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how to start a CD ladder
Old 09-30-2013, 05:39 PM   #1
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how to start a CD ladder

I've never created a CD ladder. I'm planning for up to 5 years. What's the common way to get it started? I'm thinking of splitting cash equally into a 1, 2, 3, 4, and 5 year CD. Anything I should watch out for? With rates pitifully low now but perhaps rising, I figure I might need to break some of these CDs, and I've learned the breakage penalties of various banks are all over the map. Some want 3% of the CD's value!

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Old 09-30-2013, 06:01 PM   #2
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Here's an article from bankrate on how to How to ladder a CD portfolio

With rates so low you're getting next to nothing for anything less than five years. An online savings account is just as good as a 2yr. I might would put the money in the savings account then buy a 5 yr each year till you got your ladder going. also several places ( Ally ) offer a raise-your-rate option which could help capture any rise in rates.

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Old 09-30-2013, 06:01 PM   #3
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I think it's important to set up the ladder so that the CDs mature (into cash flow) at a pace that covers your cash flow needs. That way, you avoid having to redeem them early. Nonredeemable CDs get better rates. So, for example, if you have $100K to invest, and you will need <$20K in a year's time and every year thereafter, it makes sense to put $20K in each of 5 CDs with terms of 1,2,3,4 and 5 years. If you need up to $10K every 6 months, you might want a ladder of 10 CDs that mature at 6 month intervals.

If the amount you want to invest exceeds FDIC guarantees, you may want to split your CDs between several banks. That us a lot more work, which a CD broker will do for you at a price. I investigated them a few years ago and found that their rates were significantly lower than what I could get at a bank. With a brokered CD, if you have to redeem early, you will have to find someone to buy it, and it might be a hard sell if interest rates have gone up in the meantime, so you might end up selling it at a discount. Another reason to avoid redeeming early!

My bank has been very helpful in setting up my ladders as they will get the best rates from competing institutions.
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