How to Earn More Money with a CD Ladder

For those of you looking for a way to maximize the income on your cash, a CD ladder is one worthwhile option to consider. Here's how The Street describes a CD ladder:

Here's how it works: Say you have $10,000 to invest. The rates on CDs with terms of 3 months to 30 months range from 2% to 3.25% -- better returns with more time, but still below inflation. Instead of locking up all your funds into the highest rate with the longest term, you put $1,000 in 10 different CDs with various rates and durations. You can roll over the short-term investments into new CDs once they expire, hopefully at better rates.

And the benefits of a CD ladder:

According to BankingMyWay.com's CD ladder calculator, you can earn $270 more over the two and a half years with laddering than you could by using a single CD.

I usually keep my cash in a money market account because I want immediate access to it. But maybe I should look into CD laddering for at least a bit of it. Anyone out there currently using CD laddering?

Comments

[Josh]

I have a HSBC Direct account that earns 3.05% without locking my money up, and i think WaMu even has one that earns 3.35%, now this rate can change, but I just feel that locking your money up for that long is not worth it when these types of savings accounts are available. Just my $.02.

[Tim]

I use CD ladders for part of my emergency fund since I'm sure I won't need to tap into all of it right away. The benefit of this is that I'm still earning 5%+ on three separate CDs that won't entirely mature until 2009.

[Christopher Smith]

Laddering time investments (which include bonds as well as CDs) isn't a way to increase your yield; it's a way to smooth it out and reduce both rate-change risk and "need-it-now" risk.

The essential problem is that you don't know where interest rates will be in 4, 5, and 6 years, so instead of putting all your money in one 5-year CD, you put a third in each, figuring that even if one year's rate is significantly higher or lower then you'll still get the average return.

That said, as mentioned by Josh, I looked into CDs recently, but I'm getting 3.15% on my E*TRADE savings account (and 3.0-3.5% on my Salem Five checking), and CDs offered no compelling interest-rate advantages.

[CF]

I understand using a CD ladder as a hedge against changing interest rates and avoiding having all your money locked up for a long time period, but there's no guarantee that you'll make more money by laddering vs. buying the longer term CD. Notice they say you "can" earn $270 more; it's also feasible that you "can" earn less money. It all depends on what happens with interest rates.

If rates go up, you can reinvest the shorter term CDs at higher rates, which would earn you more money (although then with 20-20 hindsight, one might argue that you should've put ALL of it in a shorter term CD to begin with and that the money locked up in the long term CDs is making you less than it could with the newer higher rates). If rates go down, the CDs that come due would be reinvested at lower rates, and (again with 20-20 hindsight) you would have been better suited to put it all in longer term CDs at the outset.

Bottom line, depends on what interest rates will do and none of us have a crystal ball.

I'm not saying one shouldn't ladder CDs - it does make sense as a hedge, but it's not accurate to say that it will earn you more money.

[Kevin]

Why would anyone lock up their money at under 4% when several online banks have no minimum savings account earning that much or more? I think my E*Trade account is close to 5%.

[WesleyTech.com]

Another happy HSBC Direct customer here. When I started out with them, my online savings account had a 5% APY. With all of the FED interest rate cuts, it's now down to 3.05%, but still much better than any other brick & mortar bank account or CD. The cash is always available and you can even transfer money in & out to any other bank account that you own (at competing banks).

[theCase]

"You can roll over the short-term investments into new CDs once they expire, hopefully at better rates",

The last four words are key here. If rate go down this laddering scheme doesn't work.

[TheJapChap]

HSBC Direct for me!! :-)

[RP]

INGDirect is also very good.they have excellent customer service and bill pay etc.