Savings may have taken a hit recently — and has a couple more to come — but there’s still plenty left in the account. So it’s time for me to start considering what I want to do with the money.
CD ladders are a tried-and-true personal finance hack that have been espoused by PF bloggers time and time again. (Not sure what a CD ladder is? Check out Ally’s handy-dandy guide.)
So yeah, CD ladders can be a great and important personal finance tool. But I’m skipping them for a pretty simple reason: Interest rates suck right now.
See, I’m thrilled to be with Ally Bank. It actually just raised its rate to 2.2%, meaning I’m earning more than double what I was at Capital One 360. But that’s actually the problem.
The comparatively high rate on my regular savings account doesn’t give me a lot of incentive to lock my money away for months — or especially years — on end.
I’d actually earn less on a three-, six- or nine-month CD than I’m getting on my bank account. So to get any kind of rate increase I’d have to sign up for at least a one-year CD, and I’d only get a 0.5% boost. Considering I’d probably only be comfortable putting $5,000 in, that’s $25 for tying up my money for 12 months.
I could get almost an extra percent (3.1% compared to the 2.2% I’m getting now), but only if I signed up for a five-year CD. That’s a long time to stow money away, and there’s no guarantee that I won’t need those funds for some unforeseen emergency. Meanwhile, I’d still only earn about $45 extra each year.
It’s also important to note that interest rates are slowly rising, which means I can probably get a better rate if I wait a little while longer. I’d say rates are going to keep creeping up — at least until the next recession hits, anyway, which allegedly won’t be until at least 2021.
That means that, if I sign up for a CD now, I’d be locking in what will almost definitely be a lower rate than I can get in 6-12 months’ time. So it makes sense to wait and see if interest rates rise to more respectable levels. Especially on the shorter-term CDs because I’m skittish about CD ladders in general.
I mean, with CD ladders you’re in trouble if emergencies hit — unless you can set it up so that one of your CDs renews each month (allowing you to cash in in any given month without paying a penalty). That or you still have to keep a lot of money in savings, which somewhat negates the point of the ladder.
Of course, you wouldn’t need a ton in savings if you have an emergency fund. Obviously, emergencies are exactly what EFs are for. But what if it’s a really big emergency? Or what if, like me, you prefer to take money out of savings when unexpected expenses hit, saving the EF for true, savings-draining emergencies?
In that case, you need a healthy savings account too if you’re going to lock away your money for the long-haul. So once again you can’t put as much money into the CD.
But this isn’t to eschew CD ladders altogether. If rates rise, then I’ll reconsider a ladder.
By the time those go up, maybe I’ll have enough in savings to safely lock away money for a year at a time. Or ideally, I’d ladder CDs to make sure one came available at least every two months — so create six smaller six-month CDs then roll over the CDs into year-long ones as they mature.
Of course, I’m sure at least one of you is going to make the argument that I should take any would-be CD money and invest it. I’d likely get a better rate of return over time, and the funds stay liquid in case of emergency. And that’s certainly something I’ll consider if I have the wherewithal to learn about investing, but that’s a dubious proposition.
But all of that is for the future, when rates are better and/or I’ve learned a skosh more about investing (or at least who to trust to invest for me).
Would you do a CD ladder at today’s rates? Or in general?