Quote:
Originally Posted by kork13
Jim, using CDs as an emergency fund sounds interesting to me... but how do you arrange for those CDs to 'roll over'? Can/will banks do this automatically for you? I'm just getting started with my career (graduating college soon), and am looking at holding about $5-7k as my emergency fund... but I'm not sure how I should go about it. Currently I have $3k in a standard savings account, but CDs, if I could make them work for me, would probably gain interest a little better.
In your example, is it correct that you could reduce risk by having them mature at shorter intervals, like by having one of six $1k 90-day CDs mature every 20 days?
For the benefit of this conversation, what I like about the idea of using CDs is that if it becomes necessary to tap my emergency fund, it generally would not require more than $1-2k (month of expenses, insurance deductible, etc.) to cover the emergency in any given month. So if necessary, I would be able to pull the current CD, then if the emergency continues beyond that 1 month, I could just continue to progressively pull out the others, and all the while they're still gaining interest.
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Disney Steve is correct- the CDs roll over automatically.
I would use 90 day CDs for various reasons. First is that is a common length- easy to compare rates and returns, 90 is also a nice round number. I would use only 3 CDs. 90/3=30, so one CD maturing each month.
We have another months expenses already in our accounts (so April 1 paycheck is paying bills for month of May). This gives us a one month buffer anyway. In addition all IRA deposits are made at the end of the month. This is close to 1/4 of monthly expenses- so meaning we have next month's IRA and this months IRA in our accounts which is half our expenses needed.
So the "payday" plan
1) keep 1 months expenses in checking account and use this months paycheck to pay next months bills
2) Open a 90 day, 120 day and 150 day CD on same day, put 1 months expenses in each CD.
3) Set up an outlook notice or reminder in 110 days and 140 days to update the other two CDs to 90 days.- FYI banks usually give a 7-10 day notice prior to CD maturing, plus a 10 day look back period as well. Some banks only have a 3 day look back period- check this.
4) the first time the 120 day CD matures, instruct bank to convert it to a 90 day CD.
5) the first time the 150 day CD matures, instruct bank to convert it to a 90 day CD.
6) when the 90 day CDs mature, they will rollover if you do nothing.
7) delay all bills (if possible) to be paid at end of month, so in reality you have 1-2 months expenses on hand if cash emergency hits.
At any time you will have this months IRA and next months IRA in checking account, plus a CD maturing within 10 days of the IRA deposit. The probability you have a window where you need cash and cannot get it is low, yet the money is tied up and out of accounts with an ATM card access.
