Our CD Ladder is Half Complete

by Kevin on November 20, 2008

Back in September we made the decision to start a CD ladder for our emergency fund. Thus far we are about halfway done in completing the ladder.

What duration of time for your CD ladder?

There are a couple of different thoughts on how to space out your CD ladder. At the end of the day it depends on how quickly you would need the money. Since this is our first CD ladder, we decided to make each CD only a six month CD.

At first glance that seems to offer very little benefit because the interest rate isn’t much higher than what you can earn on a savings account. You lose liquidity (how quickly you can access the cash), but gain a little bit in interest rate.

How Our CD Ladder is Currently Constructed

We now have three CDs with three more to go to complete the ladder.

  • CD 1: 3.75% (September)
  • CD 2: 3.75% (October)
  • CD 3: 3.50% (November)

The current savings rate for ING Direct is 2.75%. The current 6 month CD rate has dropped down to just 3.00%. Not much difference. However, we are going to stick with the plan so we don’t mess up the ladder.

Plus, it is kind of nice to be earning 0.75-1% more than we would normally with the first three CDs. Too bad it doesn’t look to last with the next CD.

Other CD Ladder Options

The key to the ladder is making each piece of the ladder be equally far apart. You can set up your CD ladder to be based on 6 month CDs with the following setup: a 6 month, 12 month, 18 month, and 24 month CD. When the first 6 month CD is up, you open up a 24 month CD.

Alternatively, you could try a 5 year CD. Open up CDs of 1, 2, 3, 4, and 5 years. When the first year CD is up, open up a new 5 year CD.

We’re not comfortable with that length of time because we might need our CD ladder in an emergency. With having a CD coming up every 6 months, we would have relatively easy access to the funds. We could dip into other accounts until the next CD matured.

How many of you readers out there have a CD ladder? I’m curious how many do it, and how they are set up. Are you like me, wanting to keep the maturity date close, or do you have a 5 year CD ladder running?

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The CD Ladder: A Different Way to Save | Prime Time Money
May 20, 2009 at 4:01 am

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That One Caveman November 20, 2008 at 12:57 pm

We haven’t set one up yet because the interest rate that I get at my credit union beats ING Direct’s CD rates right now. When our basement is finished and we have money to save again, I’ll look into building a 12-month ladder that will eventually grow into a 5-year.

philip November 20, 2008 at 6:52 pm

That sounds like too much effort to have to renew them every month, I know it is only 6 month, but you have to mess with one of them every month.

Do they auto renew if you don’t do anything else with them? that would help to automate things and might be bearable that way.

No, I don’t have any CDs at all, I am still paying off some debt before starting strong savings and my EF is not going into a CD

Kevin November 20, 2008 at 8:26 pm

@Philip: It takes about 5 seconds to set one up, so I’m not concerned with the time involved.

Although I did see a “Setup CD Ladder” option, wonder how that works…

ChristianPF November 21, 2008 at 3:00 pm

I was just talking to my mom about this today. I feel terribly sheepish telling others what to do with their investments because I really don’t know what is going to happen. But, I do feel comfortable hanging on to my own and even purchasing more since prices are so low right now. If I am wrong for myself, I can handle it, but it is another thing to have my wrongness dramatically affect someone else’s financial life.

Russell Fascenda November 24, 2008 at 8:57 am

I had a CD ladder setup quite a few years ago, I kept three 6-month CDs on a cycle so one was matured every 2 months. When I ran into bad times they were my income. Philip, it’s a bit of a nuisance if you want to ADD funds at renewal time, which is what I did to keep increasing the amounts. But my bank automatically renews for another term if I don’t do anything.

In fact one of those three CDs survived (I didn’t need the funds) and it’s been renewed every 6 months for nearly 7 years now. Not only does it happen automatically, I can keep the same term. The local bank I used doesn’t offer 6-month CDs anymore, but because I’ve left that one intact they have allowed it to continue on the 6-month cycle.

One thing I’ve considered is getting longer-term CDs for the added interest rate. Typically the penalty for early withdrawal is to forfeit some or all of the interest earned. My thinking is why not have a better earning CD, and if a true emergency came along, I’d forfeit some interest to address my emergency.

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