Laddering CD's

[robex]

I'm curious as to whether anyone here ladders investments...if so, what are the financial advantages? I'm trying to decide the best way to invest an extra $5000. I don't want to lock it into RRSP's or put it down on the mortgage as I may (or may not) need it at some point.

[sweeps]

CDs aren't paying much more than online savings accounts right now. Especially with interest rates on the rise, I would hold the money in an online savings account. You can move the money out at any time and you don't have to hassle with maturity dates. My $.02.

[Fern]

Here's how it works: Laddering CDs basically lowers your risk and increases your potential return without tying your all your money up for a long time.

You start the ladder by buying several CDs at one time but with different maturity dates, (one year, two year, three year, four year, and five year CDs). Every year one of your CDs will mature and you can roll it over into a new CD with a longer term and higher rate.

Research CD rates and go with the bank(s) with the best deals.

When the one-year CD matures, roll it over into a new CD for three years (or whatever term you decide to use for your ladder). When the two-year CD matures, roll it over into a new CD for three years. You can choose a shorter or longer term, but the key is to use the same term for each one once you start rolling them over at maturity. At the end of four years you'll have five CDs with one maturing every year, so you'll never have all of your money tied up long-term or at lower than market interest rates.

[sweeps]

Keep in mind, though, that it will take 5 years to get all your money back out (without penalty).

[robex]

Thank you for explaining it. What would you do with the money? We have 3 months emergency money in place and no outstanding debt. I'm nervous about leaving it in an account because I'm afraid that it's too tempting to spend.

[sweeps]

You can do the laddering, but go for shorter durations. You could have 12 1-year CDs, for example -- one expiring each month. You could get it started by buying 3-month, 6-month, 9-month, and 1-year CDs over the next 3 months. Then as the CDs come up for renewal, roll them into 1-year CDs.

Other options are federal savings bonds, municipal bonds, or ultra short-term bond funds.

[terry1156]

Laddering only makes sense if you can get rates that are much higher than regular savings rates. 1 year CDs aren't paying that much more - if they are at all - than you can get with HSBC (4.25%) right now. And you have not penalty if you do need the money. Put it in and forget about it and it shouldn't be tempting to use.

[Bluezy]

I agree. I was considering a CD ladder beginning from 60 days, going no longer than 18 months. However, with current online savings rates at 4.25% APR, it makes better sense to me to keep funds safely liquid.

Cheers!

[sweeps]

Please note that the original poster is concerned about pulling out his or her money early. If putting the money in CDs will help prevent that urge, then it's probably the way to go. Just like freezing credit cards in a block of ice -- it's a bit irrational, but if it works, it works.

[Bluezy]

If you are still in consideration of laddering your CD's with funds that you do not want easy access to, take a look at Self Help Credit Union and their deposit interest rates paying:

3 month - 4.62% APR
6 month - 4.82% APR
12 month - 5.00% APR

[Tree0164]

I wouldn't put 100% of your efund money into cd even if ladder. If you do have an emergency you don't want to wait to have access to it.

[robex]

It's actually not emergency fund money...it's an extra $5000 on top of that. We put the max into our retirement/pension funds, and have a little mortgage. I don't know what I would need it for. I just like to have it...security, I guess.