By: Revanche

CD Laddering, in a manner of speaking

December 17, 2009

My personal CD ladder is a work in progress. The ladder’s steps aren’t regular like most folks’s every three months, or every two months, or every month.  To be honest, it’s rather haphazard: cash gets rolled into a CD when I spot a good “high” interest, short term (12 months or fewer) rate.  It’s not conventional but the reasoning behind this strategy is sound for me, and I’ve always made financial choices that worked best for me and mine.

My priorities

 – only the money in my emergency fund can be invested (~$36k)
 – I always need to keep enough on hand to cover $2k/month until the next CD expires.
 – I only want to invest the most money at the highest rate possible.

My current CD holdings

 – $10,000 at 3.0% APY expiring 06-2010
 – $3,000 at 2.75% APY expiring 08-2010

Available cash

– $8,000 at B&M bank (investable)
– $14,000 at ING (investable) 
– $5,500 for expenses (not investable)

Given those priorities, there’s no point in my setting up a traditional ladder, convenient though ING makes it:

 

The immediate drawback of using the convenient ladder above is that my savings accounts are earning 1.3% APY.  The 6 and 9 month CD terms are earning less than that, so there’s no point in using those.  Then all the terms after 12 months earn less than 2% APY, only marginally more than the 1.3% APY.

I’d rather throw something like $15k into a 12 month CD now, leaving $12.5K to get me through the next 6 months.

I don’t expect to spend $2k per month from savings, it’s just a comfortable average amount I use for estimating monthly expenses. I might only spend $500 per month for a few months, but then an emergency could pop up costing a few thousand.  If so, I still don’t have to worry because my total available cash covers it.  Meanwhile the seed money earmarked to go out and earn “big” can continue to do so.
 
The risk here is committing the rest of my investable cash ($15k) to a 2.0% CD means that I won’t be able to open up another CD at a higher rate later on if one becomes available between now and June 2010.

Then again, had I just sent all that cash to the 3% APY CD six months ago, we wouldn’t be talking about committing to a lower interest rate now!  🙂  So it’s guesswork from here.

Option A: Invest all $15,000 now
Option B: Invest part now (how much?), invest the rest later

What would you do?

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My mac ‘n’ cheese post was featured in this week’s Make It From Scratch Carnival hosted by 11th Heaven’s Homemaking Haven.

6 Responses to “CD Laddering, in a manner of speaking”

  1. Hmm — we do our ‘laddering’ the same way, based on the best rates rather than perfectly spaced intervals. I would invest the $10k in the CD now (in an emergency you could always get at it), and maybe find a regular savings account with decent interest for the leftover $5k.

  2. I find CD ladders to be too much work. They are always coming due and then you have to deal with that. I’d rather stick my money in a few mutual funds and ignore it.

  3. SS4BC says:

    Since the 2% at ING is the highest you can get right now and it is relatively new, I think that the rates are only going to go UP over time – I wouldn’t be surprised to see a 2.5% in March or April.

    So I’d say just wait all together – or if you really want to invest some do like $3-5,000.

  4. Michelle says:

    CDs aren’t unbreakable- you just forego your earned interest. And if something were to crop up prior to accessing the CDs maturing in summer 2010, we’re talking roughly $16/month of foregone interest on a $10K CD at 2%. Eh. I vote with ss4bc…

  5. Hm. I’m facing the same question, having accrued more than enough in savings to fund the layoff survival account. The CD rates at my credit union are way low. I’m not nuts at the prospect of online banking — did that once before and found it cumbersome. Also, I’m with SS43BC: 2 percent for FIVE YEARS? Uh uh.

    I’m leaning toward the Vanguard Prime Money Market fund. Doesn’t earn much, but the rate does go up as rates go up, so that if it exceeds these rates in the near future, ALL of your 15 grand returns more than 1.25%. Of course, if the rates go down, toooo bad. But frankly, I’d be very surprised if rates dropped any lower than they are now.

  6. Revanche says:

    @RainyDaySaver: I could get at any of the money in an emergency, though this would be the first to go with the lowest interest rate. Still wishy-washy… 🙂

    @me in millions: Oh, my money’s not allowed to come back out of mutual funds – once it’s in, that’s it. I don’t spend more than an hour of actual work on my CDs per year, so it works for me.

    @SS4BC: I’m unenthused mostly because the difference between my savings rate and the CD rate is so little (1.3% vs. 2.0%)

    @Michelle: Funny, “eh” is kind of where I am right now.

    @Funny About Money: Whoa, 2.0% for FIVE years? For that length of time, I’d accept no less than 5.5%. It’s just annoying that savings accounts are so very low (less than 2.0%) but I suppose I should be grateful it’s not below 1.0%!

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