I got an email from a reader named Janine W recently. She had a couple of questions about starting up a CD ladder. I gave her some advice and then I thought that getting some reader input might help.
Here’s Janine’s email:
Hi, I was reading your article on CD ladders for beginners.
I have a couple questions.
I’m 24 with a 3 yr old. No child support, no other income other than my job as an RN. I have saved enough that we are now in our first house
Also, I paid off my car which was an ‘05, so my debt consists of my mortgage and thats all, no credit cards/student loans.
Now, I would like to try the CD ladder. My question is, most CD rates are low right now. I have a savings acct at etrade.com and my APY is 3.29%. If I did the CD ladder I was going to do $1,000 into a 6mo CD every month. Is that stupid though because my saving acct is already 3.29%? Will I be making any interest more than what I’m already making?
Please help,
Janine
So what do you think?
Here was my response:
You need to check what current CD’s are going at (rate wise). If CD’s are the same or lower than your account you might consider keeping your money in the savings. Only thing is if rates go down in the next 6 months you will have missed out on locking in your rate. Of course the opposite is true as well.
What exactly is your rationale for a 6-month CD? I’m guessing the ability to cash it in sooner. If you can lock up your money for 12 months you could get a higher rate. With 12 mo CD’s you have better opportunities to earn interest (ING is 4% for 12 months). You may just need to budget for the fact that your CD won’t have maturing in 6 months.
The point of CD ladders, for me, is that you lock in better rates and hedge against changing rates by laddering them over time.
For me, I don’t expect to need the money I put into CD’s so I feel safe locking in the rate for the time period. I have 6, 9, and 12 month CD’s depending on the rate (the lower rate ones are for less time).
With ING you can cash a CD in with a 3 month’s interest penalty before maturity (check the site for details). In the worst case of an emergency were you would need to get to that money you still could. You just lose 3 month’s interest which shouldn’t be too much on a $1000 CD (ten dollars or so?).
When I started buying CD’s I figured out how much of my savings I was comfortable with forgetting about. In other words how much money I wouldn’t need to touch.
Hope that helps. Remember to do your homework before purchasing anything.
What do you think?
I’d love to hear what advice you give! Help Janine out in the comments section!
Here’s what some other bloggers have said about CD ladders:
Creating A CD Ladder For You Emergency Fund Or Other Savings To Earn A Better, Safe Return
How To Easily Open A CD Ladder At ING Direct
How To Build A CD Ladder ANd Get The Highest Interest Rate
Using CD Ladders To Save Wisely
Sign up with ING Direct and get a $25 bonus
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Hi Janine
I know that many people including me have the same doubt that you had about CD’s.Last year I also thought about investing in CD’s when I got my bonus check.I asked couple of my friends and they came up with the answer that it’s better to leave the money in savings account as there is no big difference in interest rates.Guess what , I left it in there and today when I look back, there is hardly any money in my savings account. The good thing with CD’s is that until I read this article, I wasn’t aware that the penalty for withdrawing the money early was this low. People just have this idea in mind that once you deposit your money in a CD, you can’t take it out till the maturity date,period. While the whole world is going through an economic crisis now, it would be really advisable to save some money for your future because future can be unpredictable.Hope this helps . Also great work on this article. It was really informative.Keep up the good work
Steve
Great explanation, FFB. Nothing more to say really.
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Janine,
It is tough to say right now especially with the lowering of interest rates at banks, I believe that your CD rates could take a hit as well, so if you are going to act I would do it now.
I also like 6 mo CDs. The reason for that is that the market is bound to bounce back by the end of the six months. If you can secure a higher interest rate that is phenomenal, but for a short period of time. The laddering option is up to you. Obviously look at the market for any fluctuations and places to put your cash.
I had a CD at ING about 3 years ago. It wasn’t much, I just wanted to see how easy it was to start/cancel and roll over a CD at ING, and it was a breeze! Like their savings account, they don’t offer the highest rates but it’s pretty much painless to do!
Joe’s last blog post..25 Investment rules from Jim Cramer.
Here’s my plan:
As soon as my basement is complete, start rebuilding my savings and buy into 6, 9, and 12-month CDs once I have at least $500 apiece. After that, I’ll probably do a 12 month every 3 or 6 months, just to make sure that I’m not hurt by cashflow issues in an emergency.
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I use a CD ladder for that part of my emergency fund that I do not expect to use (the “OMG, I lost my job!” part). I want to keep that savings set apart so that I’m not tempted to spend any of it.
What I did when starting out is accumulate three months worth of expenses in savings, then invest one month’s worth in a 12 month CD. Keep saving and when you have three months again, buy another CD, but in a different month than the first.
When each CD matures, roll the original balance into a new 12 month CD and add the interest into your savings to help pay for the next CD you are saving for. Eventually you will have three months expenses in savings and 12 CDs each with one month’s expenses coming to you for 12 consecutive months.
At that point you can bleed off the interest each month for other goals or let them ride to increase the total in your E fund.
While you are building the ladder, at no point do you have less than 2 months of expenses in your efund that you can get to without penalty. If this isn’t enough for you, use whatever amount is your comfort set point.
Best of luck with your goals!
Janine-
By the sounds of it, your savings account sounds like the interest rate is satisfactory. One vital piece of information that I’m missing is actually how much you have in your savings. Or at least how much of monthly expenses you have covered.
As far as the CD, you probably wouldn’t expect to get much more by only locking it up for only 6 months. Locking it up for at least a year would ensure you locking in higher rate so as long as you have enough in your savings. Hope that helps.
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Right now, I have $13,000 in my savings. Hope that helps Jeff
I’ve been thinking about getting a CD for quite some time now. Unfortunately, as a student, the idea of being even 6-months from my money is a bit risky. Ah well, it won’t make more than a couple of hundred dollar’s of a difference over the next few years.
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@Janine. Sorry for the delayed response. A 16 month keeps you busy (I know you can relate). Everybody is different, so let me use myself as example to see if that helps. Currently, we have 6 months worth of expenses in a high yield money market account. Our goal is to have at least 8-9 months in pure savings, no CD’s or anything tied up. That being said, my wife has a salaried position and my income fluctuates month to month but I do have a base of where I’ll be at.
In your case, if you have a good sense of what your income is month to month then 6 months worth of expenses may suffice. With the economy being as volatile as it’s been, I’ve been recommending more to the 8-12 month range. Obviously, you may be losing some on the interest side, but the impact if you may need it is unmeasurable.
In your situation, I don’t see the extra interest earned by doing just 6 month Cd’s, especially if your savings is currently paying 3.29% Once you reach the 6 month of expenses in savings, I could then see you laddering between 9-12 month Cd’s. That One Caveman and threadbndr make good examples of Cd laddering that is effective for them.
Hope that helps and you have any other questions, let me know.
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Great ideas everybody! I love to see all the responses. I hope Janine has a better idea now of what she can do with her money.
Yes, Thank you everyone!!
Some things I want to share i will post in ffbs “personal finance links” article.
Thanks again
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