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…
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.
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.