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What To Do When Your CD Matures

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We put our emergency fund into a CD ladder and every month one of those certificates of deposit matures and is automatically renewed. As an added bonus, ING Direct, where our CDs live, gives us a CD rollover bonus whenever we renew (currently the bonus is 0.15% on CDs of at least 12-months long). For us, the decision is simple. It’s a CD ladder and you simply renew the CD each month for the 12 month term.

What if you’re money isn’t in a CD because it’s part of a CD ladder, what should you do?

My goal is always to maximize the interest rate while minimizing my headache. Our CD ladder isn’t at ING Direct because they offered the best 12 month CD rates (though they currently do, especially after you factor in the rollover bonus or the new money bonus), it’s because it was the simplest online savings account available when we set up the ladder.

1. Decide whether you want to save this money in a CD. If you intend to buy a house or a car and need the cash for a downpayment, don’t put it back into a CD. If you really want to put it back into a CD, consider a no-penalty CD where you can withdraw your money at anytime.

If you still want to save it, you have two options:

  • Renew the CD at your current bank
  • Open a new CD at another bank

2. Review interest rates to see if your current bank is offering competitive rates. If your bank still offers the best rates, then then simplest way is the best way – renew it at your current bank. If your bank doesn’t offer the best rate, you have to decide whether opening a new account and transferring the money, which will take several days, is worth the different in interest.

You can use this CD interest calculator to help you decide. 0.5% APY difference on a 12 month CD is only $5 on $1,000 in savings. That’s $5 before you take away part of it for taxes.

Those are the steps I take whenever I’m deciding what to do with one of my non-laddered emergency fund CDs mature.

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22 Responses to “What To Do When Your CD Matures”

  1. nickel says:

    We’re facing this right now with a five year ladder that we’re building. We have a one year CD coming due in November, and should be rolling it out to five years. It hurts to do so with rates where they are, but we could always break it and pay the penalty of rates shoot back up (foregoing a few months’ interest on a low rate isn’t a huge deal).

  2. @Jim – First, thank yourself for using ING instead of one of the locals or big nationals. While ING has yet to play the bait and switch game, virtually every bank that I’ve stepped foot in does this with regularity.

    The CD game starts with a promotional rate/term. When you renew, the rates for your term drop through the floor and only the rates on their preferred term products are competitive. This usually results in having to shop and move CDs continuously…for the few. For most, they just auto-renew at the awful rate (sometimes rolling for years) and the bank cashes in.

    What I’ve seen with ING, EverBank, and other online banks is they offer competitive yields on standardized terms. This typically avoids the perils of traditional banking.

    @Nickel – Take care to read the fine print in the certificate of deposit. I’ve seen many banks that require you to forgo half of the remaining interest to be paid. In other words, if you have a 5 year CD and redeem it early after just three years, a full year of interest would be the amount of the penalty. Granted, some institutions will simply make you forfeit the last three or six months of interest, but it pays to check the terms. (I know you’re an astute finance guy, but just dropping this out there for others).

  3. This is an interesting approach for the emergency fund. It seems the ladder might work best for those who have several months of savings. Otherwise, with a smaller savings, there’s not much to put in the ladder and with an emergency fund you don’t want the money tied up so that it’s inaccessible. I think the approach makes sense (adding it back to the ladder) if you’re still leaving a good portion available for a sudden emergency. I would think it also depends on your risk tolerance (how much you’re going to put into CDs. What do you think?

  4. LinearChaos says:

    I always recommend the CD ladder approach to anyone who receives a large sum of money. Say an inheritance or a life insurance pay out or even leftover cash from student loans and grants.

    If you stack them right you will have a CD maturing every month so the emergency fund becomes available if you need it.

    Right now, there is no safer place to invest!

  5. nickel says:

    Michael: Good point on checking the penalty. Ally, which is where our CDs currently reside, has a six month penalty for terms over 18 months.

    Given where rates are right now, I’m kicking myself for not locking it all in at last fall’s rates instead of buying the 1, 2, 3, 4, and 5 years CDs. Oh well, the laddering approach cuts both ways. At least some of that money will be coming due when rates start to rise again.

    • How do you like GMAC…errr…Ally? I know they recapitalized and their marketing has been solid along with some competitive rates.

      By the way, I’m interested to see the I bond yield and fixed rate in about 10 days or so. If the fixed rate is high enough, maybe not a bad place to put some of that emergency fund. You can ride the wave of inflation (assuming we don’t double dip this recession). Based on the CPI readings thus far, it shouldn’t be a bad rate (like the current zero) come November.

      • Jim says:

        I doubt the fixed rate will go up, the inflation rate will be around 1.5% … just wrote a post (going up Wednesday) on the whole subject.

      • nickel says:

        I like them just fine. Rates are good, online interface is functional, and their online customer service chat is great.

  6. Once I get my emergency fund finished (just 2k to go!), I will definitely set up a CD ladder for future saving.

  7. Dave says:

    @Jim – actually the next 6-month I-bond inflation component will be 3.07% rather than 1.5% according to this link:
    http://feeds.feedburner.com/savings-bond-advisor

    • Jim says:

      The I bond uses a semi-inflation figure, rather than an annual inflation figure in its equation. Just two sides of the same coin technically speaking.

  8. Greg says:

    I am crazy? With CD rates running 2% at best… I just couldn’t roll it over again.

    Last month I topped off the Roth/IRA’s and the kids college funds. This still left a nice 5 digit chunk to pay down the mortgage.

    Once you have established a liquid emergency fund and have built a nice triple digit taxable investment account is there any sense in playing the CD game at 2%?

    Even though we’ve been experiencing deflation over the last several months, it cannot last. Having thousands tied up in CD’s for months will be like throwing money away.

  9. I strongly suggest you always re lock it up in a 5 year or longer duration CD. It’s the “DVD Method of Investing” I discuss at FS.

    It makes absolute sense, as every year you don’t spend your money and keep it in a 1-1.5% savings account or 1 yr CD, you are losing 2.5-3% of your money guaranteed.

    FS

  10. Sorry, I meant to write “DVD Method of CD Investing” I mean. It’s really the only CD strategy to employ for yield maximization given the slope of the yield curve.

    Using this method, I literally have an extra $20,000/yr in interest income for the past 8 years. That’s $160,000 just b/c I used the DVD Method, and it’ll be even more money down the road as more cash is built up.

  11. zapeta says:

    I’m currently just leaving my emergency funds in my high interest checking. I don’t have enough money saved that I exceed their cap, and I earn 4% with no loss of liquidity.

  12. That’s an interesting idea with the CD Ladder. I would have never thought to put the words ‘Emergency Fund’ and ‘CD’ together. But with one CD maturing every month I think it would be okay if you had a sizable fund to begin with.

  13. Greg says:

    I guess it comes down to risk tolerance, in a taxable trading account you have virtual instant access to your money, and there are much more lucrative investment opportunities than a CD (today!). If rates ever take CD’s back to double digits like the early 80′s(?)then you would have to look at them again.

    • I don’t think anyone is advocating CDs as a lone investment. Also, CDs have outperformed stocks (pick an index) over the last decade plus. There were 10 year CDs in 1999 paying 7%…not all bad considering where we’ve been in the last decade.

      CDs can play a valuable role in your cash portfolio whether that portfolio is for emergencies or for stability in reaching longer-term goals.

      Another example of where CDs are a great fit is with retirees who follow the ‘worst case’ allocation method. This means they ladder CD maturities out over 3 to 5 years so that when shite hits the fan they have time to recover without sweating the details. Imagine if you were a retiree with a 4 year CD ladder plus your stocks, bonds, etc. I think you’d probably not sweat the details and be better able to maintain your long-term portfolio discipline.

  14. eric says:

    I have a CD maturing in February…not sure what to do it at this point.

  15. Tim says:

    you definitely need to check the new rate when your cd is about to mature. this is especially important if you got a promo rate on a cd. you should have like 10 days upon maturity to cancel the rollover.

    i wouldn’t lock any cd in at 5 years right now. max would be 3 year. interest rates have nowhere to go but up from here. the time to lock in longer term cd rates is when interest rates are high.

  16. aua868s says:

    i usually think that i have to put the matured amount from a cd into an index fund….but laziness takes over and i put it back into another cd!

  17. hoht says:

    My professor talked about this in class, it really is an awesome system to implement. It beats leaving the money in a savings account earning less than a percent.


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