Wealth Building Lessons

It’s always a good idea to keep at least 6 months worth of living expenses in reserve for unexpected events. If you lose your job, or become temporarily incapacitated and can’t work, these reserves will carry you through the tough times and keep you afloat.

The first step is to figure out how much money you spend every month. Rent (or mortgage), utilities, credit card payments, car loan payments, insurance, food and entertainment should be included. Build up an emergency fund for at least 6 months. If you don’t have any emergency cash on hand, that should be your first priority. Get a second part-time job if you have to. You may have to cut down on expenditures such as entertainment, retirement savings and even debt repayment until this vital step is accomplished.

Once you have accumulated the necessary cash reserves, make sure you don’t just leave them in your checking account earning 0% interest. Even most savings accounts don’t offer more than 1% interest. Ideally you should create a number of Certificate Deposits (CDs) where each CD has a different maturity date. For example, if your emergency fund is $12,000, then you should create the following 6 CD ladders.

• Invest $2,000 in a CD that matures in 30 days
• Invest $2,000 in a CD that matures in 60 days
• Invest $2,000 in a CD that matures in 90 days
• Invest $2,000 in a CD that matures in 120 days
• Invest $2,000 in a CD that matures in 150 days
• Invest $2,000 in a CD that matures in $180 days

Every time a CD matures, you roll it over into another 6 month CD and keep going until you need to draw from the funds. This way you obtain a higher rate of interest on your savings, and you have a full month’s worth of reserves available to you in case of an emergency or unexpected event.

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