Sticking Our Toes into the CD Laddering Pool

by Kevin on September 11, 2008

Yesterday I told you about ING Direct’s updated certificate of deposit rates. We’ve got a 3 month emergency fund saved up and I’m tempted to put some of it into CDs.

There were a bunch of quality comments with people explaining what they’ve done in regards to CDs.

Steadfast Finances mentioned that he has found a way to get 6% on his checking account. I’m impressed.

JB mentioned:

I started putting all of my E-fund money into CD’s because IT IS less liquid. For me, I needed the extra step to stop myself from stealing from my e-fund.

You do what you’ve got to do to keep yourself from blowing through that money!

Marcus made an excellent point that I hadn’t even thought of:

How about this. You said, “However, we have a lot of money saved up for various other goals.” Are any of these “goals” 6 months or further? Is this money already in a higher interest bearing account? Why not earmark that money and put it in CD’s.

He’s exactly right. We do have money saved up for specific goals that are further than six months out. It might make sense to put some of those into a CD.

Opening an ING Direct CD

ING makes opening any account extremely easy. Once you are an account holder, it is even easier to open up an additional account because they have most of your information on file.

Here’s how easy the process is. Once you are logged in to your ING account, click on Products & Rates in the left sidebar. This lists all the possible accounts you could open with ING — checking, savings, CDs, mortgage, etc. Click “Orange CDs”. This will give you a list of the current CD options (that I mentioned yesterday). Next to each CD (6 month, 9 month, etc.) there is an “open now” option.

That’s how easy they make it. You transfer money into the CD, verify you understand that they will charge 3 months interest if you have to pull the money out early, and ta-da! You’ve got a CD open.

I did just that and transferred over $1,000 into a 6 month CD at 3.75%. We opened it up on the 7th.

ING Shows You the CD’s Worth and Cost

Another thing I like about ING is it shows you what the maturity value is… and what you would get back if you closed the account early. The value of the CD six months from now will be $1,018.38. The value of the CD today with the penalty is $991.33. So the total penalty as of today is $8.67.

Starting a CD Ladder

We might consider starting a CD ladder with our emergency fund. Typically a CD ladder looks something like this: put all the money that you are going to put into the ladder into multiple CDs with varying maturity dates.

A simple CD ladder example:

You have $4,000 that you have earmarked for a CD ladder. You put equal amounts ($1,000) into a 6 month CD, a 12 month, an 18 month, and a 24 month.

At the end of 6 months, you put the $1,000 plus interest earned into a 24 month CD. From there on every six months you’ll put money back into a 24 month CD and roll the money forward.

I’m going to try this out for a month or so and see how we like it and how we think our finances are shaping up. I might consider tweaking that model because I don’t want to lock in our money for 24 months. We might consider this: for six months, once per month, opening up a 6 month CD.

So in month 1, we open up a 6 month CD and put money in. In month 2, the same thing. In month 7, rolling month 1’s money into a new CD. Interest rates probably won’t fluctuate too much over that time, but in case they did I could adjust where the money goes faster than on a 12 or 24 month CD.

What do you all think? Do you do CD laddering? How has it worked out for you?

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