Creating My Modified CD Ladder

Here’s how a normal CD ladder is setup –

You have a lump amount to invest in CDs.  Instead of buying one CD, for a specific maturity date, you spread your investment out, over several CDs, all with different maturity dates.  For instance, assume you had $10,000.  You could create a CD ladder which looked like this –

Amount Term Rate
$2,500.00 6 Months 3.25%
$2,500.00 12 Months 3.75%
$2,500.00 18 Months 4.00%
$2,500.00 24 Months 3.85%

Now, that’s how a normal CD ladder would work. Take a lump sum, and buy several CDs that mature at different times. One of my fellow personal finance bloggers, Madison from My Dollar Plan, has written a very nice guide for how to build your own CD ladder.  I strongly suggest you read that article if you plan to create a CD ladder of your own.

Here’s how my modified CD ladder will work –

Instead of taking a lump sum and buying several CDs which would mature at different times, I’ve decided to buy a new CD, each month.  Each CD will mature 12 months after I buy it.  Here’s a chart, explaining the modified CD ladder –

Date Amount Term Rate
Dec 1 $100.00 12 Months 4.00%
Jan 1 $100.00 12 Months 4.00%
Feb 1 $100.00 12 Months 4.00%
Mar 1 $100.00 12 Months 4.00%
Apr 1 $100.00 12 Months 4.00%
May 1 $100.00 12 Months 4.00%
June 1 $100.00 12 Months 4.00%
July 1 $100.00 12 Months 4.00%
Aug 1 $100.00 12 Months 4.00%
Sept 1 $100.00 12 Months 4.00%
Oct 1 $100.00 12 Months 4.00%
Nov 1 $100.00 12 Months 4.00%
Dec 1 $100.00 12 Months 4.00%

As you can see, instead of buying different types of CDs (i.e. 6 Month, 12 Month, 18 Month, etc.) I’ve decided to stick with CDs which mature 12 months after they are purchased.  Instead of focusing on an initial lump sum, and breaking it down into several CDs, I’m focusing on smaller, monthly investments.

After 12 months, my first CD will mature.  At that time, I will decide if I want to withdraw my money from the CD, and put it it my savings account, or reinvest it in the CD.  A month after CD 1 matures, CD 2 will mature.

What I am trying to achieve, with my modified CD ladder, is balance – between higher interest rates and easy access to my money.  If I were to invest all of my emergency fund and non-retirement savings in CDs, all at once, I would immediately start to earn a higher interest rate, but I’d lose a certain measure of liquidity.  Plus, there are penalties for withdrawing money from a CD early.  On the flip side, if I leave all of my money in my savings account, I’m missing out on higher interest rates.  With the modified CD ladder, a portion of my savings will be very liquid (and earning a lower rate) while another portion will be in CDs (and earning a higher rate).

Why did I choose the 12 Month term?  Well, right now, my ING DIRECTsavings account has an interest rate of 2.75%, while a 12 Month CD has an interest rate of 4.00%.  (If at some point the savings rate is going up, or the CD rate is going down, I’ll change (or abandon) my modified CD ladder.)

As a side note, I realize that there are banks which offer higher CD rates, but I have been with ING Direct for several years, and their customer service and features are top notch. Plus, I can buy a CD with just a few clicks, automatically transferring money from my savings account to the new CD.

Finally, because this is a bit of an experiment, I really don’t want to commit any of my current savings to the modified CD ladder.  So, I’m going to push myself to earn $100 each month, via eBay.  I like setting up mini-goals like this one, just to keep my head in the game.  Each month, my regular, budgeted savings will continue to go into my savings account, and this additional savings, created from eBay sales, will be assigned to the modified CD ladder.

8 thoughts on “Creating My Modified CD Ladder

  1. This is essentially what I’m doing, but for different reasons. I want to have 6 months of salary stuck aside. Now that my emergency fund is high enough (1 month salary) – we’re taking my wife’s second paycheck each month and dumping $500 of that into a 12 month CD. The idea is that every six months as the CDs mature, we add $500 and we get closer to our goal of 6 months of income saved.

  2. While your strategy is a fundamentally sound one, you should be aware of the interest rate risk inherent in it. Since interest rates are likely to fall in the coming months, you are unlikely to get 4% on all your future CD purchases.

    One other thing, you might find it more adminstratively easier to buy and track a $300 CD every 3 months.

    Good luck

  3. I’m surprised you haven’t tried one of the high interest checking accounts. As a proponent of debit cards, you would easily hit the 10-15 debit transactions required monthly, I’m sure you would pay at least one bill online, then just sign up for online statements which I’m also sure you would already do as well as login to your account once a month, and bam, 6%. I’ve been with Charter’s Turbo Checking since August now and it’s been fabulous:

  4. I’ll be interested to hear at the end of your experiment if you switch to only having them redeem quarterly instead of monthly. I found it was much easier to only shop rates 4 times a year instead of 12. Although, if you plan to just keep them at ING, there’s probably not much work involved…. I also use ING for convenience most of the time!

  5. This CD ladder set-up seems pretty useful. Would you be able to do this with ONE bank though (esp. if you are trying to diversify your rates)? And be careful all your money is FDIC insured if you plan on using this approach with more than 250K. It certainly provides a creative form of liquidity….bravo!

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