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?

{ 2 trackbacks }

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September 18, 2008 at 8:02 am
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Start-Up September 11, 2008 at 11:44 am

I currently don’t CD ladder my emergency funds, mostly because I have yet to build up an emergency fund. That doesn’t mean I won’t give you my opinion though.

CD laddering is a good idea for when you lose your job and still need an income to pay the monthly bills until you find a new job. Ideally in this instance you would have one month’s worth of bills maturing at the beginning of each month.

The trouble with CD laddering arises when you need to dip into your emergency fund for a major purchase. Like when a large appliance breaks down or you have a rather large medical bill. If the value of the CD that’s maturing isn’t enough to cover this emergency you have to take a penalty by withdrawing from the CD.

I suppose it really depends on how large a value you have maturing every month and the deductible on your health insurance.

I intend on CD laddering once I have an emergency fund.

Shaun Carter September 11, 2008 at 12:22 pm

I agree with Start-Up about not CD laddering when it comes to an emergency fund. Right now the difference between a high interest savings account and a CD is less than one percent of interest and taking a penalty for early withdrawal would take away more than the small premium received for locking up the money.

My emergency fun stays liquid, but CD’s would be appropriate for longer term saving goals where the money will not be needed with little notice.

Casey September 11, 2008 at 2:45 pm

We currently have a ladder of CDs for our EF. We have a baby one right now while we pay off debt (student loans and car) so it’s only $3,000 spread across three 3-month CDs. Do plan on eventually going to the 6 month CDs with one maturing every month.

I personally like using CDs because any small increase in return is still more free money. I also find it’s easier for me to have it set away and not think about and be tempted by the money. They roll over on their own so the money is never close enough to spend. Good for me since I tend to take anything that isn’t nailed down and throw it at our debt.

Evan September 12, 2008 at 1:58 pm

WHY!? I just wrote a post on this subject, and I can’t figure out why you would lock up your money for 6 months, when Wamu (and other banks if you don’t trust them) give you the opportunity NOT to lock it up and still get the same interest?

Take a look:

Kimberly September 19, 2008 at 10:25 am

What did you do for the “interest disbursement” option? ING just got me with the 18-month 4.50%…

karla (threadbndr) September 24, 2008 at 10:48 am

I divide my efund into two “buckets” – The “OMG, I lost my job” bucket is in laddered CDs. It keeps my mitts off that part and insures that if I do loose my job, I won’t blow my entire e fund in the first few weeks. I roll these over automatically. If I never need them, they will sit there and grow until I retire.

The other “bucket” is in an ING savings account. That is my “insurance deductible”, “the oven blew up” etc part. Right now, this is about 1/4 of the efund, but I’m working on building it back up to half.

In both cases, the fact that there is a bit of distance between that money and my checking account is a good thing. I tend to spend if I have instant access. That’s just something that I know about myself, and one reason that I keep a small checking account that is just for my ‘blow’ money – it’s funded by my overtime and is totally guilt free spending. And that little account lets me stay self disciplined and on plan with the much bigger household checking and all my savings and investment accounts.

There are some things I don’t agree with Dave Ramsey on, but one I do is that Personal Finanace has a HUGE component of “personal” – what works for one person may or may not work for others. That’s what makes the PF blogsphere so much fun!

Kevin September 26, 2008 at 11:40 pm

@Start-Up: For a true emergency, the small fee you have to pay to cash out early would make sense to me. I think the risk-reward tradeoff is good here. Higher return and in the off chance you need the money, you lose some of that return.

@Shaun: See my above comment.

@Casey: Good point and good luck with your laddering.

@Evan: What do you think of those WaMu returns these days? Not to be snarky, but you got paid that premium for a reason.

@Kimberly: We discussed this via e-mail, but for everyone else: I read this as one of two options you could do with the interest. 1.) interest is kept in the CD and continues to compound. 2.) interest is paid out to you and stuck into one of your current ING accounts. I stuck with option 1, to get the most compounding.

@Karla: It’s good to know yourself that well. I think that is the system we may end up with — efund in CDs and the rest in savings.

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