Reader Question: Why Let Your CD Ladder Fall Apart?

by Kevin on July 1, 2009

Last month I told you that our CD ladder fell apart. One reader, Dave from Do You Dave Ramsey, e-mailed in a question that I figured would make a great post. Here’s his question:

I’m curious as to your motivation to stop [the CD ladder].  I get that rates were falling, but wouldn’t you also have caught the rates on the way back up?

It seems that building the ladder is such an involved process – it takes a year to set it it up – that stopping puzzles me.

I’m not against your motives or reasoning – holding cash with immediate access at a time of need is a great line of thinking.  But, as stated, the ladder topic is very interesting to me and I’ve never heard of someone stopping or a ladder falling apart.

I applaud your candor and hope you don’t mind my line of question.

Thanks for sharing

CD Ladders are Open to Interpretation

If you asked five people about what CD laddering really is you would likely get several different answers. A CD ladder at the end of the day is a group of Certificates of Deposit (CDs) that you have built up over time. You don’t put all of your available money into one CD with one fixed rate. Instead you spread the money around over several CDs over time.

For example, if you had $10,000 land in your lap that you wanted to CD ladder you wouldn’t put all $10,000 into one CD at today’s 1.50% interest rate. Instead over some time frame that you define you add chunks of the money and put it into CDs.

The key is the distance between the CDs.

You Define the Distance Between Rungs on Your CD Ladder

All ladders have rungs on them that you step on on your way to the top.

The rungs on a CD ladder are… CDs. All you have to do is figure out how far apart you want the rungs to be.

Many people choose to position their rungs so that they have a CD mature every year. That might look something like this:

Year Open this CD
2009 1 year CD
2010 2 year CD
2011 3 year CD
2012 4 year CD
2013 5 year CD
2014 5 year CD

We Chose Short Rungs for Our CD Ladder

We were putting a chunk of our emergency fund into a CD ladder specifically to earn a higher rate of return than what we were getting with our high-yield savings account at ING Direct. We wanted a short term so that if we had a true emergency we could live off of our current savings and then wait for the CDs to mature to bring in additional funds.

For that reason we opened 6 month CDs. If we opened 6 of them in a row we would essentially have a very short ladder — every six months a CD would be maturing and we could put the money back into another CD.

Then the financial crisis hit and rates for both high-yield savings and CDs dropped like a rock. We let the CD ladder fall apart because it wasn’t meeting our goals at the time — 6 month CD rates were actually lower than high-yield savings rates (and still are). Right now ING offers a 6 month CD at 1.25% and the regular savings account is 1.5%.

Are We Being Shortsighted?

Your first response should be much like Dave’s: why did you stop? Isn’t that the point of the CD ladder — to help get through flucuating rates?


But for us this money held a sizeable chunk of our emergency fund. We were looking for a higher return and at the time a higher return wasn’t available. Plus I’ll admit we got a bit spooked and would much rather have the money liquid and available in our savings account.

Send in Your Questions

I’m always looking for great questions to spark a discussion and lead to writing an article for the rest of the community to see. Got something to say? Drop a comment in this thread or just contact me.

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CD Ladders - My Take | Do You Dave Ramsey?
August 14, 2009 at 5:00 am


DoYouDaveRamsey July 1, 2009 at 11:02 am

Very interesting and thanks for indulging my question… and for the link.

I’ve been defining the CD Ladder differently – which you suggest is common in PF circles.

I’ll commit to writing an article to share my definition and further engage the dialogue.


Kathryn July 1, 2009 at 9:25 pm

Have been considering ING direct for awhile. Do you feel it is a good place to invest? I’m old school, and not having a “bank” to visit, seems odd to me. Bottom line, you feel your money is safe?


Kevin July 2, 2009 at 10:04 am

@DYDR: Yea I think the ladder has to fit your needs. Just like a real ladder — you don’t necessarily need a boom truck with a lift when a step ladder might do.

@Kathryn: If by invest you mean save, then yes it is absolutely a great place. They don’t have physical branches, but the checking accounts have fee-free debit cards. I do all of my transfers electronically. I maintain a standard brick-and-mortar account with a local bank to write checks to church and stuff like that, but there is so much you can do electronically it just completely outweighs other banks. Plus the interest rate, albeit small these days, is better than the national average.

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