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The Importance of an Emergency Fund

The inclusion of a six-month emergency fund in your investment portfolio is of extreme importance, since it will provide for your daily living expenses in cases of emergency. No one is insured against such unpleasant events as unemployment, high medical bills due to serious health problems or emergent home repairs.

If you manage to construct a reliable emergency fund you will be able to provide money for the coverage of such expenses as utility bill or groceries. Additionally, you will be able to make the payments for such expenses as insurance costs minimum payments on credit cards or mortgage payments for approximately six months, not more.

Since the main purpose of an emergency fund is to provide you with financial safety in the cases of emergency, your primarily goal should not be the accumulation of returns on the hoarded money. Therefore, you should consider money market funds or a savings account as an appropriate place for your emergency cash.

However, if you still want to have some returns on your emergency cash fund, the construction of a laddered certificate of deposit portfolio may be the right choice for you.

Laddered Emergency Cash Fund

In order to construct a laddered emergency cash fund you should consider the following steps.

First let's suppose that the value of your emergency fund is $15,000.

Next you have to go to a bank of your choice and set five certificates of deposits. They should be distributed in the following way:

  1. $3,000 for a one-month maturity (30 days)
  2. $3,000 for a two-month maturity (60 days)
  3. $3,000 for a three-month maturity (90 days)
  4. $3,000 for a four-month maturity (120 days)
  5. $3,000 for a five-month maturity (150 days)

In order to lock-in the higher interest rate that is generally given to longer maturities, you should roll over each mature certificate of deposit to a new five-month CD. As a result, each month you will have one CD that will mature, as a result of your possession of five separate five-month CD's.

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