Comments on: The CD Ladder: A Different Way to Save

By: Brad Chaffee

Brad Chaffee — Thu, 01 Jan 1970 00:00:00 +0000

Aren’t CD’s just a plain old waste of time? Why would I invest in a CD to expect the highest likely return of 4%. After taxes and inflation don;t I need to make about 5%-6% just to break even?

Now I guess I understand it for savings, but I still do not think I would choose that method. If I am going to save for something to be used after 5 years, I will just use a mutual fund.

Right now ING is offering 1.65% on their electric orange checking. 1.5% with a CD for one year.

By: MITBeta @ Don't Feed The Alligators

MITBeta @ Don't Feed The Alligators — Thu, 01 Jan 1970 00:00:00 +0000

I use a CD ladder for our emergency fund. It’s just enough out of reach to keep me from temptation.

I know you guys all know that personal finance isn’t all about math…

By: My Journey

My Journey — Thu, 01 Jan 1970 00:00:00 +0000

PT lets go with the $50K in savings, if they have a 20% effective tax rate they are looking at 640 net. That is 53 bucks or so a month. I don’t think I’d tie up $50K for 1 year at a time (or I guess it would be 10K but still same argument) for an extra 50 bucks a month.

The question I guess that is more important, would you tie up that kind of liquid cash for an extra 50 bucks?

By: Lynn

Lynn — Thu, 01 Jan 1970 00:00:00 +0000

Well, I think I got my answer. Its just not worth it. I actually opened up a 6 month CD at a different bank than ING at 2.25% a couple of weeks ago because I got an unexpected bonus at work and wanted to make sure I didn’t spend the money. I wanted to take 6 months to decide what to do with it (save it or pay off my husbands car). I like the strategy of the 1 year cd every week thing but that is a lot of work and my time is limited with working almost full time and having 2 year old twins!

By: J

Thu, 01 Jan 1970 00:00:00 +0000

Before I bought my house in February (which has been kicking my butt, BTW), I had started a different type of ladder through ING. On every day of the month divisible by 7 (the 7th, 14th, 21st, and 28th), I was opening small 1-year CD’s. In a year, I could decide to take that money and cash out or re-up, and leads to a CD maturing every week. Then the CD rates matched the savings, so I halted. Just another strategy to consider.

By: Jules @ Lovely Las Vegas

Jules @ Lovely Las Vegas — Thu, 01 Jan 1970 00:00:00 +0000

Great post, PT Money. I like CDs and the laddering scheme, but until things are a little more bright with the economy, I’m not going to put more money into them. I have one CD coming due soon but will just funnel it into the emergency fund for a little extra cushion. True, I could be earning more by creating a new CD ladder scheme, but I prefer the added liquidity now. Plus once rates are on the increase (and I feel content with my normal emergency fund amount), I can lock the extra money into the new, higher interest rates for CDs.

By: PT

PT — Thu, 01 Jan 1970 00:00:00 +0000

@Lynn – that’s an excellent point. can the savings vs long-term CD rate ratio tell us about the market’s direction? or at least does it tell us what the banks are thinking?

@My Journey – there is definitely a break even point to consider. and online savings accounts haven’t helped out the CD product from a marketing perspective.

I think anyone with only $5000 to put in should stick with FDIC insured online savings. Once you get into the 50K range, when that $80 you mention becomes $800, I would think it starts becoming worth it to go with CDs.

But then again, not everyone is going to have 50K in cash savings. We should all be so lucky, right?

By: Lynn

Lynn — Thu, 01 Jan 1970 00:00:00 +0000

I really would like to start a CD ladder for my twin daughters. We have about $3000K saved up for each of them and it is just earning the pathetic 1.5 % interest in ING. I actually logged into my account on Monday and the CD rates are equal or less than the savings account. I was shocked. What’s the point of tying up your money if the interest is less? Does this mean a rate redution for the ING savings accoung is coming?

By: My Journey

My Journey — Thu, 01 Jan 1970 00:00:00 +0000

“Still, CD rates are largely better than high-yield savings accounts, so it might still make sense for you now.”

PT,

I went back and forth with Kevin from No Debt Plan on this issue like 9 months ago…

http://www.myjourneytomillions.com/articles/are-certificate-of-deposits-cds-worth-it/

I did the math – the interest rates were MUCH higher then, but I think the truth still stands, that the extra money made from this set up isn’t worth the loss of use of the cash involved?

Check out the math let me know what you think? But for instance,
Lets say your $5,000 is making 2% in an online savings account – you have $100 pre-tax or $80 post tax (assuming a 20% effective tax rate) for the year.

VS.

$5000 in your CD Ladder and giving you the benefit of the doubt of an effective return of 4% (just taking the higher number) you will have earned $200 pre tax for the year or $160 post tax for the year.

My point is that for an “extra” 80 bucks for the year (6 bucks a month) is it ‘worth’ to keep your money locked up?

Yes, you can access it for emergencies but almost ALL of the 80 dollar gains would be gone.

Thoughts?