By: Revanche

2018 Money Moves: Building a CD ladder

January 22, 2018

This is old hat for old hands in the PF blogging world but in direct contrast to my move toward simplification in our investment holdings, I’ve finally decided to “complicate” our cash savings and set up a proper ladder. A CD ladder!

All of 2017, I’ve been fiddling with our cash reserves because it feels foolish to hold so much cash but it also feels foolish to invest when stocks are at all-time highs. Conflict!

On January 1 2017 I rashly threw a huge amount of cash into long term (5 year) CDs at Ally. I had no plans for this cash so why not? Then the neighbor happened. Dammit. When you break a 5 year CD early, you lose 6 months of interest, so I scraped cash together every other way I could before July 1 to pay for the house reno to avoid cashing out my CDs for less than the principal I put in. I knew those terms going in but on Jan 1st, it sure didn’t SEEM like there was any reason to need that money in less than a year. Fool.

I may have mentioned this before but due to my horrendously long period of unemployment I experienced during the Great Recession, I’ve always been incredibly uncomfortable with less than 18 months in liquid reserves. Any less and I get twitchy and what feels like a jumpstart to an ulcer. This year I’m making the best of that conservatism. If we must hold that much in nearly cash conditions to keep me from going loopy, then let it be in cash that’s making a better than nothing rate of interest.

Yes, I know people with higher risk tolerance are always scoffing at the emergency fund but if you were willing to cash out of the stock market in 2008 to pay your bills when many stocks were worth less than 50 cents a share, you’ve got a stronger stomach than I. Selling everything at that much of a loss is the greatest depressant, financially, I’ve ever contemplated. So that’s not a game plan. Investments stay invested, to be sold when most beneficial to us and not in a fire sale because something bad happened that we failed to prepare for.

On a small scale, the renovation debacle was a similar model of this very problem. I had the cash in a vehicle that was less volatile than stocks, but I still absolutely hated pulling that money out at a loss. There’s no way I’d feel differently if the amounts were larger or the reason more dire.

I started at the long term end of the CDs with the five year terms to dip my toe in. I had to start somewhere and we were “flush” with home sale cash. The first thing I wanted to do was lock down that money for two reasons: there were decent interest rates coming up and I was turning into greedy hoarding dragon type over the cash. I had to put it out of sight.

In hindsight, I shouldn’t have locked up that much so soon. Sometimes I buy investments on impulse. (There are worse habits to have? I guess?) We’ll see if this has to be renamed to some other kind of CD structure instead, I’m pretty sure that I’ve botched the ladder analogy.

The whole point of this is to earn better interest on most of our cash, while setting it up to expire at reasonable intervals so the cash becomes available again for use or re-investment. The final amounts are TBD but I’m thinking of setting it up like this:

Bottom rung: (4) 5-yr CDs at 2.25% APY, expiring in 10-2022
Second rung: (1) 5- yr CD at 2.30% APY, expiring in 12-2022
Third rung: (1) 3-yr CD at 1.65% APY, expiring in 01-2021
Fourth rung: (1) 18-mo CD at 1.75% APY, expiring 09-2020
Fifth rung: (1) 12-mo CD at 1.65% APY, expiring 01-2019

Despite my need for simplifying, I’m ok with this because it’s not truly complicating. Each CD is a new account, true, but it’s also still cash and is very easy to close when the time is up. I’d LOVE it if we could open one single account that held several levels of CDs but that’s just not how it works.

:: Would you ever do a CD ladder or is that too much work for you?

16 Responses to “2018 Money Moves: Building a CD ladder”

  1. I did a cd ladder back in graduate school. We got paid 3x/year and cd rates were high, even compared to online savings. Now the rates aren’t big enough for me to be willing to trade for the lack of liquidity and the hassle of making the decision to cash out or reinvest (I know you can chose which to do when you start, but I worry I’d accidentally auto reinvest when I needed the money or just leave it sitting in no interest savings if I picked the other option.). So instead we have ~100k sitting in various savings accounts.
    Nicoleandmaggie recently posted…Grandmother’s legacyMy Profile

    • Revanche says:

      I generally don’t pay attention to the selection at the time I open the account since the timeline is so far off, but I always have the option to change the disbursement method when it expires. Do you not have that option?

      I figure getting better than double the current savings rate isn’t bad in exchange if we are doing ok in the next few years.

      • Yes, there’s definitely an option with a limited time window around it (for deciding not to auto-renew). But I still haven’t gotten around to freezing my credit from the equifax breach and I only have a week to get free credit monitoring. With CD renewal/cashing in, it’s the attention that’s the problem. Either it has a chance of auto-renewing if I have that set as the default and I don’t get to it in time or if something goes wrong and I don’t get the notification, or I let it stay in cash and it takes months to get around to actually renewing.
        nicoleandmaggie recently posted…Grandmother’s legacyMy Profile

  2. I’ve been considering a CD ladder, but rates have been low enough (with the promise of them getting raised soon) that the tradeoff for liquidity has felt not worth it. I do wish there was something more I could be doing with my EF money though, so perhaps I should be less conservative about it.
    Yet Another PF Blog recently posted…Object Lessons: HQ2 EditionMy Profile

    • Revanche says:

      My EF is *fingers crossed* intended to be a long term pot of money and I’m spreading the total amount across several CDs so I should be able to take advantage of some rate changes if they actually happen down the line. Here’s hoping they do!

  3. Joe says:

    Why don’t you just put the money in a Total Bond Fund? If you need money, just sell the fund. Seems a lot simpler to me.
    Let me know if this is a bad idea somehow. I want to learn.

    Yes, the bond fund price can fluctuate, but it should hold up well if the stock market crashes.

    • Revanche says:

      I think it was primarily because I was leaning into my difficulty with selling any funds when I need them instead of just cashing out CDs. There’s a separation between liquid savings and investments of most any kind for me like there SHOULD be between church and state 🙂

      Hum… let me think on it, I’m not fully deployed into the CDs yet so I have some money to push into a Bond fund instead of that makes sense.

      I’ll update on this once I dig deeper!

      • If you’re willing to take a bit of a risk, I’ve been astonished at how much money the (I’m pretty sure not safe kind of) money market fund that Vanguard uses as its settlement fund has been making in interest. But that’s also not predictable or (I’m fairly sure, but not 100% sure) FDIC insured. It is liquid though!

        I agree with Joe that taxable is a good place to put bond funds. We’ll have a post in March sometime about where to put what kinds of money once you’ve maxed out your tax-deferred options and it makes sense to optimize placement.
        nicoleandmaggie recently posted…Grandmother’s legacyMy Profile

        • Revanche says:

          That would be great for my next step of emergency funds but not for the core cash. I don’t want any risk there but you’ve both given me good ideas to build out the financial pyramid. I should stop picking shapes until I figure out what I’m building.

  4. I was just looking at CDs last night, doing research for a post. I decided that I wasn’t comfortable with the strict timelines, in relation to the actual yield, so we have a small EF and will put the rest in the market. However, I definitely do not look down on others if they hold a lot more in their EF. Everyone has a different risk tolerance AND different life setup. For instance, if I had a mortgage you bet I’d have WAY more in the EF.

    Anyway, we did crunch the numbers, and if one of us lost our jobs, the other’s salary could cover our expenses (mine just barely!). Our rent is about half what we could actually afford to pay, so that sets us up to save a lot anyway, and the vacations would go bye bye. In the worst-case scenario we’d resort to selling stocks, which as you point out, would such hardcore if the market was down. Is that naive?

    • Revanche says:

      And likewise if we were renting, I expect our EF would be way smaller too. Hm, probably. We were renting during the GRecession and making the rent was a big damn deal. Also we definitely could not make it on just one salary so that’s a huge factor in why we need so much in liquid funds.

      I don’t think it’s naive to set it up that way, it’s just what works for your comfort level and knowing your risk aversion! That’s what I’m doing 🙂

  5. I’m not a fan of a ladder because to me it’s the opposite of liquidity. If I have funds I’m willing to lock in for 5 years then I’d be putting them in the market. Combatting risk is a tough one, but I’d look at a money market or floating rate fund that doesn’t have much risk and is easily accessible. To me those feel more like cash alternatives than actual investments.

    • Revanche says:

      I should have been more clear that I DO consider these cash alternatives, I don’t want them to be investments, necessarily.

      But I like some of the ideas I’ve been getting from people here as alternatives to my cash alternatives too!

  6. Being a newbie investor, I’m in no position to advise you. You’ve actually taught me the ladder concept – which everyone else seems to be familiar with. I definitely respect your consideration of your own personality as you decide how to manage your cash assets. I’m also thoroughly impressed by your 18-month emergency fund. You’ve outdone Dave Ramsey’s suggestion of 3-6 months by a long shot! Like you, I know the impact of unemployment (my husband’s) from personal experience, and it certainly impacts our financial management now.
    Prudence Debtfree recently posted…Reading Aloud: An Old-Fashioned, Frugal PastimeMy Profile

    • Revanche says:

      The funny thing is that I don’t think of this as investing, it’s just making this specific set of money work harder 🙂 But it’s certainly informed by knowing how badly a recession could affect us.

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