CD Ladder vs. MM

[setab]

I have read here about using a CD ladder to invest money you plan to slow feed into your income stream or just set aside as a emergency fund. What are the advantages to this approach as opposed to simply using Vanguard Prime MM or a similar fund? Thanks in advance.

setab

 

[brewer12345]

If you use a MM, you get more liquidity. If you use a CD ladder you potentiall get more interest, but it depends on what short term rates do during the term of the CDs. Its probably a wash, realistically.

 

[kaudrey]

Hi,

Well, the idea is to lock in the higher rates associated with longer term CDs, but giving you flexibility by laddering them, so some of your money will be liquid every year.

However, with the way rates are right now, you don't get much extra interest from a 5 year CD over what you can get at ING or similar high-interest savings accounts, so I think some of the "benefit" is not that strong right now.

Also, CDs issued by a bank are FDIC-insured, whereas MMs or other such accounts may not be, depending on where they are housed.  

I'm sure someone here can come up with a much more intelligent answer, but it's a start...

Karen  

 

[Michael Moore]

Wouldn't another factor be that you can lose money in a MM acount (at least that is my impression) where the CD principal and interest is secure? This would be something a bit different from the FDIC insurance issue.

cheers,
Michael

 

[brewer12345]

Wouldn't another factor be that you can lose money in a MM acount (at least that is my impression) where the CD principal and interest  is secure?  This would be something a bit different from the FDIC insurance issue.

cheers,
Michael

In theory, you can lose money in an MMA. In practice, on the rare historical occasion this has happened, I believe the fund sponsor has made it up. I would imagine that VG, Fido, Schwab, etc. would almost certainly do so.

Oh, and pick your bank for CDs carefully. Principal (not interest) is guaranteed by the FBIC, but it can be a long, painful process to get your money back. Its a lot simpler to just pick a solid bank in the first place.

 

[MJ]

I got a large chunk of money after the sale of my house and I am still hedging where to invest it. So right now beside the MM 4.5% accounts for total liquidity, I am purchasing over the next 6 weeks 4 week bills online through Treasury Direct. I am squeezing another .25% plus state tax free interest. It's liquid enough for me until I can make so better investment decisions.

 

[lazygood4nothinbum]

early retired before my time (really can't afford it before inheritance that is likely months away), i felt the need to keep enough money extremely safe and very liquid to hold me a few years if required.

just yesterday i purchased what i thought looked like a nice product through bank. a 24-month step rate ira. (yes, i'm taking 10% penalties on early withdrawal but based on the level of misery at a job gone bad it's still a favorable quotient.)

(annual % rate/effective on day) 4.5/1; 4.76/183; 5.02/366; 5.28/548 for a blended rate of 4.89.

i don't expect to need this money at all for now, but just in case, i can withdraw without bank penalty any amount minus $1,000 on three specific days between now and may 2008.