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Create CD Ladders for Short Term Money Needs

I just moved some of our portfolio to cash. There’s a chance that we may need to access it during the upcoming year and I wanted a way to maximize the return, but avoid any risk so I have the appropriate amount of money all year.

I asked on Twitter [1] if anyone had done something similar and Banker Girl pointed me to the following directions: A Guaranteed Return Solution for Uncertain Times [2].

CD Ladders

I divided the money into four buckets and placed each one in a CD with different maturities. Here’s what my ladder looks like:

Amount Term Rate
$3375 3 months 2.40%
$3375 6 months 2.65%
$3375 9 months 2.80%
$3375 12 months 2.95%

In three months when the first CD matures, I can get access to the amount of cash that I need, and put the rest back into a 12 month CD (which will keep the ladder going).

Benefits of a CD Ladder

Lower Risk. Because the money will mature at different times, the risk of low interest rates is minimized. Unfortunately, they are very low now, but hopefully when rates go back up, I’ll be able to lock in new CDs at higher rates.

Higher Rates. Even though I will need some of the money in three months, I’m able to lock in some of the rates for 12 months by dividing the money into buckets. With laddering, you can take advantage of high interest CDs [3] rather than putting all the money into a short term CD.

Avoid Penalties. Make sure that you do not lock up the money longer than when you will need access to it. Penalties are assessed for taking the money out early. Be sure to plan ahead!

For fixed or short term uses. Ladders work well for short term money needs; and best for fixed amounts. Accessing retirement money and emergency savings can use ladders effectively. However, if you are investing for retirement, you will likely want a more aggressive mix of stocks and bonds.

Multi Use. You’ll notice that the rates are lower than ING [4] or other banks. I purposely used my local credit union because I have our business accounts there. By depositing some additional money there, I will qualify for some added benefits that will outweigh the difference in interest rates. It’s always important to evaluate package deals when shopping around.