Bible Money Matters

Christian personal finance

Menu
    • About
    • Archives
    • Contact
    • Close
  • Making Money
      • Popular Articles

        • 50 Ways To Make Money: Maximizing, Creating And Increasing Your Income
        • 10 Weird And Unconventional Ways To Make Money
        • Making Money With A Blog (e-Book)
        • 10 Places To Sell Or Trade Your Unused (Or Broken) Electronics
        • Ways To Make Extra Money Series: 20 More Income Generating Ideas From Our Readers
        • Making Side Income Can Help Blunt The Impact Of Becoming A One Income Family
        • Earn Cash Back With Discover it® Credit Card
      • Recent Articles – Making Money

        • Best Sites Like Fiverr To Make Money As A Freelancer
        • 13 Of The Best Independent Contractor Jobs
        • 25 Of The Best Gig Economy Jobs
        • How To Make Money Blogging: Turn A Blog Into A Business
      • Categories

        • Making Money
        • Investing
        • Retirement
        • Jobs & Work LIfe
        • Money
        • Income
    • Close
  • Saving Money
      • Popular Articles

        • 50 Easy Ways To Save Money Every Month
        • 10 Weird And Unconventional Ways To Save Money
        • 10 Practical Ways To Save Money And Increase Your Net Worth
        • How To Save Money On Just About All Of Your Regular Monthly Bills
        • Ways To Watch TV Without Paying An Arm And A Leg For Cable TV
        • Save Money On Your Hospital Bill - Just By Asking
      • Recent Articles – Saving Money

        • How To Save $100k In 7 Practical Steps
        • Stairs App Review: Save And Invest To Earn 4-6% Interest
        • Honey Review: Save Money Automatically When You Shop Online
        • 9 Convincing Reasons Why You Need An Emergency Fund
      • Categories

        • Saving Money
        • Frugality
        • Planning
        • Finance
        • Saving For Retirement
        • Savings Accounts
    • Close
  • Banking
      • Best Rates For 2019

        • Best Credit Cards
        • Best Savings Accounts
        • Best Mortgage Rates
        • Best CD Rates
        • Best Brokerages
        • Free Credit Scores
      • Recent Reviews

        • TradeStation Review: Commission Free Stock And ETF Trades
        • Firstrade Review: Commission Free Trades on Stocks, Crypto, And Options
        • Cadre Real Estate Investing Review: Commercial Real Estate Investing
        • Axos Self Directed Trading Review: Invest, Trade Stocks For Free
      • Categories

        • Bank & Software Reviews
        • Investing
        • Credit
        • Banking
        • Mortgage
        • Insurance
        • Family Budget
    • Close
  • Recommended
  • Video
    • Close

How To Setup A CD Ladder To Maximize Liquidity And Earnings

By Peter Anderson 11 Comments - The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited December 20, 2018.

Share12
Pin2
Tweet42
Share3
59 Shares

If you’ve been disappointed the last few years by the historically low interest rates that you’ll find when signing up for a “high yield” savings account, you may be considering your options when it comes to where you put your savings.

Since those savings accounts probably won’t be seeing their rates go up by any significant amount in the near future, a lot of people are now considering putting their money in alternative account types.  Anything from investing in peer-to-peer lending to a more liquid investment account like the ones at Betterment.com.

If those account types still sound too risky for your tastes, one stable savings vehicle a lot of people are trying are CDs.

What Is A CD (Certificate Of Deposit)

CDs, which stands for Certificates of Deposit, in some ways are very similar to a typical savings account.  You can purchase a CD at most of the same banks where you would open a regular savings or checking account.   The CD account is different from those other account types in that they aren’t nearly as liquid because when you buy a CD you are committing to holding your money in that account for a set period of time.  They can range anywhere from 3-6-9 months to a year, 2 years, all the way up to 5 years.

Check out currently featured bank for CDs, CIT Bank

What do you get in return for agreeing to keep your money in the bank for that set period of time?  You get a higher rate of interest than you would in a regular savings account, and it is guaranteed for the term of the CD.  In essence you’re trading liquidity for a higher rate.

CIT Bank CDSo to recap, the main points to remember about a CD are:

  • Fixed Interest Rate:  If your CD has a 2% rate of interest, you will receive that 2% rate for the life of the CD. No matter if the rates go down (or up), you’ll receive that fixed rate of interest.
  • Not As Liquid: When you purchase a CD you are committing your money to be in the account for a specific term.  You can’t take your money out without incurring some sort of a penalty.   Because of that you should be careful about how much you put in, and for how long you put it in.

Creating A CD Ladder

What a lot of people will do when putting their money into a CD is create what is called a CD Ladder.  CDs with different terms carry different interest rates. So for example a 5 year CD will hold much higher interest than a 6 month term CD.    Because of that it would seem to be a good idea to put all your money in the 5  year term CD – except for the fact that that your money isn’t very liquid.

A CD ladder is an attempt at helping you to keep some of your money’s liquidity, while still achieving a higher earnings and interest.  It’ll also help to hedge your bets against rates going up or down.

What you do to create a CD ladder is start saving at the beginning in CDs with different terms.  So for example, to keep it simple, let’s say you want to save in CDs with terms of 1 year through 5 years. Here are some example of rates from CIT Bank as of 10/2012:

TermInterest Rate
6 months.45%
12 months1.06%
24 months1.20%
36 months1.42%
60 months1.80%

So as you can see the rates vary from .45% up to 1.80% for the 5 year.   What you would then do if you’ve decided to save $5,000 in CDs, you would buy 5 CDs with equal amounts:

  • $1,000 in 6-month CD at .45%
  • $1,000 in 1-year CD at 1.06%
  • $1,000 in 2-year CD at 1.20%
  • $1,000 in 3-year CD at 1.42%
  • $1,000 in 5-year CD at 1.80%

Then you wait.  After the first six months, when the first 6 month term CD expires, you would take that money, turn around and invest in a second 5-year term CD.   So then your investments would look like this:

  • $1,000 in 5-year CD at 1.80%
  • $1,000 in 1-year CD at 1.06%
  • $1,000 in 2-year CD at 1.20%
  • $1,000 in 3-year CD at 1.42%
  • $1,000 in 5-year CD at 1.80%

So basically you’ll always have at least $1000 of your money a year away from being liquid in case you need it.  Your interest rates will slowly be going up as well because eventually you’ll just have 5 laddered 5-year CDs.

Pros And Cons Of A CDs And A CD Ladder

CD ladder

When considering whether you should set up a CD ladder, there are some pros and cons you should consider.

  • Pro – Hedge Against Inflation:  If the interest rates go up, you’ll have some short term CDs expiring soon that can be re-invested at higher rates. If rates go down, you’ll have the longer term CDs hedging your bets.
  • Pro – FDIC Insured: Your money is FDIC insured, so it’s safe in a CD. No worries about losing money like an investment account.
  • Pro – Higher Interest: With a CD ladder you’ll be making better interest than a regular savings account, while being more liquid than you would just buying one big 5 year CD.
  • Con – Sometimes Short Term CD Rates Are Low:  One thing you’ll want to be wary of is that sometimes the shorter term CDs will have rates that are almost as low or lower than savings accounts at other banks.
  • Con – Penalties Associated With Early Withdrawal: Need your money early? You’ll pay a penalty – although that penalty will vary from bank to bank.
  • Con – Less Liquidity: One of the biggest drawbacks of CDs is that they just aren’t very liquid.   Yes, you get higher interest, but you won’t have access to that money.

Have you ever set up your own CD ladder, or have you considered doing it? Tell us your thoughts on the CD ladder, and on CDs in general in the comments.

Related Posts

  • CIT Bank Savings Review: High Yield Savings And CD Accounts From CIT Group

    I recently discovered the savings and CD accounts from CIT Bank. They offer some pretty competitive rates, among the top 5 that I've seen recently…

  • How To Create A DIY Green Screen Setup On The Cheap: Screens, Stands And Lighting Setup

    Doing green screen can help give your videos a professional look, but doesn't have to be as expensive as you think. Here's how to create…

  • Maximize Your Money Over Your Lifetime By Using the Just Enough Principle

    We often buy more than we need in this culture, because we can. What if instead, we bought only what we needed and no more?

Share12
Pin2
Tweet42
Share3
59 Shares
Last Edited: 20th December 2018 The content of biblemoneymatters.com is for general information purposes only and does not constitute professional advice. Visitors to biblemoneymatters.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.

This article is about: Banking

About Peter Anderson

Peter Anderson is a Christian, husband to his beautiful wife Maria, and father to his 2 children. He loves reading and writing about personal finance, and also enjoys a good board game every now and again. You can find out more about him on the about page. Don't forget to say hi on Pinterest, Twitter or Facebook!

Comments

    Share Your Thoughts: Cancel reply

  1. Money Beagle says

    I never have just because when I first thought about it, the interest rates had become so low that it didn’t seem really worth the hassle for the miniscule difference we’d get versus a money market account.

    Reply
    • Peter Anderson says

      Yeah, living in the era of the 1% interest savings accounts and CDs just a bit higher isn’t that great. I can remember even a few years ago how they were so much higher..

      Reply
  2. Darren says

    Yeah, I set one up two years ago, and one is about to mature next month. It seemed more worthwhile a few years ago, when rates were a bit higher. For instance, I have a 5-year CD at 4%, with 3 years left.

    With interest rates this low though, people may not think it’s worth the effort.

    Reply
  3. Jenna, Adaptu Community Manager says

    Great informational post! Definitely something I started doing last year, so I’m only on the first “rung” or two.

    Reply
  4. Ken says

    Instead of using short-term CDs to start a CD ladder, it might make more sense to just keep that money in a savings account, and then invest it into a long-term CD after a year. There’s not much difference between 1-year CD rates and savings account rates.

    Reply
  5. Yes I Am Cheap says

    As we age, we tend to feel a bit insecure regarding our future. We should make investment and deposits so that during the time of our need we can utilize it.

    Reply
  6. Jon - Free Money Wisdom says

    Great tips–thanks for the advice! And these interest rates are a definite downer….

    Reply
  7. Ken Faulkenberry says

    The concept of laddering is a sound strategy. At today’s rates an investor should keep maturities much shorter than normal.

    Reply
  8. TheGooch says

    While this investment vehicle isn’t great in the current environment, its good to remind people that it exists for the time when rates goes back up. And I hope they do soon!

    Reply
  9. George Kern says

    I’d like to program a CD ladder, but nowhere can I find any information on HOW the interest on a CD accrues. For instance, if I buy a 5-year CD at x%, is that x% simple or compound? Is a stated x% always assumed to be in terms of APY or APR? How often is it compounded? At maturity, have I accrued x%/yr (compounded how often?) or a simple x% for the whole 5 years? Is the value of the CD considered to have grown annually or monthly, or does the interest suddenly spring into being at maturity? I know how to compute the accrual of interest on a periodic-average basis over a given period (as for interest on a savings account or a credit-card bill) because I’m told the specific parameters, and I can code a computer program to do the computations and postings. Is there such a thing as a primer on how to construct a CD ladder? All I can find is sunshine and hoopla from people advertising or selling CD’s.

    Reply
    • Peter Anderson says

      I think you need to look at the specific CD that you put your money into and see how the interest is accrued for that bank. With one of my banks for example, Ally, their interest is compounded daily and is expressed as APY.

      Reply
Previous Post: Save Money on Groceries Through Food-Buying Programs
Next Post: What Is An Exchange Traded Fund (ETF)? What Are The Benefits? Should I Consider Using One?
Discover Investment Platforms

Popular Posts

  • 21 Easy Ways To Earn Free Amazon Gift Cards
  • 10 Best Free Tax Filing Services And Software Online
  • 21 Apps That Pay You Real Money Fast
  • 17 TV Apps And Live TV Streaming Services To Watch TV Free
  • 30 Legit Online Jobs That Pay Well
  • 37 Easy Ways To Get Free Gift Cards
  • How To Get Free Stock
  • 40 Easy Ways To Get Free Money Fast
  • 21 Places To Read Free Books Online
  • 24 Legit Online Jobs
  • 17 Best Work From Home Jobs: A List Of Legit Online Jobs That Pay Well

Recent Posts

  • How To Save $100k In 7 Practical Steps
  • How to Save Money When Remodeling A Home
  • How To Hire A Contractor For Your Remodeling Project
  • Remembering 9/11 Years Later: Where Were You On That Fateful Day?
  • TradeStation Review: Commission Free Stock And ETF Trades
  • Firstrade Review: Commission Free Trades on Stocks, Crypto, And Options
  • Cadre Real Estate Investing Review: Commercial Real Estate Investing
  • Best Sites Like Fiverr To Make Money As A Freelancer
  • Axos Self Directed Trading Review: Invest, Trade Stocks For Free
  • 30 Quotes About Easter And Resurrection: He Is Risen!

Disclaimer

The information contained in BibleMoneyMatters.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation.

In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.

Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.

Amazon and the Amazon logo are trademarks of Amazon.com, Inc. or its affiliates.

We respect your privacy: Privacy Policy.

Thanks for visiting!

Bible Money Matters - Seen On These Sites and more..
Bible Money Matters is a personal finance, entrepreneurship and investing community. Give more, save more and live more.

Copyright © 2023 · Bible Money Matters | Sitemap | Advertise | Privacy Policy