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
- Login to your account if you have one (or get a signup bonus here)
- Choose “Products & Rates” on the side menu.
- Click on any of the CD term options.
- Choose whether this is single, joint, living trust, etc.
- At the top of the next page, you’ll see the option to open a ladder instead of a single CD.
- The next page allows you to specify how much you’d like to put in each and what you’d like to call them.
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.