1. Money

10 Steps to Building a Complete Financial Portfolio

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6 of 10

Build a Six-Month Emergency Reserve
Now that you are a homeowner, it is more important than ever that you establish a six month emergency cash reserve to cover basic living expenses. This will allow you to weather any unexpected storms including home repairs, unemployment, and medical bills. At the very least, the emergency cash reserve should be sufficient to cover up to six months of the following:

  • Mortgage payment
  • Insurance costs
  • Utility bills
  • Groceries
  • Fixed payments (car payments, student loan payments, etc.)
  • Minimum payment on credit cards

Investing your emergency cash reserve

The primary investment objective for your emergency cash reserve is safety, not return. The simplest option is to park the funds into savings or a money market account. If you are interested in generating extra income, consider building a laddered certificate of deposit portfolio.

Building a laddered emergency cash reserve

Assume your emergency cash reserve is $12,000. You would go to your local bank and open six certificates of deposits as follows:

  1. $2,000 30 day (1 month) maturity
  2. $2,000 60 day (2 month) maturity
  3. $2,000 90 day (3 month) maturity
  4. $2,000 120 day (4 month) maturity
  5. $2,000 150 day (5 month) maturity
  6. $2,000 180 day (6 month) maturity

As each certificate of deposit matures, roll it over into a new six-month CD. In short order, you will own six seperate six-month CD's, one of which will mature every month. This technique allows you to lock-in the higher interest rate given to longer maturities.

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