Money Blue Book

Recently, I made the decision to start tracking my personal net worth and financial status in a very public and revealing way – by posting my financial numbers online for all to see. The point of doing this was not to boast, demonstrate some fanciful financial bravado, or unnecessarily parade my personal finance publicly to satisfy the whims of voyeuristic readers. In actuality, the objective was to have a way to show people the importance of proper statistical tracking when it comes to smart financial planning. The purpose of calculating and tracking your personal financial net worth on a regular basis is not just so you can match yourself against others to see how you’re doing in comparison, but it’s also to help you evaluate the current health of your finances. Like using a gauge to take your blood pressure reading or running blood tests to get a nutritional analysis, the point of net worth tracking is to use snapshots of your financial condition to help you make better decisions in furtherance of your personal financial goals.

I don’t think it’s an over-emphasis to stress that proper money management is a very critical component of responsible living. Other than how you handle your family, friends, personal relationships, or perhaps religious views, how you manage your money probably has the greatest effect on the quality of your daily life. The abundance or the lack thereof of money can determine whether you live an existence of paycheck to paycheck living or determine whether you are able to live a life of complete financial freedom. It can also determine the type of home you can afford and the type of neighborhoods you can afford to move into. With its powerful trickle down effects, the way you handle your money also has far reaching influence on family relationships as well, affecting how your children are raised and possibly even determining their futures. Knowing how to calculate your current financial net worth and knowing how to track it on a regular basis will help you make better saving and investment decisions for yourself and your family. At the very least, it will force you to actively interact and stay abreast of your financial affairs, and stay knowledgeable and motivated about where you are on the road of life.

Calculate Your Personal Net Worth On A Periodic, But Continuous Basis

Your financial net worth is basically a snapshot of your current financial health at a moment in time expressed by a dollar denominated amount. In the world of personal finance, your personal net worth is akin to what corporations and accountants refer to as the balance sheet. Contrast that with something like a cash flow statement, neither your financial net worth statement nor your personal balance sheet contain numerical data like your salary or how much money you are spending on grocery expenses every month. However, such information is indirectly represented by changes in the net worth figures.

Net worth is simply the numerical figure you get when you take all of your assets, and minus all of your liabilities. Assets can be defined as everything you own that has value and can be expressed in terms of price or current market value. Liabilities can be defined as everything that you owe, including debt and payment obligations to another.

To calculate your net worth and determine the status of your current financial condition, you’ll need to add up all of your debt and liabilities into a single numerical number, and then subtract that from the total combined value of all the assets and financial accounts you possess.

1) Assets (Add Up All Of Your Cash Savings, Investments, and Fixed Assets) – The asset category is made up of the total amount you have in your bank accounts like checking and savings, the fund balances stored in your investment brokerage accounts, and the total value of your fixed assets which encompasses the fair market value of properties like real estate and vehicles. In general, your assets are made up of all your personal possessions and financial accounts that can be converted into monetary form in the event of a total liquidation sell off. It’s the total amount of money you could get if you pulled all of your money out of savings and sold off everything including your house and real estate properties for cash. To help you add them up, here is a basic breakdown guide:

• Step 1: Add up the value of your liquid assets (cash and bank accounts). Liquid current assets include cash, bank account deposits, checking accounts, savings accounts, money market accounts, Treasury Bills or T-Bills, and also the cash value of certain life insurance plans. These types of assets generally have the same value as cash as they are readily usable as cash or can be readily converted into usable cash form in a very short period of time. For example, the funds you have saved up in your online savings bank or stashed in your high interest savings account are both considered liquid assets as they are easily converted into usable cash form with a quick trip to the bank or ATM. Also, certain life insurance plans such as whole life and universal life insurance policies are regarded as liquid assets as well due to their convertible cash value, unlike term life insurance policies which have no cash value. Remember, we’re talking about the cash value of your life insurance policy, not the amount that would be paid out if you were to collect on the policy.
• Step 2: Add up the value of your investment assets (stocks and bonds). Investment assets tend to be less convertible into cash upon demand but nevertheless still make up your total asset count as they can be converted into cash within a reasonable period of time. Investment assets include certificate of deposits (CDs), stocks and bonds, mutual funds, and retirement accounts (401K, IRA, Roth IRA).
• Step 3: Add up the value of your fixed assets and personal possessions (real estate and vehicle). Fixed assets include the fair market value of the houses, condominium properties, and vehicles that you own. They also cover the market value of any other significant possessions including valuable artwork, expensive jewelry, or priceless household furniture. The actual decision of incorporating fixed assets into one’s financial net worth calculation is somewhat controversial as opponents argue that such assets are not appraised consistently and are not easily sold upon demand. Detractors to using the fair market value of real estate for example argue that incorporating home values frequently offer up an unrealistic and skewed valuation of true net worth. Particularly during a major real estate slump, homes are not always easily marketable and sold. Supporters obviously argue that incorporating home values into net worth calculations is important because home equity (the difference between the current market value of your home and the current balance of your mortgage) indeed has value as it can be converted into cash upon an earnest home sale and borrowed against during a time of need. For many, the fair market value of their primary residence comprises the bulk of their positive net worth and thus it would seem incomplete to not incorporate it into net worth calculation somehow. While I personally only add real estate and vehicle value into my calculation of net worth, disregarding the market values of other personal possessions like clothing and home electronics, I think the key is just to be consistent in what you include and what you leave out. It’s also particularly important to be very realistic when assessing fair market value, especially when it comes to home pricing. It’s probably best to under-estimate than to over-estimate the value of such fixed assets. You definitely do not want to give yourself the inaccurate illusion of being house rich with no other significant liquid assets to speak of. You’d only be fooling yourself.

2) Liabilities (Add Up All Of Your Personal Liabilities and Debt). Liabilities include any money that you owe from loans, or debt obligations you may have including credit card balances, car loans, home mortgages, home equity loans, lease obligations, student loans, personal debt obligations, and court mandated alimony or child support payments. Liabilities, whether current short term debt obligations like credit card debt, or long term liabilities like home mortgages and auto loans, must be added up and subtracted from the total asset number to come up with the complete net worth figure.

After you have added up the value of your total assets, take that number and subtract away the total value of all your liabilities to come up with your calculated total net worth. This will be the current snapshot status of your financial net worth number at this point in time. Whether you incorporate certain assets and liabilities into the calculation or leave certain factors out like personal possessions is not important. How you go about the details of tracking your financial networth is up to you – just be consistent from month to month. The ability to track your financial progress in a uniform way on a periodic basis is the most important factor.

Track Your Net Worth Using Online Account Aggregation Tools and Net Worth Calculators

For those not certain on how to go about tracking their financial net worth from month to month, I recommend using an online tool like NetworthIQ. While NetworthIQ’s progress charts are quite ugly (for the lack of a better word), the site’s a pretty popular choice among personal finance bloggers and those who want a simple networth tracking tool that is easy and a no-brainer to use. Just go create a NetworthIQ account and start posting monthly net worth asset and liability updates to get started. To keep actual tabs on the many bank, credit, and investment accounts you have in your financial portfolio, I suggest using an online tool like Yodlee. Yodlee is an online account aggregator service that powers the online account consolidation tools of popular financial institutions like Fidelity Investments (Full View), Bank of America (My Portfolio), and HSBC (Easy View). I personally use Yodlee powered tools through my brokerage at Fidelity and my bank account at Bank of America to help me track all of my account balances from one easy to view location.

Despite the disagreements on what ought to be and what ought not to be included into the calculation of net worth, don’t let that discourage you from attempting to track your own financial progress using your own preferred method. Questions such as whether married couples should keep their finances separate or combined for net worth calculation, and controversial issues arising from the inclusion of home equity or the value of one’s small business (like a blog business) into net worth calculation should not dissuade you from learning to track your personal financial progression. While I personally would include the total joint account balances for married couples into net worth, and personally would not include the market valuation of my home business into net worth calculation, to each his own. The key is just to be consistent so you can evaluate and chart your own personal financial growth from month to month. The goal is to give yourself the confidence and motivation to make the right changes and course corrections in your financial walk to help you achieve your long term financial goals.

Compare Your Net Worth To Others In Similar Situations

Net worth valuations may also vary greatly depending on the make up of one’s assets and liabilities. In general, assets comprised solely of liquid accounts and investments such as cash, bank account funds, and stock market investments tend to paint a more standardized and accurate picture of financial net worth. It’s when you get into vehicle and real estate valuations that the calculation of net worth gets a bit personalized and inconsistent for comparison purposes. Home valuation in particular is a tricky art and is not always entirely accurate and is highly dependent on who’s doing the appraising and the standard being used. Furthermore, just because a home is appraised at a certain price does not necessarily mean it can be sold at that high price. In a tough housing market, home buyers frequently demand closing prices well below supposed fair market value. Keep that in mind as you compare your own financial net worth with that of others. Remember that net worth calculations and standards are not always uniformly applied from person to person, and that net worth is highly relative. For example, a net worth of $100,000 for someone living in an expensive area like northern California or downtown New York City may not be as big of a deal as it would be for someone living in a cheaper state like Nebraska or West Virginia.

Other than using Net Worth IQ to track your financial net worth progression, you might also be interested in using the tool to run searches for the publicly available net worth profiles of others. For the sneaky voyeur in all of us, it’s an interesting way to view the financial health of those in similarly situated categories like age, income, occupation, education, country, and state. If you are dying to know – here’s my own publicly available Networth Profile.

Another good net worth comparison source is CNN’s Millionaires In The Making site where CNN regularly profiles singles and couples, documenting their individual stories to become a millionaire. The Millionaires In The Making site not only provides lots of great anecdotal financial planning tips, but it also provides the actual net worth breakdowns of all the individuals and families profiled. You might also want to try out CNN Money’s Net Worth Calculator tool, which ranks you according to how you stack up based on age and income. I’m not sure how accurate the tool really is and suspect the methodology is a bit off. However, it’s still an interesting comparison tool at your disposal. Just use it with a grain of salt.

For new readers of my personal finance blog, this is my first inaugural financial status and net worth update. I hope to make this is a monthly tradition to better help me track the condition of my financial health. At the same time, I am keenly aware of the potential awkwardness that comes with financial disclosure involving actual numbers. I know that there is a taboo sensibility when it comes to talking about money and actually revealing personal numbers. However, Money Blue Book is a personal finance blog and my purpose here is to encourage readers to improve their own financial lives by adopting practices that will put them on the right track to financial independence. Perhaps my own experiences and financial progress will inspire calls to action and help voyeuristic readers gain the necessary confidence to learn more about the importance of financial tracking and statistical self assessment. In the future I may discuss more sensitive topics such as my own expenditures concerning church tithing.

As a side note, the reason I am posting this halfway through the month rather than the customary beginning of the month is because of how my income accounting is set up. My income streams tend to get realized and reported at around this time.

My Current Net Worth and Financial Status Update Compared To Last Month

Income From My Small Business Enterprise, and My Current Cash Flow

Ever since I made the significant switch from traditional job to self employment, my financial life has vastly improved. In my former life (which was only actually a year ago), I was an attorney and one who was stuck working the usual 9 to 5 job with frequent overtime and weekend hours. While I received a fairly steady paycheck, I constantly felt the slow drain of my youthful creative spirit being sapped away as I slaved away in a working situation where everyday felt the same as the day before. Eventually I made the decision to start working for myself and become a full time entrepreneur. Today, I run my own part time legal practice and spend much of my active daytime working hours keeping tabs on my alternative “real life” businesses. In between, I also spend a portion of my time managing my network of income producing online businesses which include the personal finance blog you are reading and another blog about health and fitness. Altogether, my combined monthly income stream from all income sources, averages around $53,000 a month, pre-tax. Needless to say, this healthy monthly cash flow, which has remained steady for more than 9 months now, has allowed me to pursue more aggressive investment opportunities and possibilities. Looking back, if I had decided to play it safe and not leave my job as an employed attorney a year ago, I would never have had the opportunity to realize my full financial potential.

Cash Saving Accounts (Banks and CD’s)

With the recent stock market crash brought on by the imminent economic recession and continuing credit crisis, I have decided to adopt a more conservative investment strategy regarding taking on new positions in the stock market. For the time being, I’ve chosen to keep the vast bulk of my monthly income and cash flow stored away in safe investments – namely FDIC insurance protected banks accounts. Currently, the largest chunk of my cash savings are spread among accounts with the top online banks in the market. These bank accounts are made up of a small mixture of high savings accounts and CD ladders.

While I fully understand the wisdom of Billionaire Warren Buffett’s investment mantra regarding fear and greed when it comes to seizing long term opportunities, I also soberly understand the need to preserve capital during difficult times. For the short term, I want to shield my cash assets from loss so I have sufficient assets to pursue lucrative opportunities once the recession and credit crisis have finished doing their financial demolition derby. For the next few months at least, I’m putting a higher priority on maintaining more than enough cash to enable me to ride out any financial emergency should the worst case scenario arise.

Credit Card Rewards and Debt

Although my income cash flow has significantly spiked within the last year due to the financial successes of my self run small businesses, I still maintain a manageable frugal lifestyle. However, some expenses simply can’t be avoided, sadly. Because I’m a single guy, I’m a terrible cook – which means I spend a lot of money per month dining out and buying expensive ready made meals and groceries at the supermarket. To reduce costs and save money, I use credit card rewards to earn up to 5% cashback bonuses on everything I buy. In an effort to maximize savings, I use multiple credit cards to get the highest spending rebates for all the different types of purchases I engage in. Currently, all additions to my credit card balances are due solely to regular spending habits and not attributed to any balance transfer arbitrage activity. My current credit card balance may seem rather high to some, but bear in mind, I use credit cards for everything and avoid using cash when I can. I actually abhor using cash.

Stock Investments and Retirement Accounts

Unless you’ve been living in a cave on Mars with your fingers stuck in your ears, you are no doubt well aware of the devastation happening in the world financial markets. Due to the housing bubble pop and the giant ongoing debacle involving risky subprime loans, several prominent banks and major financial institutions have recently been wiped out. As we slowly make our way through this economic recession, the stock market will undoubtedly remain extremely volatile and irrationally influenced by emotions and despair. This is the reason why the majority of my assets are now in cash savings and not fully invested in the stock market. Clearly in the long, long run, stock market investing is the way to go for the growth minded investor, but in this irrational economy, where corporate balance sheet fundamentals no longer matter and are overpowered by continuous fear, I prefer to play it safe until at least after the U.S. Presidential election and perhaps until the start of 2009.

Because most of my Roth IRA, and Traditional IRA retirement investments were previously made in more volatile and risky emerging market index and mutual funds, my stock portfolio has taken quite a beating since the highs a year ago – down 40%. However, I have not sold a position since the blood letting began and in fact, actually feel quite pleased (as giddy as a schoolgirl) at the significant drop in stock market prices. Despite the rampant fear in the market, I smell a wonderful opportunity in the making, and am waiting for the right opportunity at the right low price. Remember, it’s during economic recessions and stock market crashes that opportunistic future millionaires get made. I hope to be one of them someday.

Housing and Real Estate

Currently, I’m renting a brand new condominium apartment for $1,475 a month. My monthly rent may seem high to some, but it’s quite average for my area, a very convenient Maryland suburb of metropolitan Washington D.C.

My short term plan is to purchase a primary home for myself within the next year or so. Despite the recent precipitous plunge in national housing prices, I believe home prices must continue to drop some more – at least another 20-25% before we reach true real estate equilibrium. So long as house sellers refuse to sell their overinflated homes at bargain basement prices, buyers like myself will continue to sit on the sidelines and patiently continue renting.

As my income situation continues to prosper and improve, I have upcoming plans in the works to take advantage of my cash savings and healthy cash flow. As an aspiring vulture real estate investor, I hope to purchase several real estate investment properties in the next year or two at heavily discounted prices. I anticipate saving up enough money in the coming year to afford the 20% down payments to be used towards the properties I pursue. Meanwhile, I plan to continue monitoring my FICO credit score (currently at a healthy 802) and take necessary steps to maintain the score to increase my future chances of being able to secure multiple home mortgage loans when the opportunity arises in 2009 and 2010.

During tough times, there is always the inevitable flight to quality as investors seek out stable investment options to keep their money safe from loss. Oftentimes these safe investment choices include U.S. Treasury Bills, high interest savings, and money market accounts. However, those who want to shield their money from unnecessary risk during uncertain times but still maintain a very competitive rate of return ought to strongly consider certificate of deposits (CDs). Because CD’s are issued by banks and credit unions, they enjoy the same iron clad FDIC insurance coverage and equivalent that checking accounts and saving deposits enjoy. When you buy a certificate of deposit through a bank and choose to invest your money in a CD, you can rest easy knowing that your money is fully protected up to the full FDIC coverage limit from unexpected loss (the current FDIC limit is $250,000).

While in the long run, investing in the stock market is the best way to earn high growth returns, sometimes the market conditions and wild price swings are too much to handle for some conservative short term investors. Especially for those you looking to preserve your capital and build up emergency fund savings within a short time frame, you may be more comfortable investing your money in a predictable interest bearing asset, like a high yield savings account or a CD. While I frequently solicit the use of safe investments for specialized purposes, I’m still an active bank interest rate chaser at heart – a person who constantly seeks out the best ways to maximize money and earn the most interest bang for one’s buck. This desire to delicately balance protection against risk but at the same time still earn the highest interest rate is how I stumbled upon the use of CDs and CD ladders.

What Is A Certificate Of Deposit (CD) and How Do I Buy It?

A certificate of deposit, or a CD as it’s most commonly called, is an interest bearing fixed time asset offered to consumers and businesses by banks and credit unions. When you buy a CD through a bank, you transfer money into the CD savings account for a fixed amount of time and agree not to withdraw the amount until the time period matures or expires. Upon maturation, you are free to pull your money out along with the accrued interest and decide whether you want to roll it over into another CD or walk away.

The available time periods for CD’s vary from bank to bank, but usually they are offered for periods of 3 months, 6 months, 9 months, and so forth, up to as long as 5 years. However, some banks are extremely flexible and offer CD’s for time periods as short as 1 month. While many banks require a minimum deposit to buy a fixed interest rate CD, some major banks have done away with minimum deposits, and customers are now free to buy a CD for as little as $5 (seems kind of silly to do that though). However, keep in mind that the best CD rates tend to be reserved for CD deposits that have very high minimums – called jumbo CDs, which usually require minimum balances in excess of $100,000.

Buying a CD is pretty straight forward – you can buy them commission-free from most banks and credit unions. For starters, you may want to check out your local credit unions or community banks for the best CD rates. Oftentimes, locally run institutions and online banks tend to offer higher rates for their CDs than more established brick and mortar brand name banks like Citibank, Bank of America, or JP Morgan Chase. Those who prefer online banking may want to consider buying their CDs through popular online banks like ING Direct. ING has been around for a while and has made setting up CD ladders incredibly easy. With just a few keystrokes, an ING Direct CD ladder can be set up simply by selecting the monetary amounts and time periods desired.

Deciding when to purchase and which time period to pursue requires a bit more planning. While market prices and interest rates can never be fully timed with any real precision, there are still generally applicable rules of thumb when pursuing a CD purchasing strategy. If it’s your determination that bank interest rates are very high and appears to be overinflated (prepped to drop in the near future), then it’s in your best interest to purchase a CD through your bank and lock in that high interest rate today for as long as possible. On the flip side, if it’s your current estimation that interest rates are rather low and undervalued (prepped to rise in the near future), you’ll want to be more cautious in locking up your money for extended periods of time. You don’t want to lock up your money in a multi-year CD for something like 3.5% annual percentage yield (APY) and later have to watch helplessly as interest rates soar to 4.5%, and not be able to pursue the higher rates until the CD matures.

Why Buy Or Invest Money In A CD? Why Not Just Keep My Money In A High Yield Savings Account?

As we all know, banks make money by taking our bank deposits and loaning the money out to other consumers and businesses for profit. In return, the bank offers checking and savings account holders an interest rate as compensation for allowing the bank to use their money as loans for other people. Banks love the concept of CDs because it allows them to maintain a more stable and higher balance of cash on hand to loan to others. In return for your agreement not to touch the CD money for the agreed upon period of time, the bank is willing to provide you a higher interest rate for your CD deposit than that offered to traditional checking and savings account deposits. The higher interest rate is to compensate you for the loss of liquidity, which pertains to your ability to utilize your monetary assets as you wish.

In general, the longer you agree not to touch the CD deposit, the higher the rate of return the bank will offer you. Thus, the interest rate offered by your bank for a 5 year CD will almost definitely be much higher than that for a mere 3 month CD deposit. This is the reason why savvy savers, who are not in immediate need of cash, should not merely keep all of their money stashed away in checking or savings accounts. In almost all cases, CDs offer APY interest rates that are frequently 1 to 2 percentage points higher than the best best high yield savings accounts. For example, currently as of the date of this writing – ING Direct is offering 3.00% APY for their popular high interest Orange savings account (a very good savings rate at this time). However in comparison – their 6 month CDs currently have yields of 3.50% APY, their 12 month CD’s have yields of 4.00% APY, and their 24 month CD’s have high interest yields of 4.25%. CDs simply blow savings accounts away in the interest rate department.

Choosing between interest rate and loss of liquidity (length of duration) is the most important decision when purchasing CD’s. The more liquidity and control of your money you agree to give up, the higher the interest rate you get back in return. In the banking world, checking accounts are the most liquid of accounts as there are usually little restrictions placed on them by banks. But as a result, checking accounts routinely earn the lowest interest income, if any at all for the account holder. Lower on the liquidity scale are high yield savings accounts, which offer more attractive interest rates for deposits. However, savings accounts are constrained by the monthly 6 ACH transfer limitation. At the lowest rung of the liquidity scale are CD’s which generally offer the most attractive interest rates compared to the other two. However, they are frequently the most constrained as the funds must remain off limits until they mature.

The biggest drawback of CDs is the penalty fee you must fork over if you commit an early withdraw. Once you buy a particular CD for a fixed time period, if you withdraw the money or cash out for any reason including a personal financial emergency, you will incur a significant financial penalty – which will likely wipe out any interest income accrued, as well as cut into the principle used to fund the CD in some cases. Because there are rarely exceptions for waiving the withdrawal penalty, you must make sure you are fully comfortable and committed with having that amount of money locked up in a CD account for the agreed upon period of time before making the plunge.

Building A CD Ladder Is A Good Way To Maximize Your APY Interest Rate and Minimize Liquidity Worries

A CD ladder is simply an investment strategy used to manage CD’s that maximizes liquidity and the rate of return, while minimizing the risk and the drawbacks of locking up your investment money for an extended period of time. Laddering CDs require the account holder to initially purchase multiple CD’s with different intervals so that they ultimately mature at fixed regular intervals. By staggering multiple CD investments so that each individual CD matures at set intervals, this gives the deposit holder additional liquidity and control of the otherwise frozen money so that he or she can take advantage of rising interest rates, and still be able to chase the highest rates possible. Similar to dollar cost averaging for stock investments, CD ladders are great investment vehicles for those who want the flexibility to pursue better opportunities as they arise, but still want to maintain a predictable cash flow.

Below are two examples of how you may want to create your CD ladder system. As each individual CD investment matures you should seriously consider reinvesting in a new CD account with a term that’s equal to the longest term CD. Purchasing multiple certificate of deposits with different maturity dates enables you to take advantage of higher interest rates normally associated with longer term CDs while still ensuring frequent access to large portions of your money. By staggering your CD investments across several rungs of this CD ladder, you generally can increase the potential earnings of your CD portfolio, but still maintain some semblance of liquidity and control of your money along with the security of knowing that your money will become fully available within a relatively short time frame. Of course, should you decide to, you can always make the decision to halt the CD laddering process at the end of each individual cycle and eventually free up all of your money:

CD Ladder Example 1 – Money Is Freed Up Every 6 Months

This set up is suited for individuals comfortable with having their money locked up for 6 months or longer and looking to earn a higher rate of return in exchange. Let’s say you wanted to create a CD ladder system that frees up money every 6 months. Here is how you may want to set it up. This arrangement requires an initial one time start up CD funding of $4,000 and will last for 2 years. As always, you are free to play around with the numbers to suit your purpose and savings goals, but this should give you a general idea as to the mathematics behind CD laddering:

• Put $1,000 in a 6 month CD
• Put $1,000 in a 12 month CD
• Put $1,000 in a 18 month CD
• Put $1,000 in a 24 month CD

After you have established a CD ladder with 6 month, 12 month, 18 month and 24 month terms, when the first 6 month CD matures, you would invest the funds in a new 24 month CD. Similarly with the passage of time, when the next 12 month CD matures, you would invest the funds of that particular CD in another new 24 month CD, and continue the process for the 18 month and 24 month CDs as each subsequent CD expires. At the end of two years you’ll have four individual 24 month CDs with a new $1,000 CD maturing every six months.

CD Ladder Example 2 – Money Is Freed Up Every 3 Months

This set up is more suited for individuals with greater liquidity concerns. If you’re worried about locking up your money for periods of 6 months or more, 3 months may be more appropriate for you. Let’s say you wanted to create a CD ladder system that frees up money every 3 months. Here is how you may want to set it up. This arrangement requires an initial one time start up CD funding of $4,000 and will last for 2 years:

• Put $500 in a 3 month CD
• Put $500 in a 6 month CD
• Put $500 in a 9 month CD
• Put $500 in a 12 month CD
• Put $500 in a 15 month CD
• Put $500 in a 18 month CD
• Put $500 in a 21 month CD
• Put $500 in a 24 month CD

After you have you have established a CD ladder with 3 month, 6 month, 9 month and 12 month terms, 15 month, 18 month, 21 month and 24 month terms, when the first 3 month CD matures, you would invest the funds in a new 24 month CD. Similarly with the passage of time, when the next 6 month CD matures, you would invest the funds of that particular CD in another new 24 month CD, and continue the process down the line as each subsequent CD expires. At the end of two years you’ll have eight individual 24 month CDs with a new $500 CD maturing every 3 months, plus interest.

I know it seems quite complicated, but it really is not. By staggering your CDs through this CD ladder system, you’ll be able to ensure you always have money freeing up every fixed interval period, whether it’s every 3 months, 6 months, or even as short as a matter of a month depending on how you set it up. This allows you to use your CD deposits for emergency fund purposes if you ever need it and may even help promote a healthy and active savings habit, allowing you to meet your financial goals.

After two decades at the same coverage limit, the U.S. government has finally stopped dragging its knuckles and raised the FDIC insured limit for bank deposits from the previous FDIC limit of $100,000 – up  to the new limit of $250,000 per depositor, per insured bank. For your average bank customer, this means that he or she will now receive full FDIC insurance coverage up to $250,000 for the total sum of their single accounts (checking, savings, and CD deposits) at each banking institution. Other account category types like joint accounts and trust accounts will also each enjoy separate increased $250,000 limits at each bank. However, retirement accounts held by banks as FDIC insured deposits will remain at the previous $250,000 limit.

For those who don’t know, the FDIC stands for the U.S. Federal Deposit Insurance Corporation, a federally run government organization that protects bank customers from the loss of their deposits in the event of a catastrophic FDIC-insured bank failure. The protection afforded by FDIC insurance is near iron-clad as it is backed by the full faith and credit of the United States government. There is no need for bank depositors to apply for FDIC insurance or even to request it as coverage is automatic. Below are the new and current FDIC insurance coverage limits for deposits at FDIC insured member banks. The new FDIC limits are effective starting October 3, 2008 and tentatively scheduled to expire on December 31, 2009. While the FDIC does not directly cover deposits held in credit union institutions, in response to the new FDIC limits, the National Credit Union Share Insurance Fund, or NCUSIF, has raised credit union insurance limits up to $250,000 through Dec. 31, 2009 as well.

Although the newly enacted FDIC insurance limits are slated to end at the end of 2009, I predict that Congress will more likely than not make the new coverage limits permanent after that time. Frankly, in light of the current financial crisis and deteriorating consumer confidence sentiment regarding the safety and security of our nation’s banks and credit unions, there is no reason the U.S. government should not allow the new FDIC limits to stay permanent.

The New Increase In FDIC Insurance Coverage For All FDIC Insured Deposits Will Help Improve Consumer Confidence In The Banking System

With the passage of the Emergency Economic Stabilization Act of 2008, the U.S. Congress has agreed to increase the previous FDIC insured limit of $100,000 by 150% to $250,000 through the end of next year until the last day of 2009. For those who argue that the new boost in FDIC insurance coverage is unnecessary and too high, keep in mind that after factoring in the effects of inflation since it was last increased in 1980, the current FDIC insured increase is perfectly in line with inflationary reality. Besides, desperate financial times require desperate measures. The U.S. and world economies are faltering and the major banking institutions are struggling to stay afloat during this terrible credit crisis. While the FDIC insured limit increase probably won’t have a direct effect on the credit crunch (I hate this phrase but everyone uses it) as the main problem in the banking sector is that banks are refusing to lend to each other rather than suffering from a direct shortage of bank deposits, having a higher limit will probably go a long way in instilling consumer confidence in the U.S. banking system again. In the long run, this should have a positive and stabilizing ripple effect on the economy at large.

Personally, I’ve been rather active lately in my banking transactions, opening new high yield savings accounts with the top online banks and shifting money around to make sure every single cent of my cash deposits are fully protected under the FDIC limits. As many concerned consumers have been doing, I have been seeking the shelter and safety of bank deposits during this time of financial and economic turmoil. As a small business owner I tend to carry around significant amounts of cash for payroll, accounting, and business investment purposes – much more than the usual consumer account holder. To ensure full FDIC protection for my bank deposits in excess of $100,000, I’ve been spreading cash around among multiple banks to increase my FDIC coverage limits by setting up separate single and joint accounts to take advantage of the separate FDIC coverage for each account category.

The new FDIC limit increase will allow consumers to keep more of their money at the same banking institution without having to scramble around desperately looking for other FDIC insured banking options to spread their funds around. While bank failures remain extremely rare, with the recent collapse of major banking institutions like IndyMac and Washington Mutual, the occurrence and possibility of such a reality has become all too real. The recent decision by the U.S. Congress to raise the FDIC limit on an emergency basis was long overdue and necessary to calm the public’s worry and reduce the number of irrational actions taken by those fearful of losing their money or investments. Ultimately the decision will help put a stop to the massive waves of bank withdraws due to panicky customers pulling their money out of banks in response to irrational concerns. The new FDIC insured limit will help prevent such desperate monetary runs on the banks and allow the banking system to continue operating as normal.

However, The New FDIC Coverage Increase Will Not Result In Higher Interest Yields Or Financially Affect The Vast Majority Of Banking Customers

While the new FDIC limit increase should help boost consumer confidence in banks and credit unions, and help stem some of the panic and fear in the marketplace, most consumers are unlikely to experience much of a difference. It’s mostly the wealthier individuals or small businesses who carry around significant amounts of cash in their checking or savings accounts that are likely to directly appreciate the new FDIC insurance cap. The great majority of average everyday banking customers do not have more than $100,000 in a single bank account anyway.

Furthermore, those who are hoping to see higher interest rates or yields on their high interest savings accounts or certificate of deposits (CD’s) will be sorely disappointed. There is a very real likelihood that as the perceived confidence in our banks goes up, the interest rate expectations may go down. Because the FDIC is financed through premiums paid by FDIC member banks, participating banks are obligated to pay periodic premiums for FDIC insurance coverage. As such, there is a high inevitable possibility that they may eventually have to pay more in the way of FDIC premiums for the new higher insurance coverage limits. With higher FDIC premiums to contend with, banks may ultimately pass on the cost to consumers by offering lower interest rates for their deposits.

In a move that probably will benefit smaller local and community banks more than the mega “too big to fail” banking giants like Citibank, Bank of America, or JP Morgan Chase, the new financial bailout plan also provides for unlimited FDIC insurance coverage for certain accounts. Banking customers of FDIC insured banks will receive unlimited insurance for money deposited into non-interest bearing accounts, a protection that primarily benefits small and mid size businesses that have bank deposits exceeding the new insured maximum of $250,000. This temporary, but extendable unlimited protection was enacted to stabilize business risk, and prevent the type of loss faced by many businesses when a bank or thrift savings institution failed. Under this temporary unlimited FDIC insurance plan for non interest bearing bank accounts, a typical small business will be able to keep $250,000 worth of interest bearing funds in a regular checking, savings, or CD account, and put the remainder in zero interest accounts for unlimited FDIC insurance coverage. Under the bailout plan, for the first 30 days of the program, all FDIC insured banks will enjoy this unlimited FDIC protection for their non-interest bearing bank deposits. After that, member banks must opt-out of the program if they no longer wish to offer this unlimited protection.