Climbing the ladder

I just found out I get free financial planning advice from USAA, where I have my auto insurance. I spent a good amount of time on the phone with the planner today, running some ideas past him and getting a feel for what I should be doing. He agreed that my plan is a good one so far.

One other thing I ran past him was a plan to make my emergency fund work for me better. He was very critical, but at the end, agreed that it would work IF I made sure that there was an adequate amount for immediate access to emergency funds. Here's the plan.

In my savings account right now, I have $1,506.88. This is not counting the money I have aside for my IRA (more on that later), this is pure emergency fund money. I Assume the following things:

• In February, my wife will receive a bonus, $2000 of which she will contribute to our emergency fund.
  
• In March, I will receive a bonus, $2000 of which I will contribute to our emergency fund.
  
• Monthly, I will contribute $250 to the emergency fund, regardless of any other contributions.

All of these are possible.

The plan is this. Starting this February, I deposit $1000 of the $2000 my wife will contribute into a 182 day CD from USAA, compounding monthly (current rate is 4.34%). There are better rates out there, but I like the fact that I can work with USAA's financial people to keep things on track.

The next month, I will deposit another $1000 into another 6 month CD. This will be either the other $1000 from my wife, which has been sitting in the savings account, or $1000 from my bonus. It doesn't matter.

The following two months, I deposit the other $2000 of bonus money, $1000 per month.

June, I will not do anything more than the $250.

Starting with July, I will deposit $1000 into a 6 month CD every time my savings account balance breaks $3000. The next time that happens will be December 2008, which means I will have a CD maturing once a month from that point on set up to roll into another CD. Once that happens, I will roll an extra $1000 into the CD that matures each month that breaks $3000, and reinvesting it (this is known as a ladder, giving me the chance to take advantage of new rates every month). I will be adding $1000 into the CD for the specific months of:

• March 2009
  
• July 2009
  
• November 2009
  
• March 2010
  
• June 2010
  
• October 2010
  
• February 2011
  
• June 2011
  
• October 2011
  
• June 2012

Starting July 2012, I will begin pulling the money back into the savings account as they mature. In December 2012, I will have around $26,000 (varies according to rates of CDs) in that account.

At no point will my liquid savings account dip below $2000, which should cover any immediate emergency. The rest of the money will be available, either by waiting, or by drawing the money out for a fee, in the case of extreme emergency. At the end of this 5 year period, I will have turned about $1,500 into about $26,000 for the cost of $250 a month, while still keeping it accessible in case of emergency.

This is just the emergency fund. This does not count IRA contributions, additional savings, or any other investments. I like the idea of that.