Author Topic: Practical Strategies for CDs and CD Ladders  (Read 792 times)

heybro

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Practical Strategies for CDs and CD Ladders
« on: May 01, 2018, 03:26:37 PM »
I understand how CD ladders work.  However, they seem counter to how I'd like the money available.

For instance, I may be spending this money in 5 years or 10 years.  I'm not sure.

So, making a 5 year ladder where a small portion is available each year does not make sense to me because I would never just spend a little of it.  I'll either spend a large chunk or none at all.
Likewise, putting it all in a 5 year CD seems counter as well since CD ladders are supposed to capture a wider range of interest rates.

But, you do get a higher rate if the initial balance is higher and the term is longer.  So, is buying one big CD the better idea.

I'm thinking of putting the money in a CD as I get it.  With the first CD being 5 years.  The next one being 4 years.  The next one being 3 years.

I've also thought I should just forget about CDs since interest rates are likely to continue to rise.

Anyways, what CD structure (ladder or otherwise) works well for you?
If rates hit a certain number, do you buy as many long term CDs as you can?
If rates drop to a certain number, do you try to keep shorter term CDs, hoping they will rise?

 
« Last Edit: May 01, 2018, 03:29:38 PM by heybro »

Radagast

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Re: Practical Strategies for CDs and CD Ladders
« Reply #1 on: May 01, 2018, 08:10:29 PM »
I'm not sure I understand. You want a CD ladder where all the CD's end in the same year, but you don't know what year? It seems simplest to just use bond funds with a duration similar to your expected need for money. You can change funds as your expections change. These might also have tax advantages depending on your situation and whether your taxes are high enough to matter.

Systems101

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Re: Practical Strategies for CDs and CD Ladders
« Reply #2 on: May 01, 2018, 09:41:02 PM »
I understand how CD ladders work.  However, they seem counter to how I'd like the money available.

You should go read about what the penalty is for breaking a CD.  There have been situations where it was more beneficial to get a 5 or 7 year CD and break it at 2 years than it was to get a 2 year CD (even after paying the penalty).  Then again, I suspect you can only do it so many times at a bank before they stop wanting to deal with you at all... AND you have to make sure the terms and conditions really are breaking the CD and not having you to sell it on the secondary market and thus not necessarily getting back the initial value... but it can be done... and if you intend to break them once in a 10-year span or whatever then I doubt they will get too worked up about it.

The point of using a ladder is that the diversification and added interest rate you get from building and maintaining a CD latter (always purchasing 5 year CDs for example) may still be the most sensible method of doing it, even if you have to break the CDs (and sacrifice some interest) in the end at whatever point you want the money.  It prevents you from betting on interest rates... which even the so called experts are hideous at... so don't bet.  Use the math of a ladder to your advantage (just read the T&Cs and use the right bank/credit union).