An Emergency Fund Victory

Are you getting tired of all the economic doom and gloom? Me too. So today, I thought I’d change gears and spend a little time talking about a recent financial success that we’ve experienced…

The Backstory

Back in January of 2004 we had been homeowners for about 2 years, we had three kids with another on the way, and we had just gotten to the point where we had a nice, fully funded emergency fund. Never content to rest on our laurels, my wife and I decided that we wanted to try to wring a bit more out of our safety net.

At the time, our e-fund would’ve covered close to six months of living expenses, and we weren’t crazy about the idea of leaving a bunch of potential interest earnings on the table. At the same time, interest rates for online savings accounts were at low tide.

Around that same time, I ran across a screaming hot deal on five year CDs at Pentagon Federal Credit Union — 5.25% APY, which was way, way, way above the going rate at the time. The problem was, this was our emergency fund, and we weren’t crazy about the idea of locking it away for five years.

The concern here is that, if you break a CD early, you face penalties in the form of recapture interest. Penalties are typically in the range of 3-6 months interest, and if it happens early on, you might even lose a portion of your principal.

The Non-Laddered CD Solution

Our solution? We bought five equal, non-laddered CDs. The thinking here was that we’d be able to maximize our interest earnings by getting the 5 year rate on the full amount, but the non-laddered CDs would make the make money somewhat “modular” (i.e., we could break into just a portion of it if a smallish emergency cropped up).

In reality, the interest rate difference meant that we’d likely come out ahead as long as we didn’t need to tap into that money within the first six months or so. By breaking the money into multiple CDs, we just further reduced our risks.

In the end, our goal was to sock this money away, maximize our earnings on it, and do everything within our power to avoid touching it. All the while, we were working on building up other savings and investments in parallel to these CDs. The goal was to make it through that five year term without needing that money, such that we’d have roughly a nice chunk of change coming due in January 2009.

Success

As of two days ago, we’ve officially survived the entire five year period without touching that money. To be honest, it was a bit anti-climatic, as it became clear two years ago that we’d succeed. Regardless, we now have a nice little chunk of change coming due, and we have other resources to depend on in a pinch.

Given the above, we now have some thinking to do. Should we plow this money into our mortgage? Use it to further build up our long term investments? We still haven’t decided. But it’s a good position to be in.

What About You?

Now it’s your turn. Do you have any recent(ish) financial successes that you’d like to share with the world? If so, please don’t hesitate to leave a comment. Or, if you’ve recently set any major financial goals, feel free to share those. With any luck, these goals will grow into future successes.

20 Responses to “An Emergency Fund Victory”

  1. Anonymous

    Congratulations to everyone on their successes!

    Success: Spent the last 14 months paying down credit cards and now are down to only 2 cards and all balances are on 0% deals. We also built up a $4K emergency fund.

    2009 Goals: I got laid off in Dec 2008 so #1 is to find a job. Even if I find a job in the near future, my husband and I plan to try to reduce our expenses to live off of only his paycheck (we are about $800/month too high right now). Also build up the emergency fund considerably more!

  2. Anonymous

    My success? My now-husband and I were able to buy our first home with 20% down, get married, go on a 2+ week honeymoon to Italy, and I just got my first brand new car (paid in full). This was all within the last 9 months. And we still have a nest-egg to boot (though, it’s a bit smaller than it was just a few weeks ago, pre-car purchase). I thought I was a good saver, but my husband has shown me how much better I could be.

    Since he owns his own business, he gets steady paychecks but they don’t always come at a set time (e.g. every two weeks, like mine). It comes to a full salary by year’s end, but during the year, I’ve learned that my paycheck is for the bills, mortage, student loans, etc., and for the past 4 months straight, his entire paycheck, whenever it comes for the month, has gone straight into savings. It’s the only way we were able to do this. It’s become almost a game, to see how well we can save!

  3. Anonymous

    I agree with your strategy of splitting the CDS, but I went
    with a more flexible 50-30-10-10 plan. I can use a combination of one, two or more CDS to withdraw any
    amount i may need without losing any extra penalties.

  4. Anonymous

    I’m glad this technique worked out for you FCN! I’ve suggested it to a few clients, but the thing is, the credit union I work for doesn’t dip into your principal. You only lose the interest. Personally, I think it’s criminal for a bank or credit union to dip into principal and that should not be allowed. But, good for you for NOT having to touch it in five years!

    I guess my recent success has been that I got a raise. I feel a little sad because I know several people that have lost their jobs or taken a pay cut, but I am extremely grateful that I was not among them. I put that raise towards my 401(k).

  5. Anonymous

    I’ve managed to save $800 over the past four months. It’s looking good at my job for the next year, but the economic crisis has really inspired me. I just keep socking it away in a net savings account, though I don’t love the lower interest.

  6. Anonymous

    Our emergency fund and general living beneath our means paid off big for us this past year. As the recession started to hit last summer my husband and I realized we could do much better financially somewhere else. We decided it was time to return closer to home. My husband found a very good job in an ideal location. The only problem was they were about to put out an offer to someone else (in other words we were a few weeks too late.)

    Well it turns out the other person didn’t think he/she could sell their home in the weak market and didn’t want to relocate and take the job. They called my husband and we jumped on it. We didn’t worry about selling our home because it was an inexpensive home that’d we’d just never decided to move out of. The increase in pay and benefits from the new job more than offsets the cost of owning two homes. In other words because we had an overinflated emergency fund (I’m conservative) and had lived beneath our means we were ready to jump on a good offer even as the economy was tanking.

    Now we are settled. We still own two homes, but are having no problems because our emergency fund, low debt, and good credit have allowed us to ride this tide in. We’re still able to save money each month and not tap our emergency fund. Once our house sells (and it will) then we’ll have that much more money each month. But we were able to take advantage of an excellent opportunity because we had the low overhead to do so.

  7. Anonymous

    Good news over the past year: still have job, house and health. Maxed out IRA plus contributed an extra $100/month to 403b for the first time this year. Finally closed a checking account that had my social security number as an account number, opened an account with a more random number, and even memorized the new number. Opened high-yield online savings account with higher interest than my other one. And replaced shelves in pantry with bigger shelves.

  8. Anonymous

    I’ll share my financial success story from last year. I started tracking my expenses, made a budget, spent less than I earned and got a small but helpful salary bump. Currently my situation looks like this.

    budget: done
    emergency fund: fully funded
    debt: don’t have any

    This year I hope to continue on last year’s successes, start saving for retirement and land a new much better paying job (economy willing).

  9. Anonymous

    It probably doesn’t sound like much to most people, but my husband and I managed to pay several thousand dollars worth of medical and dental care, plus replace 2 absolutely necessary computers without ever borrowing a dime. Our savings is slightly diminished, but we’re still doing pretty well. We’re now working on extra payments on the car and should have it knocked out in half the time we’d expected. Not too bad for a couple of people who came from families who never even had savings accounts, let alone a plan for success. It is ,at least in part, thanks to advice on this blog that we’re finally pulling ahead instead of just treading water. Thanks! Now if I could just teach my parents these same principles.

  10. Anonymous

    My Success: I recently paid off my last credit card, thus ending my year-long struggle to rid myself of $12,000+ worth of high-interest debt!

    I have zero-dollar credit card balance! That’s the first time I’ve been able to say that in over ten years!!!

  11. Anonymous

    I am about to pay off a 20K student loan. In the last few months, I got the balance down to about 2,000. I could probably pay this off this month if I wanted to, but for the sake of liquidity may stretch it out a bit since the interest payments are pretty minimal now.

  12. Anonymous

    Our success: I’ve been unemployed for over a month, and our monthly budget has been cut by a third. We just survived our first month on one income and even managed to put $95 into savings!

  13. Anonymous

    Our success: We refinanced our mortgage from 6.75% to 4.75%. Woho! We plan to keep paying the same amount each month, and pay off the loan in 20 years vs. 30.

    A side note: Before you go through the hassle of splitting a CD into non-laddered chunks, ask your bank if you can withdraw part of the CD in an emergency. We use a small, local bank that allows us to pull any amount out of a CD before maturity, and we only pay the interest penalty on the amount withdrawn.

  14. Anonymous

    Great advice. We have one month emergency fund already, and are in a position to bring that up three in the next few weeks, so we will definitely consider going this route. Thanks for the info.

  15. Anonymous

    Great idea on “modular” concept. Our emergency fund currently sits in a high-yield (3%) online account. Like you, we needed that fund to be liquid so CDs never really crossed my mind. But I like this concept you outlined and may give it a shot…

    Thanks!

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