How do you decide when to break a CD?

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Messy_Orchid_51
Posts: 51
Joined: Sun Apr 03, 2016 9:47 pm

How do you decide when to break a CD?

Post by Messy_Orchid_51 » Wed Jun 20, 2018 11:28 pm

There are numerous calculators that can tell you when breaking a CD will net you more money.

I have a 5-year CD ladder the purpose of which is to serve as an emergency fund.

With recent rate hikes the calculator is saying I should break 4 of the 5 CDs but of course if I do that I lose the primary advantage of having a ladder namely, experiencing a 1-year CD duration (access to your money each year) at a 5-year CD rate.

How do you decide when to break CDs? My gut says break whenever the calculator says so and not wait for the next CD to fully mature each year. This might lead to an irregular ladder that wont mature annually but rather 5 years after banks raise their rates enough to trigger the break.

Yes, I realize we are probably talking in the neighborhood of hundreds of dollars difference but I do like to optimize as best possible.

Thanks in advance for any advice!

Call_Me_Op
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Location: Milky Way

Re: How do you decide when to break a CD?

Post by Call_Me_Op » Thu Jun 21, 2018 6:44 am

Normally, one sets-up a bond (or CD) ladder with the intention of holding the securities to maturity, and rolling them over. Otherwise, it is hard to maintain the ladder. Only you can decide if the small amount of savings is worth the hassle.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

indexonlyplease
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Re: How do you decide when to break a CD?

Post by indexonlyplease » Thu Jun 21, 2018 7:06 am

I have 3 cd's and yes now the rates are higher. The calculator says break the cd. But to me the little difference is not worth the hassle. Maybe when Ally Bank comes up with a 3% cd I will make the move.

This is also my emergency money.

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: How do you decide when to break a CD?

Post by rkhusky » Thu Jun 21, 2018 7:24 am

Messy_Orchid_51 wrote:
Wed Jun 20, 2018 11:28 pm
How do you decide when to break CDs?
I wouldn't break a CD unless I was going to make at least $50 more over the next year in interest after accounting for the EWP. And that is if I could do it online. If I have to go into a branch, I would need at least $100.

pkay
Posts: 76
Joined: Wed Jan 17, 2018 11:04 am

Re: How do you decide when to break a CD?

Post by pkay » Thu Jun 21, 2018 8:43 am

Messy_Orchid_51 wrote:
Wed Jun 20, 2018 11:28 pm
There are numerous calculators that can tell you when breaking a CD will net you more money.

I have a 5-year CD ladder the purpose of which is to serve as an emergency fund.

With recent rate hikes the calculator is saying I should break 4 of the 5 CDs but of course if I do that I lose the primary advantage of having a ladder namely, experiencing a 1-year CD duration (access to your money each year) at a 5-year CD rate.

How do you decide when to break CDs? My gut says break whenever the calculator says so and not wait for the next CD to fully mature each year. This might lead to an irregular ladder that wont mature annually but rather 5 years after banks raise their rates enough to trigger the break.

Yes, I realize we are probably talking in the neighborhood of hundreds of dollars difference but I do like to optimize as best possible.

Thanks in advance for any advice!
Hello. Relatively new here. What calculator are you referring?

I have emergency fund in a 5 year CD and I'm getting taxed federal and state on the interests every year. I don't have a CD ladder. I've been thinking about breaking the CD and put a portion of it in Savings I-bonds so at least I can defer some federal income tax in the future. But I'm not sure what's the best move.

Messy_Orchid_51
Posts: 51
Joined: Sun Apr 03, 2016 9:47 pm

Re: How do you decide when to break a CD?

Post by Messy_Orchid_51 » Thu Jun 21, 2018 10:17 am

The calculator I use is from DepositAccounts.

https://www.depositaccounts.com/tools/b ... lator.aspx

I guess the question boils down to would you rather have five 5 year CDs always breaking and resetting maturity date to get the prevailing rate or a 5 year ladder with a slightly lower combined rate but with an effective 1 year duration of 1/5th your money.

For me I’ve decided to go with option 1 constantly breaking whenever there is a gain (after the early withdrawal penalty) to be had because the primary use is an emergency fund.

marklar13
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Joined: Wed Jul 08, 2015 11:47 am

Re: How do you decide when to break a CD?

Post by marklar13 » Thu Jun 21, 2018 10:34 am

Messy_Orchid_51 wrote:
Wed Jun 20, 2018 11:28 pm
There are numerous calculators that can tell you when breaking a CD will net you more money.

I have a 5-year CD ladder the purpose of which is to serve as an emergency fund.

With recent rate hikes the calculator is saying I should break 4 of the 5 CDs but of course if I do that I lose the primary advantage of having a ladder namely, experiencing a 1-year CD duration (access to your money each year) at a 5-year CD rate.

How do you decide when to break CDs? My gut says break whenever the calculator says so and not wait for the next CD to fully mature each year. This might lead to an irregular ladder that wont mature annually but rather 5 years after banks raise their rates enough to trigger the break.

Yes, I realize we are probably talking in the neighborhood of hundreds of dollars difference but I do like to optimize as best possible.

Thanks in advance for any advice!
I don't do CD ladders, so I am probably misunderstanding... but I am going to ask anyway. Wouldn't it make more sense to compare each CD in your ladder with a new CD that matches remaining time to maturity, instead of just comparing everything to a new 5 year CD?

The way you keep your ladder in tact would be to replace with CDs that match remaining length, so I would think that would be your comparison.

Again, I don't hold a CD ladder, so maybe this is not conventional wisdom. This was just my gut reaction when reading the post.

Messy_Orchid_51
Posts: 51
Joined: Sun Apr 03, 2016 9:47 pm

Re: How do you decide when to break a CD?

Post by Messy_Orchid_51 » Thu Jun 21, 2018 10:48 am

You are correct and the calculation takes remaining duration into the equation when determining the break point.

For example a 5-year CD with 10k at 2.05% with 36 months left until maturity vs a 5-year CD with 10k new issue at 2.65%.

If you break this will leave you with about $96 more at the end of 36 months after subtracting the early withdrawal penalty of 5 months interest.

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