Last week, I was going through our various bank accounts and decided to put some money in an ING CD. The 6 month interest is currently 3.75% (vs. 3% in Orange Savings). I was pleasantly surprised that they’ve added a very easy way to open a CD ladder.

Steps to Open a CD Ladder

    1. Login to your account if you have one
    2. Choose “Products & Rates” on the side menu.
    3. Click on any of the CD term options.
    4. Choose whether this is single, joint, living trust, etc.
    5. At the top of the next page, you’ll see the option to open a ladder instead of a single CD.

option to open a ladder

    1. The next page allows you to specify how much you’d like to put in each and what you’d like to call them.

cd ladder page

One handy thing about ING Direct is that they don’t have CD minimums. It’s probably a bit silly to ladder $100 into 4 $25 cds of different lengths. But it’s nice to know that you don’t have to meet some kind of minimum before you can do it.

I really like how ING has set it up so that you can start your ladder without the repetitious clicking “Open an Account,” etc.

Why Open a CD Ladder

What are CD Ladders? CD ladders are essentially dollar-cost averaging for CDs (certificates of deposit). To create a CD ladder, you buy several CDs with varying lengths and interest rates.

For purposes of illustration, let’s say that your CD ladder is pretty simple and consists of 4 CDs: one 6 months, one 12 months, one 18 months, and one 24 months. Since CDs lock in the interest, you know that you’ll be earning 3.75% on your 6 month CD but 4% on your 12 month, 18 month, and 24 month ones.

When your 6 month CD expires, you reinvest it in a 2-year CD. At this point, the 12 month CD is down to 6 months, the 18 month is down to 12 months, etc.

Laddering is an attempt to hedge against market volatility. If rates go up, the part of your CD ladder that’s only got 6 months (or less) to go will become available sooner and you can invest it in a better CD. On the other hand, if the rates go down at least you’ve got the other CDs invested at a good rate for longer. You can hope that the market will recover by the time they comes around.

In the end, you have an average of sorts. You never renewed all your CDs right before interest went up, but you also never invested in CDs right after the interest went up again. But you did a little of both.

CD Laddering — Yes or No?

Is CD laddering the best thing ever? Honestly, I can’t say that it is or isn’t, a lot of that has to do with whether or not you subscribe to the idea that dollar-cost averaging is a good strategy. One thing I do like about it is that it gives you some flexibility in your CDs (particularly if they’re at 6 months). You’ve always got one coming due in the next 6 months, but you’re also less inclined to spend the other ones, since you’d lose money by withdrawing them.

At any rate, if you choose to ladder your CDs, ING has a simple setup that will save you time. Once you’ve signed up for an Electric Orange Checking Account, you can open as many savings accounts or CDs as you like.

What’s your take on CD laddering? I’ve only recently started researching it and I’m interested in feedback. For various reasons, I opened a simple 6 month CD at this point. But I’m planning to look into it further in the future.

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Andrew Stevens September 2, 2008 at 12:32 pm

CD laddering is a good idea for your emergency fund, though not precisely for DCA reasons. You want to invest in the longest term (and therefore highest interest rate) that you can. However, this is your emergency fund we’re talking about and you don’t want to have to wait too long to access it. So you begin with a ladder to stagger the maturity dates for the times you need them.

Say you need $8000 to get you through three months of expenses. You open a 3-month CD for $8000, a 6-month CD for $8000, a 9-month CD for $8000 and a 1-year CD for $8000. In three months, your first CD matures. It’s not an emergency so you reinvest it in a 1-year CD (and do what you like with the interest, though inflation might make it wise to reinvest that as well). Three months later you do the same for your old 6-month CD, etc. Eventually all four of your CDs are at the higher one-year rate, but still mature three months apart (at which time they are all reinvested for a year). Your emergency fund is never more than three months away from access (you keep enough to get you through the first three months in cash). DCA is a fringe benefit (?) of this plan, not necessarily the goal.

I put the question mark in above because I don’t think the arguments for DCA are all that powerful, at least when it comes to the stock market. I think it’s a better idea for interest rates though, so I’m not really denying its value in this particular case.

My Daily Dollars September 2, 2008 at 5:01 pm

I like the idea as well. My concern is splitting money up between accounts. Wouldn’t a larger lump sump do better thanks to compound interest? Or does the higher interest rate on the longer pieces offset what it would all earn at the lowest rate?

Laura September 2, 2008 at 8:50 pm

Thanks for the step by step on this . . . i have a large CD maturing soon and would like to break it up into smaller amounts and ladder it as such you described. When the maturity date comes . . . I will check this site again!

mrsmicah September 2, 2008 at 9:25 pm

@Andrew Stevens, I’m never quite sure if DCA is the way to go. But it’s my default mode of investment since I only have so much to invest each month.

@Daily Dollars, if you want your CDs to be fairly accessible then (as Andrew Stevens points out) by laddering you’ll eventually have 1-year-term (or longer) CDs coming due every 3 or 6 months. So they’re earning higher interest overall but still being available. If you don’t care about availability then I’m not as sure…

Megan September 3, 2008 at 9:40 am

I’m a huge fan of CD laddering. For years, I have had money in a series of 12 month CDs. Of course, thanks to dropping interest rates and trying to get the best interest rates by using 6 month and 7 month cds, my ladder is totally screwed up by this point, but I’m working to correct that.

I laddered initially so that I would have money available every three months, just because I didn’t know what I had coming. I could earn more money by choosing a term of more than 12 months, but for my sanity, I like having that “just in case” money available to me.

Of course, in an emergency, I could withdraw the money early and pay a penalty, but that’s what the emergency fund’s for, and if I need more money than that, then I clearly have bigger issues in my life than worrying about losing a small percentage of my savings.

Andrew Stevens September 3, 2008 at 11:32 am

We all dollar cost average to some extent; there’s no way to avoid it. E.g. my wife and I put $10,000 into our Roth IRAs in January rather than dribbling it out over the course of the year, but investing once a year in January is still dollar cost averaging, just on a different time scale. (Also, I do it that way to minimize fees, not just to avoid DCA.)

Dollar cost averaging, in general, lowers your volatility while lowering your expected return. It’s a fine risk-reduction strategy and I would use it if I were facing significant risks. If I were to get, say, $100,000 right now, I’d just invest it right away. But if I were to get $1,000,000, I’d dollar cost average it.

deepali September 4, 2008 at 3:26 pm

It sounds like a good idea, except one issue – my savings account earns at near-CD rates (and sometimes) better. So does it still make sense to do a CD ladder?

mrsmicah September 4, 2008 at 3:32 pm

@deepali, well, a CD ladder is all about trying to hedge your bets. I suppose the best thing to compare rates to is the long-term CDs, since you’d eventually be getting the 1-year or 2-year terms. It also depends on what kind of guarantee you’re looking for on your interest. Bank rates fluctuate but CDs are locked in (also a downside if rates go up). If your interest rates are consistently around long-term CD rates or higher, then it makes less since than if there’s something significant like .75% difference. (my thoughts…)

Danielle October 1, 2008 at 6:02 pm

I have a friend that did this for his emergency fund, but didn’t do it in the same manner you describe, having different terms and a CD maturing every 3 months.

He instead opened a CD with 1 months expenses (or close to) every month for 6 months.

In this manner a CD was maturing every month and until he needs to tap it the interest can just be reinvested.

I don’t think this method would apply to the dollar cost averaging part of this discussion, just thought I would share the CD ladder method I heard of first.

Mike October 9, 2008 at 2:19 am

Thanks for a great discussion of CD ladders. There is also also a visual diagram of how this works here:

Eliza November 17, 2008 at 5:16 pm

I like the idea of CD laddering for an emergency fund. We are currently in the process of opening a $1k CD every two weeks for a year–each CD will run 12 months, so we are getting a better-than-savings rate, and the fact that the money is locked up in CDs reduces the temptation to spend it on something-or-other. So I would say that there is a psychological value to CD laddering, as well, especially if you are saving and paying off debt at the same time–locking the money up in a CD helps me to keep my commitment to myself and actually start saving.

Toni Chasmar December 3, 2009 at 9:12 pm

Are deposits with ING Direct insured? I guess the question is : are these cd deposits covered by the Canada Deposit Insurance Corp. – as in up to $100,000?
.-= Toni Chasmar´s last blog ..Ongoing Commentary =-.

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