CD Laddering

Gone are the days of super high interest rates.  I think that when I first opened my Capital One 360 Account (then known as ING Direct), the interest rate was around 5%.  It then steadily dropped to 0.75%, where it’s been holding since October of 2012.  Still better than a lot of accounts, but I miss those high interest days.

The accompanying CD rates have also dropped so it’s no longer as lucrative to lock your money away in a CD.  In fact, as of right now, at Capital One 360, the CD rates are below the Savings Account rate until you get to the 24 month CDs, and then they go up every year.

Still, I thought I would look into CD laddering.  What I used to do with  my savings accounts was open a new one year CD every three months for a year.  That way, a portion of my savings was locked away, but every three months, I had access to a quarter of it.  And I made good interest.

But now, with rates as they are, I would need to do at least a 24 month CD to make it worth my while.  Locking my money away for two years or more seems a bit dangerous.  What if I need that money?

So I did a bit more research.  In a 12-month (or shorter) CD, the penalty for early withdrawal is 3 months of interest, and in a longer CD, the penalty is 6 months of interest.  So if an emergency arose and I needed to pull out the money early, the penalty wouldn’t be bad.  If the CD was old enough, I would still come out ahead.  It’s a risk, but a calculated one, since I know my maximum risk.  And with interest rates this low, it’s not like I’m out that much money.

Of course, I’m not going to lock away all of my money, but I’m thinking about putting some of my longer term savings into a CD ladder.  Maybe a 2 year, 3 year, and 4 year or something along those lines.  Ideally, interest rates would go up in 4 years, but you never know.  I’m sure we were all thinking in 2012 that interest rates would be improving again, and here we are almost three years later with no increase from Capital One 360.

Plus keeping my money locked away is another visual reminder that this money is for saving.  It is not for spending and it will not get spent.  Emergencies are one thing, but it’s all too easy to whittle away at a savings account.  Never hurts to make your money a tiny bit harder to access.

How do you manage your savings?  Bonds?  CDs?  Gold bars under your mattress?

Megan Smith

Megan is a 40-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:

In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance.  It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information.  It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck.  While that was working for me, clearly I needed a better plan.

While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.

Except that’s not what an emergency fund is for.

So I did a lot of research, read a lot of blogs, and decided that I needed a plan.  I needed to budget.  I needed to know what I was spending my money on.  I needed to prepare for the future.

I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way.  I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.