CD Ladders, Do They Still Work?

CD ladders use to be a good way of saving funds and gaining more interest on those funds than you would with just a simple savings account. CD ladders combine the best of both long term earnings and more frequent access to a portion of your money. If you’ve never heard of a CD ladder, I’ll give you the basic run-down. Say your bank offers CD’s of up to five years and you have $20,000 total to invest. Instead of purchasing one CD for $20,000, you will split your money up.  $4,000 per each year. At the end of year one when your CD has matured, you can either use your money or renew into your longest term CD, or in this case a 5 year. Reinvesting into the longer term will give you a better return on your money and the next year you can still access the same amount.

This use to be a great way to get a higher rate of return on your money and still have access to it. Many people, otherwise, don’t usually choose the longer-term CD’s because they don’t want to tie up their money for so many years and if they do have to close them early suffer large penalty fees. But is it really worth it now with interest rates so low? Do CD’s ladders still offer a greater “best of both worlds” approach?

Let’s consider the highest rate banks of today. If we use Ally bank’s rates there are several options to choose from, let’s pretend you have $5,000 you won’t need for at least 5 years, maybe longer, You could make a ladder like this:

• Rung 1: $1,000 in an 11 month No Penalty CD at .87% APR
• Rung 2: $1,000 in a 2 year Raise your Rate CD (with 1 opportunities to raise the rate over the next 2 years if the APR changes) at 1.30% APR
• Rung 3: $1,000 in a 3 year High Yield CD at 1.50%
• Rung 4: $1,000 in a 4 year Raise your Rate CD (with 2 opportunities to raise the rate over the next 4 years if the APR changes) at 1.40%
• Rung 5: $1,000 in a 5 year High Yield CD at 2.00%

With the ladder approach, your total earned interest after 5 years is $435

Now say you just took that $5000 and put it into a regular savings account for 5 years at the current 1.00%: total earned interest is $251.25.

However, the total earned interest putting $5,000 in a 5 year CD is $525.84, which is obviously more than making a CD ladder.  If you had to early access your money, you will pay a penalty of about 150 days of interest in a 5 year term.

So what is the answer? Are CD ladders worth the fuss of re-upping every year or should you just “Set it and forget it” as some say. If you are positive you won’t need that money for the next five years, I would suggest just putting all your eggs into one basket; but then on the other hand, who can ever be sure they won’t need money? Murphy is not anyone’s friend, you never know when your house catches fire and you need that money (or some other horrible scenario) so I guess it just comes down to situations and choices, you decide.

 

 

 

 

 

Automatic Investing and Is It Right For You

Two years ago, I learned from the great Mr. Money Mustache about automatic investing with Betterment. You can set up an auto deposit, you invest towards a monetary goal, and they invest your money for you. You pick if you want conservative, moderate, or aggressive investing and then they build your portfolio for you. I’ve been investing with them since then.

Betterment gives advice and a projected portfolio value when you meet your investment goal showing an estimated value with weak market values and strong market values and everything in-between. Of course, the market has been up and down and all over the place for quite some time that can make anyone nervous. Mr. M. Mustache believes the only time you need to worry about the price of your stocks is the day you are going to sell them, and I agree. But here’s my rub: using the graph on Betterment, if I add another three years worth of funds, I may only make $800 – $1000 more than if I take that same money and put it in a 1.00% APY savings account, but I run the risk of losing almost twice that if the market is poor the day I go to withdraw my funds.I don’t know if that makes me feel secure.

This is in no-way a slam to Betterment. They are an excellent choice if you’re looking for automated investing. Now I realize mine are smaller funds than someone who has hundreds of thousands invested for longer periods of time. But to me, for short-term, smaller goal investing, I just don’t see where the market is any better than a savings account; which, by the way, has little or no fees.

Another area I’ve invested in is Lending Club. I’ve shared with you a little how lending club works. I invested $25 bi-weekly in notes with Lending club for the last 40 months. I was very specific which notes I chose. I wanted them to pay out in 36 months, I never bought a note that had more than 13% interest because I felt it unfair to charge someone the same high interest rates I was so desperately trying to get away from myself. I didn’t re-invest in the same loan twice which reduced my risk of someone defaulting on their payback to me and I looked for a small mark-up or no mark-up on price when I bought them and a high rate of return. I fluctuated between 9-12% return on my money. That is much higher than anything I was making in the stock market and much higher than anything I was making at the bank.

This was a great way for me to get my feet wet in the world of investments. Plus, I worried I might have an itchy fingers and want to withdraw my money when you make a little progress, with Lending Club, I wasn’t so tempted to impulse withdraw since it took longer to get my money out. I even invested some notes for my son. He is making 12% on his $200 worth of notes and is thrilled when he watches his little payments go in his portfolio.

But here is one of my problems with Lending Club. It’s no longer a secret. There are more and more loans and more and more defaults. They are stricter on who they lend money to, which is good, but it takes literally three years for someone to pay you $28.00. If you have three to five years to let each of your notes mature, then it’s fine; but if you need to get your money out because of an emergency or other reason, it sometimes takes a long time for your notes to sell and so you’re at the mercy of other investors. I only invested $2000 in Lending Club. That may seem like a long time to invest such a small amount, but at the time, I was still in debt so small investments made me feel like I was making some progress without it being a detriment to paying off my debt. Then I just let those notes mature out over their 36 month period. So you see how that tiny amount of money has been tied up for a little less than a decade? My suggestion is don’t do what I did!

If you are going to invest in Lending Club. Wait until you have your $2000, or $10,000, that’s what Mr. Stache started with. Then in one day or week, because it will take you a while, purchase as many notes as you can that pay out in 36 months. That way in three years, all of your notes will have matured and you can withdraw your money then or re-invest it. Or if you’re willing to take a bigger risk for a higher return, go for some 60 month payoffs. They offer automatic investing now also, but keep in mind thee is a high minimum investment.