Why I Stopped Laddering My Certificates of Deposit

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CD LadderFor years we’ve had our emergency fund in a certificate of deposit ladder at ING Direct, now Capital One 360. Then a funny thing happened a while ago (I don’t remember exactly when but it’s over a year now since all my CDs have matured), the interest rate on a savings account was higher than what you would get for a 12-month CD. If you look at yields today, the same holds true.

If you look at the rates at Capital One 360, you can get a 0.75% APY on your savings account. To beat that with a CD, you need to go to 60 months! Anything less than that and you’re better off keeping your money in a savings account. At Ally, the rates are better but not much better. Ally will pay you 0.85% APY on a savings account and a 12-month CD is only slightly better at 0.94% APY.

Isn’t higher yield better? In theory, yes. In theory, I am better off putting the money in the CDs and letting the ladder continue because I get an additional 0.09% APY per year. The reality is that 0.09% is such a small difference I’m more comfortable with just keeping it all in cash, surrendering the difference in interest, and being happy with immediate access to my cash without penalty.

What am I doing now? Currently nothing with those funds because they’re earmarked for emergencies. It’s very tempting to want to put them in the stock market, especially given how well it has done, but that’s not what the money is for. I’m saving up for an emergency… that hopefully never comes. 🙂

Unfortunately, there aren’t any safe alternatives that offer much higher yields. I don’t want to invest it because emergencies like to strike when you really don’t want to access invested funds. I don’t want to jump through all the hoops to use reward checking accounts, plus that’s not really “automated” like a CD ladder is. So for now I’m standing pat until rates increase or the difference makes enough of a difference.

There is one alternative I have considered but didn’t do. In the past, Ally has offered a 0.25% APY loyalty bonus when you renew a CD. I have considered putting my funds back into the ladder there because of the bonus. I even considered getting a 3 month CD and then renewing it to a year with the higher rate plus the loyalty bonus. In the end, given the dollar amounts of the fund, it seemed like a lot of hassle to capture a couple dollars more of yield on the year.

Should you stop laddering? That’s up to you but a lot of people have stopped putting money in CDs. They’re just not worth it anymore especially when you can get a savings account offering similar interest rates. You do surrender certainty, the interest rate on a savings account can change in an instant, but they don’t change as often as you might guess. Each bank will list their rates and an “effective date,” which is the last time they changed it. Capital One 360 hasn’t changed it since Oct. 10th, 2012. Ally Bank changed it more recently (June 28th, 2013) but they just list one date when they may have only changed a single rate.

Have you changed your savings strategy for your emergency fund? Still using CDs?

(Credit: rdenubila)

{ 12 comments, please add your thoughts now! }

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12 Responses to “Why I Stopped Laddering My Certificates of Deposit”

  1. admiral58 says:

    Just use an online bank with a high rate, and maybe a rewards checking account

  2. Daniel says:

    I have never had a CD, because my credit union’s checking account pays higher than any savings account or CD, so I keep all of my emergency fund in my checking account. The current rate is 1.99% APR (2.01% APY). With 2% on the checking account, why would I put something into savings (0.10%) or a CD (0.15% to 0.85% depending on term and balance)?

  3. David says:

    Take a look at
    I have been using their “Bank” for 3 years.
    I use it for emergency savings but also for goals and yearly bills like my property taxes and car insurance.

  4. Jerry Mandel says:

    My credit union pays 2.5% on checking accounts and I am happy to “jump through all the hoops” for $100s of interest per year. I use it for savings and use Bank Of America for checks and online payments. If you keep the maximum of $25,000 in each spouse’s account, that is $25,000 X 2 X 2.5% = $1,250 interest per year. (Actually more because it is compounded monthly.) Good luck with your CDs and bank savings accounts.

  5. Karen says:

    I use SmartyPig for some savings, but it takes at least a week to get funds out of there. So I mostly use it for stuff that has an end date (like my car insurance, and a vacation I’m taking in December).

    I actually get more interest through my Rewards checking account, so I keep my emergency money there.

  6. Greg B says:

    How about laddering Series E (government) savings bonds? If I recall correctly, these pay a floor amount of interest tied to the CPI, meaning you’ll always earn at least the official rate of inflation – sometimes more. 2.2% sounds pretty good these days, right? I think you can choose the denomination and can ladder the terms like you would with a CD ladder. You pay an interest penalty for early withdrawal, but won’t loose principle.

    I haven’t tried this, but this strategy is at the top of my list to implement when my emergency fund recovers.

    • Jim says:

      I’ve considered it but you can’t withdraw your funds within a year and then it’s a 3 month penalty. Also, a lot of hoops to jump through to redeem. Treasury Direct isn’t the most user friendly of places.

  7. Emilio P says:

    About a year ago, after comparing rates with online banks including ING and Ally, Barclays had the best rate. I don’t see that bank mentioned too often here.

  8. Keith Connes says:

    Jim, have you considered putting your emergency cash into one or more of Ally’s no-penalty CDs? They have an 11-month term but can be redeemed at any time with no penalty, as the name suggests, and their interest rate is generally a little better than that of a savings account, while at the same time providing protection against a further drop in interest rates.

    • Jim says:

      I have but 0.85%APY on a 11-month CD vs. 0.84%APY on a savings account is really not large enough of a difference for me to do it.

  9. Jared says:

    I stopped laddering when I realized the penalty for withdrawl isnt that bad. With a little algebra, I found the crossover point when withdrawing-with-penalty is better than a no-penalty CD. Given two CD’s with rates r1 and r2, accrual n, and penalty period p, you can find the crossover = p / (1 – log(1+r1/n)/log(1+r2/n)). For example, if r1=0.85% and r2=1.49% (Ally’s current 11-month no-penalty and 5-year high-yield rates, respectively), interest accrued daily (n=365), and 60-day interest penalty (p = 60), the crossover is 140 days. In other words, after 5 months, you can withdraw any time you like and still be ahead.

  10. Sadie says:

    Laddering has not always worked to my advantage though I did start out with laddering.

    Upon renewal, I was forced to either accept a “lower rate” to retain the ladder structure or shoot for the highest interest available (totally disregarding term limit). Fortunately in choosing the highest rate even though it disrupted the ladder plan, this method has now proven to be far more effective; only thanks to the ever “decreasing interest rates”!!

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