Yuppie Sherpa

Purchasing CDs (Certificates of Deposit) fell out of favor with many as the returns offered by high yield savings accounts came to match or exceed the interest rates on most CDs. High yield savings accounts also had the added bonus of retaining your money’s liquidity — a selling point that CDs could not compete with.

However, the US Federal Reserve has been slashing interest rates all willy-nilly as of late. My savings account bank of choice, ING Direct, has already lowered the interest rate on their “High Yield” savings account twice this year. This hits me especially hard right now, since I just wrote a check for almost $8,000 to pay off the my car loan in full. And although I’m puckering from all sides and curbing all unnecessary spending until that money is replaced, I certainly wouldn’t turn down the extra money that I’m now not getting from my ING account.

Enter the CD Ladder

CD laddering is the process of buying multiple certificates of deposit with varying rates of maturity to take advantage of their high yields without having to tie up all of your money at once.

Here are two crude examples…

Example 1:

In January, I purchase 3-month, 6-month and 12-month CDs for $5,000 each.

At the end of March, my first CD (the 3-month CD) matures and I get my $5,000 plus interest back. I still have $10,000 tied up in the other two CDs, until the end of June and December. I can re-invest the money from the first CD into another CD, or redirect it elsewhere if needed now that it’s liquid again.

Example 2:

In January, I purchase a 6-month CD for $5,000. I proceed to buy another 6-month CD for the same amount every month for the next 5 months. At the end of June, the first CD I purchased matures and I get my $5,000 plus interest back. I can reinvest this money in another 6-month CD, or redirect it elsewhere now that it’s liquid again.

Because good CDs have a minimum investment amount that is significantly higher than the minimum balance on most high-yield savings accounts, they’re not affordable for everyone. However, now that the benefit of high interest at many high yield savings account providers is diminishing, this might be a good time to look at other investment vehicles.

For more information, check out the CD Ladder Calculators at Bankrate.com and Dinkytown.net.

If you enjoyed this post, consider subscribing to the Yuppie Sherpa RSS Feed to get all new posts delivered straight to your feed reader.