Putting the Savings Ladder into Practice

A Dime Saved Advice In Real Life

I recently had a friend reach out to me to ask for help figuring out her financial situation. I am not one to let an opportunity slide so I took the liberty (with her permission, of course) to write up her situation and the advice I gave her.

Many times you can read about savings ideas and practices but it’s hard to imagine how to implement it in real life- with real numbers and specific circumstances. Here is one example of using the Savings Ladder for a real person’s situation.

Mary graduated a year ago and has been living at home to save costs while working her first job. This has been great but now her circumstances have changed and she need to plan for the next few years.

She has been accepted to a graduate program that starts in two months and she has to move as well. It’s a lot! She is hoping to find a new job in her new city but is worried she won’t find one right away. What should she do?

Well, luckily, Mary has been very frugal since she started working and hasn’t spent much of her paycheck. The bad news is that it is all sitting in a checking account, doing nothing for her.

Here are the numbers:

Amount in her checking account: $24,856.00

Amount in a low-interest savings account: $4,366.00

Cost of Graduate School Tuition over the next 2 years: $16,099.00 (not including books)


We are hoping that her new job will cover her living expenses (rent, food, bills (not including tuition) but we want her to have a very full emergency fund just in case.

Most personal finance advice really boils down to the few basics. As with most savings questions I would follow the Saving Ladder.

As per the savings ladder I would suggest:


  1. Emergency Fund– She already has over a thousand dollar in a savings account. Keep it. Don’t move it. This will be the basis of her emergency fund.

  2. Retirement Fund– Why should she start an retirement fund now? Because there is no better time as the present! As nervous about money as she is now- for the purposes of financial planning we will assume that it will be harder for her to save in the future. As life moves on, she may want to get married or have a family or do something else and the expenses can keep rising. So put the $6,500 in a targeted retirement account now and forget about it. She will hopefully keep on contributing to this but at least a large chunk will start earning interest now. Compound interest is our friend!

  3. 3-6 month savings- Usually I would suggest putting away 2-6 months of living expenses away for emergencies but because she is nervous about her job prospects and paying for school I am going to recommend that she takes the whole tuition amount and put it in a savings account. She can also utilize a 6 or 9 month CD (as she needs the money liquid to pay tuition every 4 months) but the rate that they are offering is so close to a savings account- I wouldn’t want to lock myself in to such a low rate. Of course, CDs and MMA accounts are still an option for her if she chooses. So $16,099.00 into a decent savings account such as Barclays Bank. This way she has the money for tuition put away, earning her a small amount, but this can also double as an emergency fund if she needs.

  4. Moving costs money! So before she invests in long term savings- I would put some money away for expense that may crop up. $5,000 is a nice round number that gives us plenty of cushion. I would top-off her savings account to reach $6,000. (5,000+1,000 emergency fund). So she would place $1,634 into her existing savings account.

  5. That leaves us with $3,989.00 in her checking account. I wouldn’t leave her with no money in her checking account! So I would take $3,000 and open a long term savings account. This amount gives her many options but the Vanguard STAR fund is a safe choice. This can be her savings for a down-payment for a house, a car in a few years or any other huge expenses. Don’t forget she will be graduating with no student debt so she will be able to throw money at this account after she graduates!

The next 2 months: Mary still has two months of minimal expenses and a decent paycheck and it is up to her as to how she wants to use this money. Of course 10% will go to charity and a minimum of 10% will go to savings. I would suggest that she up that and take as much as 50-60% and put it towards one of her savings accounts. How she does this is up to her. She can open a CD and us it for books. She can put it in her long-term savings account. If she is very nervous about her income the next few years she can place that in her Barclays savings and have that there just in case.

This is a very conservative, risk-free way of using her money. There are other ways to play out this scenario with more gain (higher interest etc) but with higher risk as well. Since Mary wants the most conservative approach possible this is what I suggest.


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