When it comes to managing your finances, it’s vital to adapt your strategy based on your age and financial goals. Younger people often focus on accumulating wealth, while older adults might prioritize protecting their assets. One effective way to safeguard your finances is by creating a CD step stool, particularly useful in a flat yield curve environment. This involves investing in CDs or Treasury bonds with durations of no more than two years.
It’s a common pitfall for even multi-millionaires to go bankrupt by taking on too much risk. Consider professional athletes who end up penniless; a more cautious approach could have preserved their wealth. The unexpected can always happen, like the global economic shutdown sparked by the coronavirus pandemic in 2020.
Over the years, CD rates have fluctuated significantly. From 2010 to 2021, savers were forced to take on greater risks due to low returns on traditional savings. Thankfully, these risks often paid off with strong performances in the S&P 500 and the real estate market. The landscape shifted in 2022 when inflation spiked, prompting the Federal Reserve to raise interest rates, leading to an uptick in yields for both CDs and high-yield savings accounts.
However, the future of market rates remains uncertain. If we face a flattening yield curve again, it’s more prudent to build a CD step stool rather than a traditional CD ladder. This strategy involves reinvesting in short-term CDs, allowing for flexibility and reducing exposure to long-term interest rate risks.
For instance, a financially independent couple in their 60s with a substantial net worth might consider allocating a large portion of their assets into low-risk CDs, mitigating the risk of significant losses and securing a steady, risk-free income. This conservative approach is particularly appealing when considering the potential instability in the markets.
On the other hand, a couple in their 40s on the path to financial independence could benefit differently. They might use the CD step stool to close the gap between their passive income and living expenses, aiming for a yield that covers their costs without needing to draw down on the principal.
Younger couples or individuals just starting out might find the CD step stool less appealing due to their longer investment horizons and lower immediate cash needs. For them, a more aggressive investment in equities might make more sense, given their time to recover from potential losses and their current lower levels of wealth.
In any case, it’s crucial to reassess your investment strategy regularly, especially in response to changes in the economic landscape like interest rate adjustments. The key is to balance between achieving high returns and maintaining enough liquidity and safety, ensuring that you can meet your financial needs without excessive risk.
