give yourself a pay day in advance with a CD ladder

OK, so you followed my advice and started doing a few things to save up for a brighter future through spending less than you have coming in and saving up for the future. Awesome!

Today I'd like to show you how to super-charge your emergency fund to help out when you lose that rockin' grocery-bagging job and have to go on the hunt for a new one. There's a certain way you can actually loan money to banks when you have it so you can give yourself regular pay checks when the well runs dry.

The HEMI under the hood to power your emergency fund is called a CD ladder, but that's not really sexy, so let's call 'em CD PayDays.

Why you need CD PayDays...

When you have a regular job, you come to count on a certain amount of money coming in at certain intervals (monthly, twice monthly, every two weeks, etc.).

Based on this expectation, you line up a bunch of regular expenses because you know that money is coming in. But eventually something bad happens, such as the loss of that job or some emergency expenses (car broke down, broke your toe, etc.), and you still have to pay the rent/mortgage, phone bill, grocery store, etc.

Sooner or later, you'll also want/need to take on whole new expenses, too, so you need to prepare for those in advance so you can afford them when the time comes. After all, your car/furniture/health isn't going to last forever, and you may want something new (Master's degree, baby, vacation...).

There's a fairly simple way you can keep the paychecks coming in the future by making spending a few minutes every paycheck or two while you're earning money now.

I use ING for this, but there are other perfectly fine banking institutions that will gladly help you make this happen.

Start now, even if it means starting small.

One thing I like about ING is that they let you open CDs with small amounts. So if you don't have hundreds or thousands of dollars to start out with, you start with what you can. My first ING CD was for an earth-shattering ten bucks. But as you open more CDs, it can really add up.

You want to get as much money as possible into your emergency payday fund as soon as you can, but if you have to start small, it is definitely better than not setting aside emergency pay for when it all goes wrong.

What's a CD ladder?

A CD is money you loan to the bank for a certain period of time, for which they pay you interest at the end of the loan period. The amount of interest they pay you on a CD tends to be a better deal for you than other forms of in-bank savings accounts, because they are rewarding you for letting them hang on to that money for a known period of time.

A CD ladder is a series of CDs that become due at regular intervals, such that every few weeks, month, year, or other timing of your choice, at least one CD comes back to you.

I like to know that I have an emergency fund that ensures I'll have a predictable amount of money coming to me at least monthly to help pay my bills in the event of an emergency, but actually get paid every other week. So I've set my phone to remind me every two weeks to open another CD from my pay before I can be tempted to spend it.

As a result, I'll have CD PayDays every couple of weeks, just like the pay I'm used to from my current employer.

You can get better interest rates from the bank on CDs that the bank gets to keep for longer periods of time, so when first starting your ladder, you should consider opening at least one or two of your CDs for longer periods to take advantage of the better rates.

I like 6-month CDs for my emergency fund, because the interest rate isn't as important to me as the other advantages of the ladder. But I still started off with a few longer-term CDs to start off stronger.

You can always go for longer-term CDs after your emergency CD PayDay fund gets big enough.

When you start building your CD ladder, go ahead and grab a wall calendar and write down the dates on which the bank will be repaying the loans to you, and how much they will be repaying. (They will spell this out in a non-confusing way.) Then, each time you open up another CD, make a new entry on the calendar so you know when you're going to be paid back.

The calendar will be useful in helping you know exactly when how much money is coming in, which should make you feel a lot less stressed about money. But it will also help you see when you need to open up more CDs to make sure more money is coming your way often enough to really help out when you need it.

Try to keep that job and avoid actually taking the money from the bank on these CD PayDays, and the bank will gladly automatically handle the process of that money being loaned to them again for the same period of time, continuing to earn even more interest for you. Because even the interest they owe you already will be part of the loan, and they'll owe you even more interest when the follow-up loans become due to you.

So when that happens, log in to your account and make another entry for the new upcoming CD PayDay, which will be an even higher paycheck than the last one!

More than just an emergency fund...

This is a great and simple way to prepare for emergencies, but also to help save up for something big, like a home loan.

When you try to borrow money to buy a house, the lender will consider the CD ladder as further proof that you are a good risk, because you have some insurance that you will have money to pay them when the payments are due. And you can also use your CDs as straight loan collateral.

In a worst case scenario, your CD pay days are there to pay your bills when you find yourself in a bind.

Here's another guy's discussion of his family's CD ladders that describes it differently.