Building a CD ladder

[Retireatee1]

I've been putting $5K a month into 7-month CDs at 4% interest.  The 7-month CDs have the highest interest rate currently.  If and when I reach 7 months, I'll have a 7-month emergency fund.  After they mature, I can roll them back into new CDs and optionally withdraw or invest more money so it will be a revolving ladder.  This is with Bank of America, and they are kind of a pain to set up but are workable.

[JimDogRock]

A question I have always had about CD ladders is how someone knows when to redirect more money into them or pivot away from them entirely.
Right now you're getting 4% APY, but do you have a plan going in for when rates hit different thresholds you will do different things?
For example, "If the rate drops to 3.5% then I'll not reinvest the interest. And if the rate hits 2.75% or lower then I'll move to something other than CDs entirely."
Obviously there can be a lot of factors in play in the macro environment as well as if an individual's circumstances change.

But basically, 4% was good enough for you to start a CD ladder. At what point is it not good enough for you to continue a CD ladder?
This is not a critique on CDs in any way. I'm just curious for the discussion.

[Radagast]

I use Vanguard High Yield Tax Exempt.

Positives vs CDs:
+ 4.23% yield
+ No federal taxes on interest
+ No effort to roll it over or renew it, it's buy it once and leave it till I need it

Negatives:
- Credit risk: in a serious market crash it can go down
- Duration risk: in rising interest rates it will go down (in falling rates it will rise however)

I also use savings bonds (I-bonds)
+ No taxes on interest until redemption (could delay taxes 30 years!) (Even those taxes can be avoided if used for education)
+ No risk whatsoever: no inflation risk, no reinvestment risk, no interest rate risk, no credit risk, no market pricing risk
+ No effort to roll it over or renew it, it's buy it once and leave it till I need it
+ Can be redeemed any time 1-30 years at my option (though a small penalty within 1-5 years)

Negatives vs CD ladder:
- $10k/person/year purchase limit
- 3.11% is the current combined rate. Fixed rate set a purchase, inflation rate varies.

[chuckster]

A question I have always had about CD ladders is how someone knows when to redirect more money into them or pivot away from them entirely.
Right now you're getting 4% APY, but do you have a plan going in for when rates hit different thresholds you will do different things?
For example, "If the rate drops to 3.5% then I'll not reinvest the interest. And if the rate hits 2.75% or lower then I'll move to something other than CDs entirely."
Obviously there can be a lot of factors in play in the macro environment as well as if an individual's circumstances change.

But basically, 4% was good enough for you to start a CD ladder. At what point is it not good enough for you to continue a CD ladder?
This is not a critique on CDs in any way. I'm just curious for the discussion.

My personal strategy had been, when rates looked to be going down, to gradually pivot from 12-month to longer-term CDs, which tended to keep a higher rate longer. So my twelve annual CDs coming due every month would renew to become twelve 24-month CDs spaced out every other month over time.

But it's all a complicated question that has to factor in current rates, anticipated future rates, anticipated returns from other investment options, my personal anticipated risk factors/how likely it was I would need to cash out for an emergency, etc. And honestly at the levels I was investing in (~$12k ish), it was like optimizing to get an extra $30 over 2 years and ended up not mattering much.

The good thing about the ladder method is that you are averaging the rates over time so when rates do head down, most of your money is locked in at a higher rate for a while and you can weather swings.

[talltexan]

The purpose of the ladder is to optimize interest rate. Every renewal should be for the highest available interest rate. Longest time if there's a tie. Try to maximize that yield for your $$$