I have made a (temporary) change to the amount I contribute to my 403(b) retirement account.  After making a few major purchases, it’s time to rebuild our cash reserves.

Our income has been down, just a bit, as compared to this time last year – and expenses have been up.  We now have three kids, and our youngest is still in diapers.  As a family, we are trying to eat at home more often, and we are focusing on fresher, healthier (and therefore more expensive) foods.  I also used some of the money in our cash reserves to purchase some additional (and un-budgeted-for) disability insurance.  We also purchased a new computer – a MacBook that I love – and a new lawn mower – which I also love.  Adding it up, we’ve spent more this year than in previous years, and now it’s time to reign in the spending and rebuild our reserves.

One interesting thing that I noticed over the course of the last few months, is how strange it feels to buy things, even things we can afford.  In the past when I used a credit for most “major” purchases, I would focus on monthly payments, barely giving a thought to the real cost of each item.  Now, as I move through life paying cash, it “hurts” to spend money, because every dollar, every single dollar, comes straight out of our bank account, right up front.  Buying a $1500 computer requires – surprise, surprise – $1500.

The season-of-splurging (if buying a laptop, insurance, and a lawn mower can be considered splurging) has come to an end.  We are going to focus on rapidly rebuilding our cash reserves.  Here’s our quick-and-easy plan for piling up the cash.

1.  I will temporarily reduce contributions to my 403(b) account.  By temporarily, I’m thinking six months, or less.  Reducing my contributions will increase our taxable income, but we are willing to “take this hit” in order to rapidly build our cash cushion.

2.  I will automatically deposit a set amount, at the first of each month, into my online savings account.

3.  At the end of each month, any extra money that I might have earned from blogging or eBay sales will be deposited into the savings account.

4.  We will fine-tune our budget, cut out the fat, and go back to our more-frugal ways.

For the first half of 2009, I’ll freely admit, I’ve been a bit more “relaxed” than I could have been.  I needed these six months, to focus on my family, my commitments at work, and my health.  Now, however, it really is time to “get back into the game” and get serious again.  It felt good to spend a little money, and it will feel just as good to rebuild our savings.

Side-Note:  I consider “cash reserves” to be any money not allocated to retirement or education savings accounts, and above our standard six months’ of expenses “emergency fund”.  Also, even with the reduction in retirement account contributions, we will still be contributing more than 15% of our gross household income to retirement savings.

Here’s how a normal CD ladder is setup -

You have a lump amount to invest in CDs.  Instead of buying one CD, for a specific maturity date, you spread your investment out, over several CDs, all with different maturity dates.  For instance, assume you had $10,000.  You could create a CD ladder which looked like this -

Now, that’s how a normal CD ladder would work. Take a lump sum, and buy several CDs that mature at different times. One of my fellow personal finance bloggers, Madison from My Dollar Plan, has written a very nice guide for how to build your own CD ladder.  I strongly suggest you read that article if you plan to create a CD ladder of your own.

Here’s how my modified CD ladder will work -

Instead of taking a lump sum and buying several CDs which would mature at different times, I’ve decided to buy a new CD, each month.  Each CD will mature 12 months after I buy it.  Here’s a chart, explaining the modified CD ladder -

As you can see, instead of buying different types of CDs (i.e. 6 Month, 12 Month, 18 Month, etc.) I’ve decided to stick with CDs which mature 12 months after they are purchased.  Instead of focusing on an initial lump sum, and breaking it down into several CDs, I’m focusing on smaller, monthly investments.

After 12 months, my first CD will mature.  At that time, I will decide if I want to withdraw my money from the CD, and put it it my savings account, or reinvest it in the CD.  A month after CD 1 matures, CD 2 will mature.

What I am trying to achieve, with my modified CD ladder, is balance – between higher interest rates and easy access to my money.  If I were to invest all of my emergency fund and non-retirement savings in CDs, all at once, I would immediately start to earn a higher interest rate, but I’d lose a certain measure of liquidity.  Plus, there are penalties for withdrawing money from a CD early.  On the flip side, if I leave all of my money in my savings account, I’m missing out on higher interest rates.  With the modified CD ladder, a portion of my savings will be very liquid (and earning a lower rate) while another portion will be in CDs (and earning a higher rate).

Why did I choose the 12 Month term?  Well, right now, my ING DIRECTsavings account has an interest rate of 2.75%, while a 12 Month CD has an interest rate of 4.00%.  (If at some point the savings rate is going up, or the CD rate is going down, I’ll change (or abandon) my modified CD ladder.)

As a side note, I realize that there are banks which offer higher CD rates, but I have been with ING Direct for several years, and their customer service and features are top notch. Plus, I can buy a CD with just a few clicks, automatically transferring money from my savings account to the new CD.

Finally, because this is a bit of an experiment, I really don’t want to commit any of my current savings to the modified CD ladder.  So, I’m going to push myself to earn $100 each month, via eBay.  I like setting up mini-goals like this one, just to keep my head in the game.  Each month, my regular, budgeted savings will continue to go into my savings account, and this additional savings, created from eBay sales, will be assigned to the modified CD ladder.