Your Money_ The Missing Manual - J. D. Roth [72]
Though organizing your accounts this way might seem trivial, it can actually be a powerful motivator. Targeted saving lets you see how you're progressing toward each goal and helps you set priorities.
Tip
Targeted saving lets one person save for many goals. But what if you have many people who want to save for one goal? Check out SmartyPig (www.smartypig.com), which bills itself as a savings program for chasing goals. The site lets your friends and family members add money directly to your account so they can help you save for things like your wedding or a down payment on a house.
Building a CD Ladder
Just as you can use systematic investing (All-in-one funds) to reduce the risk that fluctuations in the stock market pose to your portfolio, you can use a CD ladder to reduce the risk that fluctuations in interest rates pose to your savings goals.
Say you have $5,000 in savings that you want to get a better interest rate on. To build a CD ladder, you'd open CDs with staggered maturation dates. For example, you might put:
$1,000 in a 1-year CD
$1,000 in a 2-year CD
$1,000 in a 3-year CD
$1,000 in a 4-year CD
$1,000 in a 5-year CD
As each CD matures, you put your money right back into a new 5-year CD; this lets you keep the 1-year stagger, or ladder. This will help you keep your interest income relatively constant.
Protecting Yourself with Parallel CDs
With a CD, one of the biggest risks is that you'll need to pull your money out before it matures. When you do this, you pay a penalty. The site FiveCentNickel.com suggests that you can decrease this risk with parallel CDs: http://tinyurl.com/parallel-CDs.
Here's how it works: Let's say you have $5,000 you'd like to put into CDs. Instead of opening a single CD and putting that whole amount in it, you'd open multiple CDs, all with the same maturation date. You could open five CDs of $1,000 each, say, or open two with $1,000 and one with $3,000.
This gives you a buffer in case you need to get at the money early. If you need $500 for an emergency, for example, you can break just a single $1,000 CD. That way you don't pay a penalty on the rest of the money you have in CDs, and the penalty will be smaller than what you would have paid if you'd put the whole $5,000 in a single CD.
Get in the game
Think of all this money management as a game that has real financial payoffs. If you take the time to learn about the accounts your bank offers—and the accounts that other banks offer—you can actually have fun finding ways to make more money. (Even if optimizing your accounts isn't your idea of a good time, it really is important. You don't want to end up paying $1,500 for a "free" Frisbee!)
After you've got your bank accounts whipped into shape, it's time to optimize another part of your financial life: your credit cards. The next chapter shows you how.
Your Money And Your Life: Pay Yourself First
If you're living paycheck to paycheck, saving may seem impossible. You have to pay for things like rent, a car payment, groceries, and maybe even student loans. You'd like to save, but at the end of the month, there's no money left to set aside. And that's the problem: Most people try to save something out of what's left over instead of saving first.
One of the best ways to build wealth is to set aside a portion of your income for savings before you pay your bills, buy groceries, or do anything else with your money. Here are three reasons to pay yourself first:
It makes you the priority. You're telling yourself that you are more important than the electric company or the landlord. Think of the money you put into savings as a down payment on your future.
It encourages sound financial habits. Most people spend their money in the following order: bills, fun, savings. But if you bump savings to the front of that list, you can set money aside before you come up with reasons to spend it. That way, since the