.
You know, have that consistency, that then when you go and get
the new job, then you can takefrom that income stream the
ability to replenish.
But also, you know, if you'retempted to have a vacation or
something, get the job, use theincome stream to pay for the
vacation.
Don't use your retirementaccount or your not retirement
(20:49):
account, your six month savingsaccount, your emergency fund,
your rainy day fund, in order tofund those things, because
that's just going to put you ina world of hurt in the event
that you have emergencies in thefuture.
Speaker 2 (21:01):
Right, right.
Yeah, that's a cool optionother than a high-yield saving
account that I didn't know aboutAnything else you have on it.
Speaker 1 (21:09):
No, I mean.
The main reason to do this overa high-yield savings is you're
locking in the rate for a longerperiod than a high-yield
savings is, so potentially youcould end up with a higher rate
when rates come down.
But, the primary reason because,again, you really shouldn't be
worried about rates in thissituation.
The rate isn't the concern.
The financial consistency isthe concern here, and so this is
(21:34):
just a reason to put it there.
Allow it, so you only have tomake a decision once a month
about it.
It turns into income if youneed it and you're beating
inflation every single time.
So that about wraps it up.
I hope you enjoyed the episodeand thank you for listening.
Speaker 2 (21:54):
Thanks for listening to our podcast.
Speaker 1 (21:56):
We hope this helps you on your balance freedom
journey.
Speaker 2 (21:58):
Please share your thoughts in the comments section
below.
Speaker 1 (22:01):
Until next time, stay balanced.
Welcome to the Balanced Blueprints podcast,
where we discuss the optimaltechniques for finances and
health and then break it down tocreate 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 ladderthem and why the interest rate
(00:23):
on those CDs isn't the mostimportant thing to consider when
you're doing it.
So I sat down with a clientthis week and we were working
with setting up their retirementplans, setting up their
emergency funds and justplanning on how to put
themselves in a firm position tobe able to retire successfully
(00:45):
and not have any concerns.
But part of the issue that comesup when we start doing that is
determining how much money canwe put towards retirement and
how much money do we need tohave liquid so that if we have
an emergency now pet gets sick,kid gets sick, car breaks down
you know you lose your AC inyour house or the heater, you
know the furnace goes how do youmake sure that you have enough
(01:06):
money to cover that and at thesame time, not make it so that
money's not working for you?
There's a few different ways todo this depending on the
individual's financialintelligence.
You know I you know, financialiq score determines which route
we go.
So somebody who's very familiarwith money and knows how to
(01:29):
turn lumps of money into incomestreams, you just take the money
, put it into a high yieldsavings and roll with it.
And what we're talking abouthere is your six month savings
money your liquid assets.
So we're not talking about whatyou're putting into your Roth,
annuities, life insurance, allyour other investment vehicles.
We're strictly talking about.
We know how much money we needto have liquid.
(01:51):
Generally speaking, at aminimum is six months of
liquidity.
How do we make sure that thatmoney is not just sitting there
and losing value because ofinflation?
So, if you have a highfinancial IQ, you can just put
it into a high yield savings.
You'll be getting a solidinterest rate.
Let it sit there as you havethings come up.
(02:11):
You can just take a loanagainst that money and I say a
loan because you don't want totake 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 againstthat money, spend it and then
put the money back.
Most people, though, don't knowhow to take their six-month
savings and, if they lose theirjob, turn it into monthly income
(02:35):
.
There are a lot of people, alot of clients that I see, that
lose their job.
They start to think okay, Idon't really need to think about
work right now, because I gotfired through no fault of my own
.
I have unemployment moneycoming in.
I have a six-month savings, sorealistically I could just not
do anything relax, recharge.
(02:55):
I have six months of moneysitting here.
The problem is that if you havefull access to that, it's just a
true nest egg.
Sitting there, you may depletethat faster than six months.
The other thing to think aboutis, if you are depleting that,
you had to work really hard toget it there and you don't want
to just deplete it for the sakeof depleting it.
You want it to be there for afuture event, if the future
(03:18):
event happens.
And so what we do withindividuals that haven't been
taught as much about money iswe'll do what's called CD
laddering, and all that means isyou buy a CD, you buy several
CDs and eventually what you'regoing to end up with is six CDs
that come due.
(03:38):
One comes due every six monthsand what does the ladder?
Speaker 2 (03:43):
What's a CD?
Speaker 1 (03:44):
Oh, what's a CDd?
Speaker 2 (03:46):
fair enough, fair enough because I keep thinking
of uh videos.
Yeah, okay, okay, yeah fairenough.
Speaker 1 (03:52):
Slow my roll here a little bit.
So, cd certificate deposit.
Okay, all cd is is it's aeffectively an account with the
bank that is tied up for howeverlong that cd.
So in this case we're going tobe talking about three and six
month CDs, which means they'retied up.
You don't have access to themfor three months or six months
(04:14):
and in exchange you're given aninterest rate from the bank.
It's typically going to be ahigher interest rate than the
high yield savings or the.
You know just a standard savingsaccount, your standard savings
account, money market accountsare typically below 1%.
A lot of times they're beloweven a half of 1%.
So with inflation at two and ahalf 3% lately, you're losing
(04:39):
money on the money that's inthose accounts, but you need to
have a six month savings themoney that's in those accounts,
but you need to have a six-monthsavings.
So how do you make sure thatyou're not losing money to
inflation but that you have asix-month savings?
And that's where the CDladdering goes.
And the reason it's calledladdering is you want to think
of it like a ladder and at eachrung of the ladder another CD is
(05:00):
going to come due.
And what this does is if you buyand we'll, just for simple
terms, I'll explain how youwould go into the buying process
.
But if you have six, six months, six, six month CDs, you're
going to have one CD coming dueevery month but you'll have a
fully funded six month savingsaccount because you'll have six
(05:22):
of these, one month each ofvalue.
So altogether your CDs will addup to your six-month savings.
But, like we said, you'regetting better interest rate
than a money market or ahigh-yield savings typically.
So you're getting a higherinterest rate than what the
current market's giving you.
So you're beating inflationmaybe not by much, but you are
beating inflation.
So the money is still stayingthere and then every single
(05:44):
month you're able to determinedo I need this money, yes or no?
The answer is no, which mostlikely the answer will be no,
Then you just go and buy anothersix-month CD.
Speaker 2 (05:57):
If you want to do this, just two questions.
So you just walk into a bankand you can buy them there, and
what is the rate of returnusually?
Speaker 1 (06:04):
So you would go into a bank and, like you can buy
them there and what is the rateof return usually?
So you would go into a bank.
You would, you know, talk tothe banker, tell them that you
want to open a cd.
You're typically not gonna.
You know, you might tell theteller that you're gonna open,
that you're looking to open a cdand you're looking to get
information on that.
They're typically going to moveyou over to, you know, a branch
manager or somebody in one ofthe offices.
It's not something somethingyou're gonna do right there with
the teller, because it is aspecialized product and there's
(06:25):
conversations that need tohappen with it.
Cd rates right now I'm justgonna pull them up quick Again.
The CD rates are always gonnafluctuate based on prime rate
and what's going on in themarket.
But CDs right now are anywherefrom three and a half to 5%,
depending on the length of term.
So you know we're talking abouta six month, which is a shorter
(06:47):
term length, versus a 10 month,a one year, two year and so on
and so forth.
But I'll get into why theinterest rates don't actually
matter that much.
But for building the processhere, you know, each rung of the
ladder is that dollar amount.
The reason I do six months withmy clients instead of using,
like, a 12-month cd, is if youhave a, if you have an emergency
(07:14):
account that is funded for 12months of funding, then you
would use 12-month CDs.
But if you only have six monthsof funding, or you're between
six months and 12 months, thenyou'll divvy that up into six
chunks and have six-month CDs,and the reason being is that
you're going to have, howeverlong the term is, that's how
many CDs you're going to have.
(07:35):
However long the term is,that's how many cds you're going
to have, because it's going toend up coming due every six
months or every 12 months inorder for you to have monthly
income, which, again, theprimary concern that we're
addressing here is not knowinghow to turn a lump sum of cash
into an income stream.
This allows us to turn it intoan income stream automatically
(07:57):
without having to think about itother than the initial setup
period.
So by doing this, you havemonthly income out of that and
every single month, around thesame time, you're making that
decision Do I need money rightnow for an emergency or not?
Yes or no?
You say no, then you just goand buy another six-month CD.
At this point, you have a goodrelationship with your banker.
(08:17):
Your banker is going to callyou every six months and just
say are we buying another one orwhat are we doing Now?
You don't have to think aboutinterest rates, and the reason
you don't have to think aboutinterest rates is this isn't one
of your primary investmentvehicles for your retirement.
This is your emergency account.
This is money that we have setaside.
We know that we're not beingsuper aggressive with it.
(08:40):
We're actually being superconservative with it, because we
need this money here in case ofemergency.
This is our rainy day fund, andso what we want to do is we want
to make sure that our rainy dayfund isn't losing money due to
inflation.
It's keeping pace with it bybuying CDs, and what drives the
CD rates?
Inflation has a large playingfactor in that, and so typically
(09:10):
it's very rare for a CD rate tobe lower than the rate for
inflation.
Typically, cds even atsix-month CDs will beat the
inflation rate, and so we're atleast beating inflation.
We're making sure that ourNASDAQ is maintaining its asset
growth and asset value, butwe're not being super aggressive
with this, so the interest ratedoesn't matter as long as the
(09:32):
interest rate is above inflation.
What drives CD rates ispartially inflation, inflation,
and so that rate is typicallyalways going to be above that.
So we don't have to have theconversation with the banker
saying, oh, what are the rates,what are this?
The banker's going to have totell you because of legislation
and what they have to say.
But you don't have to worryabout that in your decision
making process, because wherewe're actually worried about
(09:53):
rates of return and growing ourmoney is in separate vehicles
where we'll have thatconversation.
This is just for the.
Speaker 2 (10:00):
This is just the rainy day fund that we're
talking about okay, so the theonly other thing that I was a
little unclear on.
So am I buying six individualsix month ones, so they come up
on each month?
Speaker 1 (10:13):
so what you're going to do is and this is where you
get into the buying piece isyou're going to buy these over
the course of three months, andwhat you're going to do is the
first month when we startsetting this up, and this is
where you'll typically work withsomebody.
You can do it on your own andI'm going to give you the whole
layout on how to do that butyou'll typically work with
somebody who knows how to dothis to explain it to you.
(10:42):
But if you want to do ityourself, this is how you would
do it the first month that youstart and for easy sake we'll
just call this January.
So January is when you'restarting you figure out what
your six-month savings is andwhat your six-month savings
requirements are.
So if you live after-taxdollars off of, say, $5,000 a
month, tax dollars off of, say,five thousand dollars a month,
your six month savings needs tobe thirty thousand dollars.
It's that five thousand dollarsa month times six months gives
(11:02):
you thirty thousand dollars,which means you have six, five
dollar chunks of money andthat's what we're going to go
and buy the cds with, becausethat's you know.
You're basically just takingthe calculation on what you need
for six months and you'rereversing it to then break it up
so that it's now monthly incomeagain.
So in January you're going tobuy a three-month CD for $5,000.
(11:31):
And you're going to buy asix-month CD for $5,000.
Speaker 2 (11:36):
So you can't touch that money until the three
months is up, right?
Speaker 1 (11:39):
The three months and the six months, the three-month
one yeah, right, the three-monthone you won't be able to touch
for three months.
Six-month one you won't be ableto touch for six months.
Again, this isn't a concern,because every point of this
ladder you're going to have afull month's worth of money
sitting aside.
Speaker 2 (11:53):
Because this is an emergency fund.
Speaker 1 (11:55):
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 andbreaking those pieces up.
So in February you're going tobuy again a three-month and a
six-month CD.
So at this point you will havepurchased four $5,000 CDs.
(12:24):
You have two three-months andtwo six-months, but you're
already a month into the onesthat you bought in January.
In March you're going to do thesame thing a three-month and a
six-month CD.
And the reason we do thethree-month in here we're going
(12:45):
to get to the real punchline onthis.
But the reason we do thethree-month is so that we can
get into this and get this setup as quickly as possible.
Because now we're at month fourand so in in month four, now
we're only buying six monthsaccounts, because at this point,
at the end of march, beginningof april, you've already bought,
(13:08):
you've already taken your fullsix month account and you've put
it into six different cds.
So they have six, five thousanddollar chunks of money at this
point.
The cd you bought in january,that's a three month, has come
due and your banker's callingyou hey, what are we doing with
this three month cd that justjust came due and you're going
to tell them.
From this point forward, we'regoing to buy six month cds,
(13:32):
because now you buy the seat,they take the three-month that
came due.
You buy the six-month-er inApril.
Now in May your three-month-erthat you bought in February
comes due and you buy asix-month-er.
Speaker 2 (13:47):
Yeah.
Speaker 1 (13:48):
In June the three-month-er that you bought
in March comes due and you buy asix-month-er.
And then July you're going totake your six-monther from
January and buy a six-monther.
And now at this point, comeJuly, you have a six-month CD
coming due every six months andyou just continue to buy a
(14:09):
six-month CD every month.
Every month you're going tohave one CD come due and you're
going to buy another six-monthCD.
What this allows you to do isyou're slowly building that
account with the rate ofinflation and if you want to
increase the amount of money inthe account or you have a
surplus in your budget that youwant to put, maybe you've got a
raise at work and now you'remaking another $5,000 a year.
(14:32):
$5,000 divided by six bringsyou into think.
That's four hundred fiftydollars, I believe.
So now that means we're dividedby twelve.
You would do five thousanddollars.
Divided by twelve it's twohundred fifty dollars a month.
Times six, that gets youthirteen thousand five hundred.
(14:55):
So now you need to increaseyour six month savings by that.
But you're not going to just beable 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 sixmonths your first six months,
that increase in income.
Just put that into the CD andadd it to the value when you buy
(15:16):
the new CD.
Now, after six months, you canactually take and enjoy your
raise that you received, becausenow you've put away six months
savings for it and you'veprepared yourself so that you
can live the same lifestyle ifyou lose your job in the future,
because you've already setyourself up for it and every
(15:37):
every single month you have theoption of either just buying
another cd or, if you have anemergency that has come up, you
can say, okay, I have anemergency, let me, let me take
some money out of the cd andthen your your goal is is that
in six months you will have paidyourself back for whatever that
emergency was and then be ableto put that money back into the
(15:58):
CD.
The CD comes due and now youhave a six-month savings that
isn't just sitting there as onelarge sum that is tempting to
just dip into and borrow againstand pay it back later, which
you'll never do.
You have it there and it'scoming due just like regular
monthly income, and you're justmaking the decision once on do I
(16:20):
touch it or do I not, once amonth.
Speaker 2 (16:22):
So that's kind of the advantage, I guess, over the
high yield saving account is.
It's not as tempting, just takeit out whenever.
Speaker 1 (16:30):
Correct.
It's not as liquid, so it's notas tempting.
It has the right amount ofliquidity because it's a six
month savings and you'rebreaking it up into monthly
income.
Do you have the right amount ofliquidity there at any given
point?
You know, if you, if the dayyou decide, okay, I'm going to
buy the six month CD, I don'tneed the money, and the next day
(16:51):
you end up in a car accidentand your car's totaled, the most
amount of time that you'regoing to be waiting is 30 days
to get that money.
Most emergencies you can last30 days on most.
And so you know, there's thenuanced scenarios where you
(17:12):
can't last 30 days.
And what I would tell you is, ifyou 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 creditcard, you can put the emergency
onto the emergency credit card,get the points for that and
then, when the six month cdcomes due, you then take that
(17:32):
money and pay off the six months.
You pay off the emergencycredit card and at this point
you've not caused any intereston your credit card.
You're not paying any interestthere because you're just paying
it off within the you knowstatement period and you've now
made it so that you're perfectlyokay.
You've taken care of theemergency, you've paid it off
and then in six months,hopefully, you'll be able to pay
(17:54):
back yourself and and bringthat cd back up to its full,
appropriate value.
Speaker 2 (17:59):
Yeah, that was going to be one of my other questions.
I was thinking you'd probablyuse a credit card because that
would buy you 30 days.
Speaker 1 (18:08):
Right, that's why the latter works.
If you have the emergencycredit card, you have the 30-day
wait period and you have a CDcoming due in 30 days.
That is in the scenario whereyou have the accident.
It's like worst case scenario.
That's the accident thathappens the day after you
decided to put the money backinto the CD.
Speaker 2 (18:29):
Yeah, I would imagine there's probably rarely
emergencies that would exceed afull 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, butthat's probably rare.
Speaker 1 (18:52):
Well, even if your emergency is two months pay,
it's because you lost your joband you've lost your income.
Speaker 2 (18:58):
Right.
Speaker 1 (18:59):
Because you got to remember, you're still bringing
in your monthly income, so aslong as you're living within
your means, your emergency inorder for it to be over a month
expense would have to be ascenario where you lost your job
.
Speaker 2 (19:16):
And if you lost it from a car accident, you're on
disability.
Speaker 1 (19:21):
Right, well, if you have disability insurance.
Speaker 2 (19:24):
Yeah.
Speaker 1 (19:25):
You'd have to have been in a car accident while
working in order for you to beon workers' comp or your work's
disability policy, so you'd haveto have disability insurance
for that.
But most of those scenariosit's going to be a case of you
lost your income.
That's going to put you intothe multi, multi-month scenario.
(19:45):
But again, because of the waythis is structured, you're going
to get that paycheck yeah,because xcd is going to come due
and you're just going to takethat money and then let it roll
and continue to continue to rollthe money that way.
Speaker 2 (20:00):
That makes sense and I imagine, like you said at the
beginning, the very importantpart is you lose your job.
You're getting that monthlyincome.
You better be finding a new jobpretty soon.
Speaker 1 (20:12):
Right.
And what this does is it forcesyou into just having the same
level of monthly income that youhad while you were working.
So you're not going to betempted to say, oh, I finally
have some free time on my hands,let me go do something I
normally wouldn't do.
Speaker 2 (20:27):
Yeah.
Speaker 1 (20:28):
It allows you to.
You know, have that consistency, that then when you go and get
the new job, then you can takefrom that income stream the
ability to replenish.
But also, you know, if you'retempted to have a vacation or
something, get the job, use theincome stream to pay for the
vacation.
Don't use your retirementaccount or your not retirement
(20:49):
account, your six month savingsaccount, your emergency fund,
your rainy day fund, in order tofund those things, because
that's just going to put you ina world of hurt in the event
that you have emergencies in thefuture.
Speaker 2 (21:01):
Right, right.
Yeah, that's a cool optionother than a high-yield saving
account that I didn't know aboutAnything else you have on it.
Speaker 1 (21:09):
No, I mean.
The main reason to do this overa high-yield savings is you're
locking in the rate for a longerperiod than a high-yield
savings is, so potentially youcould end up with a higher rate
when rates come down.
But, the primary reason because,again, you really shouldn't be
worried about rates in thissituation.
The rate isn't the concern.
The financial consistency isthe concern here, and so this is
(21:34):
just a reason to put it there.
Allow it, so you only have tomake a decision once a month
about it.
It turns into income if youneed it and you're beating
inflation every single time.
So that about wraps it up.
I hope you enjoyed the episodeand thank you for listening.
Speaker 2 (21:54):
Thanks for listening to our podcast.
Speaker 1 (21:56):
We hope this helps you on your balance freedom
journey.
Speaker 2 (21:58):
Please share your thoughts in the comments section
below.
Speaker 1 (22:01):
Until next time, stay balanced.
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