What is a CD Ladder?

Hello fellow YNABers,

I have heard a bit in the forums about "CD ladders." 

Would someone mind explaining the idea to me?

I am looking at the possibility of a 12 or 18-mo CD with Ally.

As of 2/11/19, they are 2.75% 

I already invest what I need in my (and wife's) employee-matched Roth 403B as well as have my emergency fund and 3mo expenses. 

Thanks for any help!

cm

Sorry....I may should have posted this in Retirement-Investing instead of Savings!

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    • Khaki Storm
    • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
    • Khaki_Storm.1
    • 6 mths ago
    • 2
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    I have no idea, but since joining YNAB and the community, I've learned a lot about investment and banking terms from around the world. It's been interesting. Related or not, have you thought about this: there's old trick not not locking all you money into one CD. If you have $10,000 to invest, then you put $2,000 in a 12 mth CD in Feb, $2,000 in a 12 mth CD in Mar, $2,000 in a 12 mth CD in Apr, $2,000 in a 12 mth CD in May, and $2,000 in a 12 mth CD in June. Now, all $10,000 is in! There are 2 benefits. 1st: you can break into one of the CDs if needed, without losing interest on the others, before Feb 2019. 2nd: once you hit Feb, you get the interest from that CD, reinvest the money in another 12 mth, and this continues with you getting a little payback spread over 6 months interest of waiting for it all at once. I never knew what it was called.

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      • canman
      • canman
      • 6 mths ago
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      Ben K. This helps , thanks!

      Reply Like 1
  • A standard 5-year CD ladder means that on the same day you open 5 CDs: 12 mo, 24 Mo, 36 Mo, 48 Mo, and 60 mo. Moving forward, as each CD matures, you use the funds to buy a 60 mo CD. You have a cycle of a CD maturing every 12 months. 

    Reply Like 5
    • HappyDance
    • YNABing consistently since 2014
    • HappyDance
    • 6 mths ago
    • 6
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    In theory, a ladder enables an investor to straddle the fence between increasing interest rates and creates windows of access to invested funds. Using the example of $10,000 to be invested in something ultra conservative, I might not want to lock the entire amount down at today's interest rates and miss out on interest rate increases. And I might be reluctant to commit the funds for a five-year stretch without being able to access some of my funds for as yet unknown happenstance.

    The money is divided into different portions and each portion is invested in a different term at a different interest rate. Frequently, the example of a five-year ladder is used where five separate investments are used. Then as each investment matures, the funds can be used to buy the next investment (at hopefully a higher interest rate) or to use the funds for other purposes.

    The example of five years is frequently used, but the choice of portions and terms can be customized. You could also have just two investments, and every time one matures, you buy a new 2-year investment.

    I am using a reverse ladder to save for my next car. Each year I buy a $2,000 GIC (Cdn version of a CD), with a maturity date of 2022.  In 2017 I bought a 5-year GIC, in 2018, I bought a 4-year GIC, this year I'll buy a 3-year GIC.   By the time 2022 rolls around, all my GICs will mature simultaneously providing me with a nice lump sum to go car shopping with, at which time I may decide to reinvest for another year or two, which will depend on how well my car is lasting.

    Reply Like 6
  • I've grown weary of my CD ladders and am unwinding them. It's become too much clutter. At this point I'm choosing between various savings accounts, the Ally No Penalty CD, and appropriate Vanguard Money Market funds. It's easy enough to move money around as rates change. I'm also slowly shifting money into I Bonds (the funds can't be accessed for the first year) because they are tax-deferred and inflation protected.

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      • canman
      • canman
      • 6 mths ago
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      nolesrule I think this is more the direction I feel is best for me at this time. Thanks so much for sharing. I really don't want a lot of clutter. I hadn't seen that Ally No Penalty CD, thanks so much for sharing about that, looks great for my scenario right now.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
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      canman I know my list of possibilities also seems somewhat cluttered, but it's because I already have the savings accounts at 3 different banks, so it's just a matter of moving the money via transfer anytime rates change.

      The No Penalty CD is easy enough to move in and out of... it just takes a few more minutes because you always have to go through the steps of opening a new CD each time you want to have one. Breaking the CD is easy. And in YNAB, you can always just hide the account when the balance is zero and not being used (you might have to re-link if you are using import, because account numbers will change if you close one and then open a new one).

      Reply Like 1
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