By: Revanche

2018 Money Moves: Correcting the CD ladder and updating the emergency fund

February 21, 2018

Photo by Mark Eder on Unsplash

I found the flaw in my previous attempt at the CD ladder.

In hindsight, it’s incredibly obvious: The ladder should have started with 6, 9, and 12-month CDs, not 5-year terms. Duh!

My five year CDs were held in my Cash category but they’re so long term that, if I hold them to term, then they don’t actually make sense as my liquid reserves! I don’t know why I didn’t math out the whole plan before… oh, wait yes I do. I was impatient. Antsy, even, after a year of massive spending. That was foolish.

What I did earlier only makes sense if it was part of a 5 year bundle of cash and cash alternatives, though we’d then have to talk about the wisdom of having that much cash when we’re still far away from retirement!

Reclassifying those CDs makes our Investments category a little bit stronger at the expense of the Cash category but we truly needed the balance anyway. Across all our investments, our portfolio is incredibly heavy on stocks, I hold only one bond fund. That’s less than 1% of our portfolio and that’s way too aggressive.

Right now, the bond funds are paying just a wee bit more but they come with an expense ratio which the CDs do not. Since I’m already committed to them, the CDs will take the place of bond funds in our strategy. This buys me some time to do the research on which bond funds make sense and maybe also until interest rates are a bit more settled. We probably need to add more bonds over the next year or two to create real balance – I-bonds may be the vehicle of choice if the bond funds aren’t doing the trick.

New conclusion for the emergency fund: A short term CD ladder is a sensible home for my 18-month stash.

My savings at Ally currently earnsΒ 1.45%. This is what I should have done…

CD amount 6 month 9 month 12 month
Less than $5,000.00 1.50% 1.60% 1.75%
$5,000.00 – $24,999.99 1.55% 1.65% 1.80%
$25,000.00 or more 1.75% 1.85% 2.00%
  • Half the emergency money stays in cash, that would last between 7-9 months.
  • The next 20% of it goes into a 9-month CD so that expires when I run out of the cash.
  • The remaining 30% goes into a 12-month CD which runs out when I run out of the 9-month CD money.
  • Rinse and repeat.

With these rates and that ladder, I’d be earning between 0.35 to 0.55% more, which adds up to a total of $247 more than if I’d left it in the savings account. That’s real money but it’s also not a huge amount in the long run.

Since I already locked up a third of our cash in the long term CDs, albeit a third that was investable anyway, I’m letting this sit for a couple weeks to see if it still makes sense to set up this ladder or if I should leave well enough alone. At least it’s useful to know that I’m not losing huge gobs of money by not moving on this immediately.

See, you CAN teach me to be more patient!

:: Does this make more sense than my earlier plan? Would you bother to commit the cash at this point or just hold it?Β 

6 Responses to “2018 Money Moves: Correcting the CD ladder and updating the emergency fund”

  1. Joe says:

    I think you made the right choice with the CD. Bond funds are good, but the interest rate is going to push the price down more. Best to let it play out this year.

  2. $247 just isn’t enough to get me to do anything anymore. (In fact, DH made a mistake on the taxes that’s about that amount but fixing it would mean amending and then sending a different check… I am not sure if I can get up the ability to do that.)
    nicoleandmaggie recently posted…How do you deal with dinner when everybody is scattered all over the place?My Profile

  3. Linda says:

    With the rising rates I want to revisit my CD approach for the EF, too. I can see you doing this for the extra $247. πŸ™‚
    Linda recently posted…Yet another eye updateMy Profile

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